British tech firms received a stark warning about the dangers of relying on crowdfunding this week, after one startup founder spoke of his “eye-watering” experience of losing potential backers due to a false fraud alarm.
Josh Turner, who founded the Manchester-based Stand4Socks in 2015, lost donations from backers after Stripe – the payment processor his campaign was using – blocked all payments following a fraud alert. The alert was triggered accidentally by Turner’s father, who donated a series of small sums while on holiday in Vietnam in an effort to support his son’s first attempt at crowdfunding.
Stand4Socks sells “ethically-made”, bold-patterned socks and donates part of each sale to UN-supported charities. The firm has avoided traditional bank and venture capital investment, instead choosing to follow the lead of many UK startups and opt for crowdfunding.
Loss of momentum
Although payments were only blocked for some six hours, Turner believes the loss of early momentum proved crucial, with all the firm’s plans to raise publicity during the campaign based on the assumption of rapid first-day fundraising.
The campaign, partnered with crowdfunding platform Indiegogo, initially planned fundraising pledges for up to £100,000, but has now only raised some £7,500, with just two days left.
“The issue is that we went for an all-or-nothing approach,” he told Tech City News. “Every press release and everything we had lined up just fell apart because hadn’t funded. We had to go back to the drawing board.”
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Indiegogo was unable to give Turner contact details for the lost backers due to privacy laws, he said.
The rise of crowdfunding
Crowdfunding has grown massively in recent years as a source of startup revenue. The UK’s ‘alternative finance’ market grew by 84% over 2015 to be worth £3.2bn by the end of the year, constituting 12% of the market to small businesses. London-based digital challenger bank Monzo made headlines last year when it claimed to raise £1m in 96 seconds via crowdfunding platform Crowdcube.
Crowdfunding specialist Anastasia Emmanuel described Stand4Socks’ experience as “unfortunate” but “rare”.
“[Stand4Socks] should have done the research to see that lots of small contributions from a country that might be on a list would cause a red flag on their payment site. When I’ve run campaigns, I make sure that the [startup] is fully aware of those types of issues.
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She went on to say that if a payment processor flags something it thinks is fraudulent, its only option is to shut the campaign down. Unfortunately, she added, there’s nothing Indiegogo can do to help until the payment processor lifts the ban.
“It’s obviously a really unfortunate incident to happen on day one of your campaign. But it sounds like a bit of an anomaly,” she concluded.
Article updated at 18:57 on 17.05.17: Turner told Tech City News that 568 backers had been lost due to the payment issue. This figure seems to be false, so the information has been removed.