Every backer should prepare themselves potentially losing money when backing a project. I refer to this as the maximum monetary loss from any crowdfunded project backed. This monetary loss is in addition to any non-monetary risks, including opportunity costs. Let’s take a closer look at how much a backer could lose in a crowdfunded transaction.
- Both Kickstarter and the project creator have close to zero loss in the crowdfunding transaction.
- The backer’s loss ranges from $0 to the full amount pledged.
What is a maximum monetary loss?
Loss is defined as the value that is not recoverable, for example, via a refund for a backer. The monetary value under consideration is the amount pledged. This amount is used to cover any services fees as well as remaining funds that the project creator receives as income / revenue from the transaction.
Maximum loss for every stakeholder in the crowdfunded transaction
Every successfully crowdfunded project has a loss profile for all parties involved in the transactions. This could be explained as follows for each stakeholder or party in the crowdfunding transaction.
1) A backer’s likely loss and impact from a successfully funded project
A backer’s loss profile depends two factors:
- whether the project creator actually ships the rewards;
- whether the reward received is as expected, in the quality and quantity described, including unlocked stretch goals.
Let’s unpack the backer’s loss profile by applying the following scenarios.
Assume that you pledged $40 for a boardgame. The project was successfully funded, and the $40 was taken from your bank card at the end of the campaign. Shipping is expected in about six months time. Ignoring any opportunity costs, such as potential interest that could have been earned on the $40, the loss profile can be depicted as follows:
From your $40, the service fees totaling $3.20 is taken to pay for Kickstarter and Amazon Payments. This is a non-refundable payment for services that is paid regardless of whether the project creator ships the reward or not.
If the reward ships, and you receive it as described, then your loss is zero. This is because the sale transaction is successfully concluded and you have received a commensurate reward for your pledge.
If the reward ships, and it is not as described, then you have at a minimum lost the services fees paid, as well as any monetary value attached to the defective reward. For example, the boardgame is made of cheap cardboard, then the loss is the $36.80 less the monetary value of the cheap cardboard.
If there is delayed shipping, then the loss is calculated based on the time value of the delay. For example, you pledged $40 and agreed to wait six months for the reward, and this wait is factored into the overall cost of the transaction. If you expect that the project creator would still ship the reward, then the loss is minimal; but if not, then the loss tends towards the full $40.
If the reward doesn’t ship at all, your maximum monetary loss is $40.
2) Kickstarter’s likely loss and impact from a successfully funded project
Kickstarter gets its 5% service fee immediately once the funds are collected and cleared via Amazon Payments. The risk, and accordingly, the potential loss to Kickstarter, is that not all the funds clear from backers. This loss is contained and the impact overall is minimal, especially as Kickstarter transfers to onus of collecting funds from backers to project creators, and project creators in turn, can use emotional pleas to backers to resolve the issues.
3) A project creator’s likely loss and impact from a successfully funded project
The project creator’s loss is zero, because once the funds cleared and Kickstarter and Amazon Payments take the services fees, the project creator gets all the remaining funds. There is no loss for the project creator in getting the funds.
The project creator can spend the income as needed for his business, and hopefully, this includes shipping the products to backers. Any loss would be part of the risk profile of the project creator’s business, and is not related to getting the funds from the backers.
As the backer in the crowdfunded transaction, you face the maximum potential loss. Make sure you know what you are backing and how much you can afford to back.