Why crowdfunding scams are good for society

Yesterday I suggested a scenario about the Skarp laser razor campaign, in which the new device disrupts the current shaving industry giants. Well, that was yesterday. Less than 24 hours after I published the piece in this blog, Kickstarter suspended (a polite word for “dumped”) the project. The people behind Skarp jumped ship immediately to Indiegogo, and seem to be doing quite well in there – gathering approximately $10,000 every hour, for the past ten hours.

There have been several accusations by so-called experts and professional experts in the field of lasers and physics, regarding the feasibility of the laser razor. And yet, the suspension by Kickstarter was formally because of a very different reason: it turns out the Skarp team did not have a working prototype. Or maybe they did, but it was working so haphazardly that it could not be used for actual shaving.

So what’s going on here? Don’t the folks at Kickstarter consult experts before they agree to take up projects that may be physically impossible?

I believe they do not, and that’s generally a good thing.

In order to understand why I say so, let’s first try to see what purpose Kickstarter and crowdfunding platforms as a whole serve in society.

The Three Steps of Innovation

We often hear of the entrepreneur who had an amazing idea. A truly breathtaking invention formed in his mind, and he immediately proceeded to make it a reality, earning himself a few billion dollars and a vacation in the Bahamas on the way.

That, at least, is the myth.

In reality, innovation is based on three distinct steps:

  • Recombination of existing concepts into many new ideas;
  • Finding out which ideas are good, and which aren’t;
  • Rapidly iterating a good idea until it becomes an excellent one.

The Polymerase Chain Reaction (PCR) is an example for a unique recombination of existing concepts that changed the world. The PCR device is used in nearly every biological lab as part of the work needed to sequence DNA, to create new DNA strands, and genetically engineer bacteria, plants and even human cells. The technique was invented by Kary Mullis, who won the 1993 Nobel Prize in Chemistry for it, ‘simply’ by recombining existing techniques and automating them to a degree.

Many other winning inventions are in fact a recombination of existing ideas. Facebook, for example, relies on the recombination of a social network, the World Wide Web, smartphones, image and video storing, hashtags, and many others. Similarly, autonomous (driverless) cars are a recombination of computers, sensors, image processing, GPS, etc.

Since we’re constantly innovating, dozens (and sometimes hundreds and thousands) of new ideas are being added to the mix every year, and entrepreneurs are trying to recombine them in different and exciting ways to create new inventions. This is the first step of innovation: the frantic recombination of existing ideas by inventors from around the world.

The only problem is, most of these new inventions are, well, rubbish.

In his book “How to Fly a Horse”, Kevin Ashton (the inventor who gave the Internet of Things its name) details what happens to newly patented inventions in at least one firm – Davison Design. For the past 23 years, Davison mainly took money from customers to register their patents. Overall, its revenues equaled $45 million a year, with an average of 11,000 people signing with the company. How many people actually made any money from their patents and inventions? Altogether, only 27 people have seen any money out of their patents. The statistics, in short, are grim for any inventor. You may think the market is eager to use your new idea, but you can never tell for certain until the product is actually on the market. In fact, Shinkhar Ghosh from Harvard Business School has discovered that, “About three-quarters of venture-backed firms in the U.S. don’t return investors’ capital”. So nobody knows which idea is going to be any good: not even the big venture capitalists who invest millions of dollars in those ideas.

This is where the second part of innovation comes in: we have to winnow the good ideas from the bad ones. In the past, this function was only performed by government grants and investors. Distinguished committees would go over hundreds and thousands of idea submissions, and select the ones that seemed to have the best chance for success. Unfortunately, such committees are hard-pressed to support all the applicants, and as a result, 98-99% of ideas are refused funding.

Consider, on the other hand, Kickstarter and other crowdfunding platforms. In Kickstarter alone, 43% of campaigns reach their goals and obtain the money they needed to make their vision a reality. In a way, crowdfunding allows inventors to test their ideas: does the public want this new invention? Is it any good? Are people willing to pay for it… even before the factories have received the million dollar contract to manufacture all the parts?

In that way, crowdfunding platforms enable innovation by streamlining the second step: distinguishing the good ideas from the bad ones. And once a good idea has been found and supported – whether it’s an ice chest with a USB charger, or a pillow that covers the user’s head completely – the inventor keeps upgrading and changing the product so that it becomes better with each iteration. This is the reason that iPhone 6S is so much better than the original iPhone.

Innovation is the steppingstone on which our modern day society is built. Innovation leads to increased productivity, and as Paul Krugman says – “Productivity isn’t everything, but in the long run it is almost everything.” Innovative new companies are responsible for the majority of new jobs in the United States, and innovative ‘crazy’ ideas – the kind only few dared to support when they were originally proposed, like Airbnb or Google – have led to wholesale changes in the way society behaves.

Today’s new Google or Airbnb would not have had to look for elite investors: they could’ve went to the crowdfunding platforms to ask for assistance, and their chances would’ve been much higher to receive funding, at least in principle.

That is why Kickstarter is so important for innovation and for modern society: it allows the public to support many more innovators than ever before. And while quite a few of them are going to fail (probably most of them), the ones who make the big breakthroughs are going to change society. At the very least, even the fluked campaigns show the rest of us the value of some ideas. Overall, crowdfunding platforms move society forward.

The Bad Apples

“That is all just swell,” you might say now, “but how can we be sure that the projects on Kickstarter are not a scam? How can we know for sure that the Skarp laser razor isn’t a scam? The experts were all against it!”

Well, here’s a newsflash: when it comes to innovation, you can’t always rely on the experts.

There are plenty of examples that support this statement. Both Lord Kelvin (noted British Physicist) and the great astronomer Simon Newcomb dismissed any attempt to build a heavier-than-air flying machine, a mere two years before the Wright brothers demonstrated the first successful airplane. The British Royal Astronomer Richard van der Reit Wooley has declared confidently that “Space travel is utter bilge” – one year before Sputnik orbited the Earth. In fact, experts are wrong so often about the limits of possibility, that Arthur C. Clarke has issued his First Law about them –

Arthur C. Clarke's First Law. Originally from IZQuotes
Arthur C. Clarke’s First Law. Originally from IZQuotes

In short, experts can be wrong, too, even in matters as rigid as the laws of nature and the ways we can manipulate them. And it is so much easier to get social developments and innovations wrong, since there is no perfect model of the human mind or of society. And thus, no expert would’ve forecast with certainty that people will upload their photos so that millions can see them (Facebook, Flickr, Instagram), or share their houses (Airbnb) and cars (Uber) with total strangers. And yet, these innovative start-ups made it into existence, and changed the world.

That does not mean, of course, that the public should support every wily promise on Kickstarter. In fact, I think Kickstarter did a good thing when they removed the Skarp project because the inventors had no fully working prototype. In the end, crowdfunding platforms need to balance between the desire to protect their users from scams, and the fact that it’s very difficult to distinguish between scams and some extremely innovative ideas. At least in this case, it seems Kickstarter decided to err on the side of caution.

Conclusion

While many are asking whether the Skarp laser razor is a scam, it’s the wrong question. The real question is what purpose Kickstarter and other crowdfunding platforms should have in our modern society, and the honest answer is probably that the users of these platforms have a better chance of seeing their money dissipating into thin air – but altogether that’s a good thing, since more innovators overall get supported – and the few who succeed, change the world.

So go ahead: support Skarp on Indiegogo, or any other crazy idea on Kickstarter, Tilt and the other crowdfunding platforms out there. Buy that new (barely functioning) 3D-printer, the shiniest (and fragile) aerial drone, or that dream-reader that doesn’t really work. Go ahead – now you have the justification for it: you’re promoting innovation in society. Or in other words – bring on the scams!

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3 thoughts on “Why crowdfunding scams are good for society

  1. I strongly disagree – scams should be weeded out, not encouraged.
    Your example with Lord Kelvin, Simon Newcomb and others fits Arthur C. Clarke’s view not about the experts but about the *elderly* experts.
    (other experts at their time supported research and even built heavier-than-air flying machine, and rockets)
    I am not against trying and supporting new ideas that might fail – I am against supporting ideas that have no chance of succeeding, and this laser razor is a pipe dream.

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    1. I’m not saying crowdfunding platforms should completely open themselves up to any scam, but my point is that experts in every age treat anything new and extraordinary with deep suspicion (I know even I do that in my field of expertise). Therefore, it’s all too easy to call “scam!” on anything that seems impossible in first glance.

      You say that the laser razor is a pipe dream. Other experts agree. Other experts – including distinguished university professor in this field, and the top industry guy on the subject – say it’s possible. So who is right? The public is willing to take a bet. And if they win – everybody wins.

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