It started like a typical Kickstarter success story. A startup raised almost $1.5 million last fall for tiny new wireless headphones that claimed to be the first that could charge through a phone. They promised delivery a month later. But Apple didn’t approve the device, so everyone who wanted the headphones for their iPhone will get headphones that don’t work as advertised–if they get them at all. Nothing has shipped yet.
How often do funded Kickstarter projects fail? A recent study found that it’s actually relatively rare–around one in 10 projects never ship rewards to backers. Some types of projects, including games and technology, are more likely to fail than artistic projects like music or dance.
The size of the campaign also matters–the smallest and largest projects are riskier than those in the middle. “The effect is much larger for the smallest projects,” says Ethan Mollick, a professor at the University of Pennsylvania’s Wharton School, who led the study. “I think these often don’t have the resources needed to deliver on their promise. Larger projects are more ambitious and complex, which creates more opportunities for things to go wrong.”
The chances of failure are high enough that anyone launching a Kickstarter should plan for it. “All projects have a risk of failure,” he says. “The best way to plan for failure is to try to ensure that you have thought through all of the critical aspects of your project before launching. Once underway, you should communicate with your backers frequently and keep them in the loop. If things go very badly, it might be better to shut down fast and return whatever money you have left, rather than trying to dig yourself out of a doomed venture.”
That doesn’t always happen; in the headphone debacle last fall, iPhone owners who wanted out couldn’t get a refund. Last summer, the Federal Trade Commission went after the creator of another failed Kickstarter project that never sent rewards (he spent the money on himself, and later settled with the FTC). Mollick found that only about 13% of backers of failed projects received refunds.
Is a 9% failure rate reasonable for a community of people trying to bring creative projects to life? We think so, but we also understand that the risk of failure may deter some people from participating. We respect that. We want everyone to understand exactly how Kickstarter works—that it’s not a store, and that amid creativity and innovation there is risk and failure.
Compared to traditional investments, a Kickstarter project actually may be more likely to succeed. “It is certainly not worse, and I think is likely a lot better,” says Mollick. “Some of my future work looks at this issue in more detail.”
But do backers really understand the risk? A VC would ask a startup for financials and research their claims. Watching a Kickstarter video, many people assume that what they’re hearing is based on vetted facts. When the “world’s thinnest watch” raised over $1 million in 2013, the designers realized–after spending almost all the money–that it would cost twice as much as they expected. It’s likely it will never be made.