Live

Watch CBSN Live

​When a $1 million Kickstarter project implodes

Even broken watches tell the time accurately twice a day, but what happens when the watch simply fails to materialize?

The answer is accusations of deceit and calls for refunds, according to a massive $1 million Kickstarter campaign that aimed to create a sleek watch called the CST-01 using an "E Ink" screen and a micro-energy cell to create what was billed as "the world's thinnest watch."

The founders of the campaign, which drew 7,658 backers, wrote in an update earlier this month that its manufacturing partner needed an additional $1.2 million to finish the project. In essence, the project stalled out after grossly underestimating the costs to produce the watches (which should be noted aren't smartwatches).

Crowd-funding campaigns like those that run on Kickstarter come with inherent risks, which some backers might not realize. Investing in a project comes with the thrill of helping a cool idea or interesting product make it to market. But if it fails, backers aren't guaranteed a refund like they'd get if they had bought an item on Amazon (AMZN). Hardware projects like the CST-01, created by a company called the Central Standard Timing, sometimes run into similar difficulties because of the challenge of estimating production costs.

"It's not super often that a big flameout happens," said Chris Tsai, the founder and CEO of Celery, told CBS MoneyWatch. Celery helps startups that have raised money through crowd-funding continue to take pre-orders as they ramp up. Hardware projects that are crowd-funded tend to be "underfunded and oversubscribed," he noted, adding, "There is a big distinction between being able to show a prototype that is often showcased in a video versus mass producing something."

According to the founders of Central Standard Timing, the project ground to a standstill after they failed to raise additional money from backers. Issues such as the costs and "slow pace of development ... have made it difficult to impossible to raise the amount of money we need to both scale the business and fulfill orders," they wrote.

After telling the manufacturer about their money problems, "they decided to stop the line until it was clear how they would get paid," the founders noted. All told, they created only 335 watches, the post said.

Central Standard Timing didn't immediately return a call to CBS MoneyWatch.

To be sure, other crowd-funded projects have been known to fall apart. The issue that rankles some backers, though, is that the Central Standard Timing crew didn't keep them up to date with what was going on as they hit roadblocks. According to the New York Observer, the creators failed to alert backers to delays until long after the watches were due to arrive on their doorsteps.

While some backers have been asking for refunds, the company apparently doesn't have any money left, based on a chart of its bank account posted with the latest update, which shows the balance hovering near zero. That's leaving some Kickstarter backers, who contributed anywhere from $1 to $1,000, with a sour taste.

Consumers should keep a few things in mind before proceeding with backing crowd-funded projects, noted Celery's Tsai. For one, delays are common for campaigns that are creating physical products. Many companies will try to refund what money they have left over if it's clear that the project isn't going to succeed, he added.

Consumers should also be on the lookout for red flags, such as promotional videos that show renderings rather than actual prototypes.

"If there isn't even a working prototype, that's a signal these guys aren't serious," Tsai said. Check that the makers have a track record of delivering on projects, and that they have a background in the project's field.

"You can't just look at the gloss of a campaign," Tsai said. "You have to do the due diligence that any investor would. Is the risk and reward worth it? If it's a $200 investment, are you ready to lose that?"

View CBS News In