Using Crowdfunding to Validate? Better Follow Through!

An Entrepreneur article recently noted the potential for crowdfunding to validate your product or business — basically, putting up a crowdfunding campaign may allow you to see if people are literally willing to pay for your idea. This is of course important for information for potential partners and investors who want to know if people actually want to buy what you’re selling. Regardless of whether or not such a view of crowdfunding is valid, if you intend to use crowdfunding, at least in part, to validate your product or company by making advance sales through a crowdfunding campaign, you had better be prepared to follow through on that customer interest. There are a number of initially successful crowdfunding campaigns that ultimately scuttled because they failed to actually deliver the promised product. Usually that is the result of running into product development roadblocks, or running out of cash for product development or actual manufacturing of the product. Even wildly successful crowdfunded companies might run out of cash because they failed to take into account the hidden costs of crowdfunding, such as the fees to the crowdfunding portal and payment processor, and the various taxes that need to be paid. In any event, if you can’t actually deliver the promised product or service to your crowdfunding backers, you may run into serious legal and business problems. From a legal perspective, if you fail to deliver the promises of your crowdfunding campaign, you may open yourself up to various commercial claims, such as breach of contract or implied commercial warranties, or worse, violations of state and federal consumer protection acts or unfair business practices acts. Legal issues aside, by failing to deliver on a promised product to crowdfunders, you destroy the credibility of your company, and of yourself personally, and you may end up doing the opposite of validating your product or business.

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