Crowdfunding Needs Crowd Dispute Resolution

What can investors reasonably expect from the ventures they support? Not in terms of a return. In terms of how they’re treated.

Your job, as a crowdfunder backing a new venture, isn’t just to figure out what’s worth putting your money into. Your job is also to be part of the crowd community, to set the norms and expectations for how those new ventures treat you and to make it clear when they’ve crossed the line.

Your job, as a crowdfunding platform, isn’t just to enable individuals to support the new ventures they think are worthy. Your job is also to build a sense of trust between the investors, the ventures, and your platform. Everyone involved needs to know that the inevitable disputes between founders and investors, between creators and backers, will be resolved fairly. Because if that trust is lost, then investors will stop putting their money down, and worthy entrepreneurs won’t be able to get their ventures off the ground.

When it comes to out and out fraud, then government agencies like the FTC and the SEC can already step in. But there are all kinds of other potential disputes. In reward-based crowdfunding, like Kickstarter, where backers receive awards like early access to a new product, disputes can be over things like delays in receiving the award they were promised. In equity crowdfunding, disputes can arise coming out of poor communication between the venture and its investors, with the crowdfunding platform there in the middle.

So what’s the best solution for resolving these disputes when they come up? Should it be left to the regular arbiters, like FINRA? Or the online dispute resolution (ODR) services like Modria? Should you just trust that services like CrowdCheck will warn you away from problematic entrepreneurs and steer you to ventures that will certainly leave you pleased?

Or maybe you should let the crowd resolve its own disputes.

Crowdfunding judges

Doing so means that the platform needs to set up the system for crowd dispute resolution, and the investors, the crowd, need to take part. Here’s the idea, leaning heavily on a 2014 article by two professors from Indiana University. The best idea is for the platform to try to prevent disputes from coming up in the first place by insisting that ventures communicate regularly with their investors. Like in much of life, you can keep most fights from even getting started by establishing open lines of communication.

But okay, let’s take it as a given that sometimes the communication will be lousy and investors will get upset. Here’s what goes into crowd dispute resolution.

First of all, crowdfunding sites need a way of identifying problematic ventures. Set up a way for investors to log their complaints, and when a certain percentage of investors have complained let that automatically trigger the platform taking a closer look. All the investors would then be notified of a potential problem, and they can join the complaint if need be. It’s the equivalent of automatically initiating a class-action lawsuit, without the need for lawyers or courts. What’s especially nice about this idea is that it’s a way of pulling together pieces of information that were spread out – different upset investors – and turning it into a realization that there’s a potential problem here.

The venture gets a chance to respond, and the investors can each select their response to what the venture had to say. Collectively, they can determine whether they are being treated fairly or not. A third-party arbitrator might still have to be involved, but the whole process could be fairly smooth and take advantage of collective intelligence to reach a happy resolution.

Secondly, and more interestingly, crowd dispute resolution can help resolve individual disputes. Let’s say an individual investor has a complaint. The venture has ignored him for 3 months, despite his daily attempts to communicate with them. Or his reward was delivered a week late. Who should be the arbitrator to decide whether or not the complaint is justified?

The crowd that you want to turn to here is the platform’s users, as a whole. They’re a built-in community of people who trust this platform and want to see it succeed as a good site for them to use to reach the entrepreneurs they’re excited about. In this stage of crowd dispute resolution, the platform can send a message to all its investors, not just those investing in this particular venture, asking them whether or not they think the behavior was okay.

Crowdfunding vote

The investors, the community of users that care about this investment platform and want it to be their means of making money, are already invested in making sure disputes are resolved quickly and intelligently, so it’s smart to get them involved. And the end result of using this process enough times is that the investors themselves will set the norms of what’s acceptable and what isn’t. They’re young and comfortable with online, collective means of setting the rules. They’re willing to take certain risks but also don’t want to be taken advantage of. So you don’t need an arbitrary body deciding how crowdfunding should operate. Let the investors themselves, as a collective, set the rules.

Now if the person complaining hears back from the crowd that his complaint is unjustified, he’ll have to look himself in the mirror and rethink things. Maybe his expectations were unfair. After all, we’re in the business of entrepreneurship, of building things from the ground up, of needing to be agile enough to quickly shift directions. He can learn from the community what’s reasonable to expect and when he should actually be complaining.

Here’s why this is so valuable:
1) Investors won’t be mistreated, and if they are it’ll be resolved and their trust is maintained.
2) The norms for the crowdfunding community get established, and people learn when not to complain, saving the entrepreneurs the headache of trying to respond to pointless complaints.
3) Helps investors feel good about their investment rather than feeling ignored or mistreated.

Crowd dispute resolution is not yet the norm for crowdfunding platforms. But if enough of us demand it, that could be another way for the crowd to set the norm!

Mike SchultzJuly 10, 2015

Mike Schultz

I am a contributing author who writes about crowd wisdom. I love reading broadly and synthesizing diverse sources of wisdom, but it's so cool when you realize the crowd itself does that even better.