Crowdfunding has revolutionized the way entrepreneurs organize and fund projects from documentaries to board games. Even for ideas that haven't become actual products yet, large groups of people invest, hoping to turn them into reality. Crowdfunding has become a powerful tool for businesses and entrepreneurs to launch new consumer products in particular. Many campaigns are easy to like and are inspirational, featuring a protagonist and a compelling story. This method of raising money has gotten so much hype, sometimes people ignore its negative effects. In a space where some campaigns raise over $10 million and fates of entire careers rest on 30-day campaigns, not all products turn out the way people hope. There are several ways in which crowdfunding has negatively impacted the product development landscape and they are worth noting and minimizing.

1.) Too Many New Products

Almost any time you lower the barrier to entry, you get a much lower signal to noise ratio. This means there are simply too many products being launched and it crowds the space, making it hard for your product to be seen. There are often separate companies or teams working on a highly similar product, launching on the same day, without even knowing about each other. A good recent example is the dynamic between Chargerito and Pocket Dock-it. Both offer extra-small phone chargers, but unknowingly launched within two days of each other.

2.) Crowdfunding Rewards Products Launched First

Crowdfunding often rewards the teams who race to be the first to launch instead of the teams who take their time to really develop a quality product. When products are developed within a company with existing capital and distribution, the team knows it could reach at least some sizable market, so they go through a more rigorous design vetting process. Since the success of a crowdfunded product isn't guaranteed from the beginning, there isn't as much preparation for success. Because funders put their money upfront first before they actually use the product, more design thought is put into catching the attention of potential crowdfunders instead of being useful to them.

3.) More Gimmicky Products Get Funded

More practical products often don't raise much money through crowdfunding because they are perceived as being boring. It often seems like viral videos carry more weight than a useful value proposition from the product. Scanning the list of most funded products can sometimes make one question not only their practicality but even their safety. Interestingly, many entrepreneurs who try crowdfunding have found that it skews product development to target a wealthier class of people who can afford to spend money on products months before they receive them. Often there is a smaller concentration of mass-market, affordable products on crowdfunding campaigns and a larger amount of highly designed, upper-market, expensive products.

4.) Customers Don't Know What They Want

Henry Ford famously said, "If I had asked people what they wanted, they would have said faster horses." Crowdfunding democratizes product development and gives anyone with a credit card a vote. However, great entrepreneurs sometimes know what customers need before they want it. It takes many years to gain the experience to learn how to solve a problem for a large market, design an elegant solution, distribute it to your market and continue to develop the product going forward. Customers tend to ignore these nuances of product development and reach for the flashiest gadget that serves the most immediate problem they have. Perhaps the best way to learn about a new product is to have a friend who uses it, loves it, and recommends it to you. That is far less probable with crowdfunding as most of the products are still theoretical.

5.) Potentially Unsafe and Illegal Products Get Support

When larger companies develop a new product, there's a great deal of effort that goes into making sure it will be safe well before it is released to customers. Often a team of attorneys will make sure a product doesn't violate any regulations or intellectual property rights. When it's doubtful whether a campaign will even succeed, inventors are encouraged to save addressing all these problems for later. It's worth noting that many products which reach large funding goals are unsafe or may run into legal trouble when they hit the market.

Crowdfunding certainly has its advantages, but there are ramifications that come with relying on this method that are often not considered. Product managers should be aware of the ways these campaigns influence how a product may be targeted, marketed and developed. Hopefully, traditional product development will continue to be an important channel for innovation as crowdfunding matures and addresses its own pitfalls.

Published on: Sep 10, 2014