Mannconomics: A Kick In The Pants

Kickstarter: teh new hawtness. Thanks to DoubleFine and others, practically anyone who's anyone has at least one Kickstarter or other crowd-funded project running right now. But where does this lead? How do the creators and backers view this arrangement differently? Kickstarter is not just handing money over for a product at Wal-Mart or through Steam; it is a payment for the promise of ... something. If that promise is just that you will help them continue with their project and here's a pat on the back, that's okay, but often Kickstarter is used as a pre-beta storefront: You pay me money, I will make you a game. This arrangement, no matter how hard everyone tries to deny it, is an investment. And investments carry risk.

Like ebony and ivory, mom and apple pie, risk and reward are constant companions in business. In order to grow, nearly every business needs capital, (e.g., money and resources). There are several ways to obtain capital investment, but the hoped-for result is always the same: The finished product earns more money than it cost to create — this is the reward. Investors always hope for success, but a great many projects fail, and the investment is lost — herein lies the risk.

Many small businesses are bootstrapped — that is, funded solely by their founder(s). Others require no real investment to speak of, like a home-based cupcake bakery. Still others require millions of dollars of funding, and require backing by external companies usually in the form of Venture Capitalists (VCs). Regardless of the way a business is funded, though, there is risk: Roughly 90% of businesses will fail within their first five years. Those who have invested the most money have the most on the line.

Risk and reward are directly proportional. A very low-risk investment like a money-market account, which is basically guaranteed to not go bust, also has a very low reward: currently a truly abysmal 0.2% annual return. Very high-risk investments like penny stocks and cutting-edge technology firms fail often, but when they pay off, they pay off 100x over. Anyone can make a low-risk investment, but for the high-risk investments … well, even doing your homework is no guarantee of success. VC firms still have close to a 90% failure rate with their investments, hoping that the one out of ten that does pan out will pay off at least 30x of the investment. (This link is a clean and concise primer on how risk and reward are spread out for both the business owner and the venture capitalist depending on the type of funding procured.)

Most modern video games cleanly fall into the VC category. The payoff is generally six months to four years away and requires multiple people working during that time, which means many mouths to feed, utility bills to pay, and so forth. Generally, developers' VCs are publishers. Sometimes each game is shopped around individually, sometimes they form a sort of “Sugar Daddy” partnership where a particular publisher has first refusal or even total control over a developer’s content by purchasing the developer. At any rate, the outcome is the same: Publishers finance a game, have “board of director” input, and stand to benefit financially (along with the developer) if the game succeeds.

Of course, this means a lot of ideas never get published at all. Many more get funded, but never recoup their initial expense. Precious few wind up selling 20 million units and keeping everyone in the black. At the very least, though, no VC or publisher is going to fund something without at least some potential for reward.

That would be silly … right?

A Brave New World

Kickstarter and other crowdfunding mechanisms have changed the top level of the game pretty considerably. The traditional idea of carrying around a pitch deck to various VC houses has been transformed into a pitch video and prodigious use of social media to cut above the noise floor of all your potential “backers”. Instead of hoping to land that one big fish, the goal is to land thousands and thousands of minnows. It all tastes the same anyway, so to speak.

Make no mistake, though: Despite its innocent appearance, crowdfunding is still a way to give resources for future and uncertain products, i.e. "investing." And like every other form of investment, it still carries very real risks. A recent study of Kickstarter showed that as many as 75% of projects deliver late, or still have yet to deliver, and it’s very possible that we will see some high-profile failures in the next few years. We've already seen it begin, actually, from mismanagement to mysteriously absent product to claiming that the sun itself is speaking to them in their dreams to delay/change the project and keep those changes a secret.

How many backers considered that risk before plunking down their money? Very few, I would wager. Kickstarter seems to encourage this line of thinking, trying to play it up almost as a storefront rather than a way to scattershot funding (and its associated risk). Its terms of use page, which functions as an EULA and you ostensibly agree to anytime you either post or fund a project, even says the following: "Project Creators are required to fulfill all rewards of their successful fundraising campaigns or refund any Backer whose reward they do not or cannot fulfill." The use of the word "rewards" is … curious, to say the least.

Crowd-funding mechanisms and savvy projects try hard to hide the fact that there's risk involved, and they try really hard to hide the lack of reward, but those issues are there, nonetheless. You can no more get rid of risk in business investment than you can remove the oink from a pig. People do have a history of forgetting about risk, though: Every time the stock market tanks, there are people who are shocked, just SHOCKED that their investments have a potential for loss. The trick is to accurately assess what is an investment and stay far away unless the potential rewards are great enough to more than offset the risk.

However much they may try to hide it, the risk is still there. That EULA is most likely completely unenforceable and is almost entirely a CYA statement for Kickstarter itself. Kickstarter isn't going to try to go after someone who has misallocated $50,000; the legal fees alone would cost far more than that, and Kickstarter themselves don't have any skin in the game. Even a class-action by backers seems very unlikely. If money has been spent on salaries or utilities or whatnot, you can't just take it back. It's gone. In a severe case one may be able to confiscate property or assets, but this would leave no money for the backers after legal fees and would have the additional negative effect of running any sane businesses far away from Kickstarter — at least with a bank loan the terms are easier to deal with, if they're going to lose their shirts regardless.

Backers' reactions to the first whiff of funding failure, Code Hero, shows a lot of anger and a lot of lack of understanding of the fundamental principles of risk. It shows that they really are treating Kickstarter as a storefront, not a dicey investment proposition. Let's imagine that it was Amazon: It would be like for every ten items that you bought through Amazon, Jeff Bezos mailed you eight and decided to keep two. If that was consistently true, who would continue to shop there? It's bad enough if you only received eight $2 toothbrushes; now imagine that each item was a board game for which you pledged $150. It adds up fast.

In VC funding, the VC floats almost all the risk while the business owner holds very little risk. In return, the reward potential is very great. In Kickstarter, the risk can run from $30 to $30,000. Arguably this runs from throwaway money to a very serious investment, on par as a percentage of resources as a major VC investment. But here's the kicker (heh): There is no fungible reward in the Kickstarter world. A backer risks money in return for a product that, once it makes it to market, can be purchased with no risk whatsoever — sometimes even more cheaply than the lowest backing tier. Higher levels of funding obviously incur higher levels of risk, but typically the only things gained are tawdry baubles and that would likely be included in a Collector's Edition of the game or pure vanity rewards, like the backer's name or likeness in the game.

This is the dirty little secret of crowd-funding, the shell game of deception that has been played through the medium's infancy: There is no reward. There is no chance of tripling one's investment on Kickstarter. Crowd-funding is set up so that the risk is spread out over so many people that no individual will feel a failure too severely. But running any sort of non-zero risk for zero reward is a sucker's bet. TANSTAAFL, and all that.

Still, in economic terms, each individual investor has a very low marginal utility of the money invested, whereas a VC's marginal utility is enormous. If one pays $20 in a Kickstarter, that money has a pretty low opportunity cost for most people — there's not a lot else they could do with it that would have a huge impact on their lives. Maybe they could earn like three cents in interest. Yippee!

If you spread risk out over many thousands of people, each individual's risk approaches zero — but near zero is most decidedly not zero. Some Kickstarter heavy-users are beginning to realize this; many who backed 30-40 projects are still waiting for 15 of them to deliver, well past due date. If risk is not zero, but reward is, well: There's a sucker born every minute, right?

At the end of the day, crowd-funding is most likely here to stay; the US congress even passed a law making it easier for people to execute it. If it’s here to stay, potential investors need to be able to properly weigh the risks and rewards in order to best use their money. In order to do that, everyone needs to recognize that if it walks like an investment, and quacks like an investment … you get the drift.

Comments

Minarchist wrote:

The accredited piece was put in to protect people, but often has a frustrating unintended consequence. It's there to protect what the government considered to be vulnerable people with assets, like widows, from getting conned by shysters into "investing" into bum schemes. Unfortunately, it often means that a lot of very smart people are locked out of the investing process, and it perpetuates the haves-and-have-nots class warfare that's been in the news so much lately.

Oh certainly, at the time "accredited" was put in there, we probably didn't have much of a middle class. Nowadays though, class warfare it is and I'm glad Congress was actually able to pass something useful.

If I may give some advice, I strongly suggest not backing this because of this.

For the security of potential backers, it's nice that this mess happened before the thing was funded.

Wow. That guy is so...something.

To get into the bigger argument of "should studios hire and fire based on projects (the Hollywood model) or work to have everyone busy all the time", I'm a firm believer in the second one.

And for Chris Taylor to ask "should we keep the campaign going, or just fold the company?" shows an awfully large lack of foresight.

You burned your company to the ground. Time to pack up and go home. Thankfully you pulled the plug early enough to afford severance and PTO packages, help those folks find other jobs and move on to your next gig.

There is nothing wrong with crowd funding. It's clear to anyone worth educating themselves and who isn't an entitled bastard. For everyone else, I don't think they're going to be interested in learning what it actually is. Is that kickstarter's fault? I don't think so.

The return as others have already stated is the feeling of helping something you like and of giving people a chance to create something that may not exist otherwise.

You might get a game out of it, you might not. It is not an investment. It's buying box seats at the Curran Theater; you might like the play, you might not. The play might even close before you get to see it.

But you will never see any kind of 'return', ergo, it is not an investment, and using this kind of language is dangerous.

This has been the reason for my reluctance to back any project on Kickstarter. I don't see it as an investment. To me, an investment carries with it not only risk/reward but also ROI. Yes, I'm a capitalist pig and I want to earn a profit. Darn that dreaded "P" word.

Getting a game out of my backing is fine and dandy, but that's just a delayed transaction for a good. I am perfectly fine in delaying the end of my transaction to several months or possibly years down the road, but I would rather do so with proven companies who have a track record of delivering on their Kickstarter promises. This is not to imply that these companies, or entrepreneurs do not exist--just that when I find a Kickstarter that I'm interested in, I want to be sure the project lead is reliable with a proven track record. The risk of failure is still present, but at least it's minimizing my risk and attempting to maximize my reward.

Best.

In my mind, Malor has the right of it.

When one makes a financial contribution to a Kickstarter project, one is technically providing a no-strings-attached gift of cash.

The second aspect of the transaction would be the granting of a contingent right to whatever the project administrator represents will be delivered if (and when) the project is successfully completed.

On this basis, Kickstarter is not an investment platform. Investment signifies an expectation of return (and with it, accountability to the investor).

That is why I think the term 'crowd funding' is apt to mislead because the term funding suggests there is a relationship of a debtor and a creditor when there is no such thing in the case of a Kickstarter project.

Whilst I have not read them, I am sure the EULA / T&Cs to Kickstarter makes it clear there is no recourse against the project administrator in the event of failure.

Hence, Kickstarter is not offered to Australians because the making of a payment with an expectation of return is subject to strict financial services regulation (but note platforms enabling patronage with no strings attached can still operate outside our financial services regulations).

Update: A suit was filed against a Kickstarter back in May.

With two exceptions, I've only ever participated in Kickstarters put up by fairly well-established artists or groups that have already put out plenty of products that I've enjoyed. In those cases, I've thought of it more as a way to say "thank you for doing this previous cool stuff, here's some money to do your proposed new cool stuff." All the projects have been successfully funded; several of them have completed their project and sent me my rewards, and the rest are either still working on the project or are preparing to get to work.

Of the remaining two cases, one is being run by a friend, and I've already seen the early stage of the project (a musical in progress; the KS is to make it bigger and better), and the other I have my doubts as to whether it'll ever be completed - it's by someone who's making a fan film based on a short story by one of my favorite authors. (He posts the occasional updates, but work is pretty glacial; I think he doesn't have a lot of experience doing this sort of thing.)

In all cases, I've given not-large amounts of money, money I can afford to lose if the project crashes and burns. Yes, it's risky... that's most of why I generally only give to people who have already done stuff that I like!

People seem to be getting the message that this whole crowd-funding thing ain't all it's cracked up to be. Turns out there is risk! Who would have imagined?

Now excuse me while I go yell at these kids on my lawn.

Madness!

How does that change anything? It still makes Kickstarter a means of funding a project where backers bear all the risk, and it only reinforces the notion that the most successful Kickstarter campaigns are based on products or brands that were already made popular through more traditional channels.

McIrishJihad wrote:

So what happens when the Veronica Mars project raises $2.8 million in 36 hours?

Since these are mostly tested workers on a high-profile project, in all likelihood the project will deliver. There will be a high-profile KS that fails at some point, but I think it's unlikely that it will be this one. Still, the point of backers bearing the risk for little-to-no reward and probably not understanding that is fundamentally the same.

EDIT: also known as, what Clock said.

So I started a thread in the Interesting Kickstarter Catch all and someone pointed out this topic so I figured I'd repost here. While its similar, this is a different take on the risk reward. Nothing has failed (quite the contrary) but here the founding investors (non-kickstarters, friends/family, maybe some angel or seed money) have probably gotten a return, and the private equity company that just invested in Oculus is definitely setting itself up for return. However, this probably wouldn't have happened without the successful KS campaign in the between those points and so basically my argument is that Oculus (intentionally or accidentally) exploited the largesse or perhaps naivete of the crowdfunding phenomenon to bootstrap its way to step 1 of a big payola, but the KS backers will get nothing from it other than their prototype kit.

I would like to disclaim that I am not anti-kickstarter I'm just skeptical that anyone that asks (or receives) large sums of cash from it sees it as "free money" and that's not what it should be for. The country needs more people who can take a $10K crowdfunded idea and turn it into the next google, microsoft or facebook. I'm not sure it needs people doing digital pandering because they can't raise money in the standard capital markets so they go begging for a big handout so they can get a big investment from private equity in a few months.

---

Repost from other topic

If you haven't seen, yesterday kickstarter funded Oculus VR received a $16MM series A investment from private equity led by Spark Capital.

Part of me wants to say Good for them and congratulations for making it big.

However the cynical part of me looks at this and sees very smart founders and initial private investors who took advantage of "free" money from Kickstarter, launched their product, then took series A money just made themselves a lot richer while the kickstarter "investors" paid their salary.

Said differently, if the $300+ backers all received shares of stock instead of prototype hardware, they probably could buy 5 Oculus VR's now (at least on paper).

Anyways its another interesting endgame from kickstarter. With this sort of money, I'm curious where it goes. The new investors instead of launching a product (and risking a market failure) may instead really want to create a huge bucket of technology and patents then try to sell them off for a big return. If the Kickstarter backers actually had some equity in the company, they could block it (or at least get paid first), instead now the future of the company is controlled by the private equity investors.

If you look at the bios of Spark Captial, most of the bios go on and on about what companies each partner has sold and to whom...only one guy has gaming experience... he was a GM at a publisher... Zynga. More interesting news, Spark Capital was one of the early investors in a little developer called OMGPOP, and I think we all remember what happened there. A year after its final funding and 4 years after its initial Series A, they sold to Zynga for a massive return.

If you are/were an early kickstarter backer of Oculus VR would you be ok if they sold to a defense contractor without bringing a product to market?

In light of this, do you continue to spend money on big kickstarters knowing you can never participate in something like this?

Carl -
Being a patron of an artist/the arts is, in a way, the polar opposite of being an investor. Pledging to a project is - essentially - becoming a patron. Patrons might expect some small gift or favor, a portrait, perhaps, but little more.

Investors buy shares in a going concern with an explicit statement of part ownership of said concern, and the clear expectation of a financial return on their purchase.

You would be hard-pressed to find a truer polar opposite of the dressed-up charity that patronage is, than buying shares in a company.

I don't disagree that giving charity and buying shares are different. However, nothing about Kickstarter is about charity. Their own website says it. The goal is to get seed funds to start a business venture. In the case of Oculus VR, they raised $2.4MM of money off kickstarter, and yes prototypes have been shipped. It is arguable that without this money, Oculus VR would be bankrupt by now, but they were able to develop their technology and get a prototype out there.

Yesterday Private Equity companies invested $16MM in this company. Dependign on how it was structured, the founders probably got paid for salaries worked without pay, maybe they had some friends and family who leant them some money. They all got paid with interest. I'm pretty sure the first thing Spark Capital does is bring in an army of patent lawyers to make sure everything is nicely buttoned up. Tomorrow, under direction of significant shareholder Spark capital, they could sell the company to a defense contractor or start patent trolling looking for a huge settlement. That's what Private Equity companies do. That doesn't make them bad people, no doubt Oculus will spend most of that money to continue R&D, but PE investors are looking to make money and make it fast.

Is it ok that the founders have been enriched, any initial angel/seed investors have been paid back with interest, any friends and family loans have been settled with interest, and Spark capital is now lined up to make even more millions (if things go well). I would argue none of this would have happened without the successful kickstarter campaign, yet the only one left out of the returns are the KS backers.

If I told you that was the plan of the Oculus VR founders all along would you still look at your backing (and receipt of your prototype) in the same light?

As with anything, check what you're signing up for. As I understand it a kickstarted project tries to deliver what the pledge level lists, but anything beyond that is a gift, and you weren't even promised that, because kickstarters sometimes go pear shaped.

Pledging to a Kickstarter entitles you to nothing more than whatever your pledge level reward was, and whatever feelings you derive from knowing that you helped them get their big break, or knew about them before they were a big thing. Your involvement ends when you receive your reward. The expectation that Kickstarter backers are entitled to any part of future earnings is incredibly selfish, and has the potential to ruin what the Kickstarter was for. It's not hard to imagine a new kind of trolling where people who don't like a project "back" it with the intention of ruining it, or drastically changing it.

The Oculus VR backers got everything they were promised. Thinking they deserve more is like (hyperbole alert!) saying that all the teachers you've ever had are entitled to a percentage of all your future income.

I am not seeing a problem here at all. In fact, I think it is a good thing, generally. A company got some funding through KS, delivered on their promises to their backers (so far as I know, I was not a backer), and leveraged that into more funding to continue to develop their company. Sounds like a success story to me. Stuff like this just affirms that people with an idea can successfully use Kickstarter as a viable option for, uh, kickstarting their company.

Carlbear95 wrote:

If I told you that was the plan of the Oculus VR founders all along would you still look at your backing (and receipt of your prototype) in the same light?

This is all a problem of perception. A lot of people go into kickstarters thinking that the system is something it's not.

Stengah wrote:

The Oculus VR backers got everything they were promised. Thinking they deserve more is like (hyperbole alert!) saying that all the teachers you've ever had are entitled to a percentage of all your future income.

I think this is the question. I'm not even sure KS backers got what they wanted because the product isn't to market. Put aside the notion of getting a financial return, was a prototype really all the backers wanted? If so then that sort of goes against the argument of "patron of the arts", since those donors in general are looking for the greater cultural or public good, not the tote bag.

Again, I dont' think kickstarter is a bad thing. The problem is that now, an entrepreneur, partnered with the YC's, VC's, private equity, angel investors of the world, can attempt to game what appears to be an irrational (using the economic definition of rational) group of investors who are wiling to give money to a risky venture for virtually no return. Basically I can hand the "risk" of a startup over to KS investors who don't need to be compensated for taking on this significant risk. If the product takes off, great, sell shares to someone and be rich and throw our KS backers a small bone. If not, oh well, it wasn't my money.

I think i'm worried more about less generous people taking advantage of Kickstarter as an interest free loan, not the attitude or intentions of individual backers.

You say that as though kickstarter is money for nothing, you've still got to do a good enough pitch, have the foundations right to convince a few thousand people to part with their cash, and there's plenty of unsuccessful kickstarters. Another aspect with kickstarter is that because it's front loaded with the consumers, it's more visible, but the same (or similar) process happens with most other products just behind the scenes.

Carlbear95 wrote:
Stengah wrote:

The Oculus VR backers got everything they were promised. Thinking they deserve more is like (hyperbole alert!) saying that all the teachers you've ever had are entitled to a percentage of all your future income.

I think this is the question. I'm not even sure KS backers got what they wanted because the product isn't to market. Put aside the notion of getting a financial return, was a prototype really all the backers wanted? If so then that sort of goes against the argument of "patron of the arts", since those donors in general are looking for the greater cultural or public good, not the tote bag.

A prototype was for backers who pledge at the level where it was a reward. Only the $275 levels and above got a prototype. There were 1,937 backers who just got a poster, shirt, or a virtual thank you. "Patron of the arts" is by far the most realistic way to view backing a Kickstarter, even though there's an incredibly large number of people who use it as a pre-order system.

Again, I dont' think kickstarter is a bad thing. The problem is that now, an entrepreneur, partnered with the YC's, VC's, private equity, angel investors of the world, can attempt to game what appears to be an irrational (using the economic definition of rational) group of investors who are wiling to give money to a risky venture for virtually no return. Basically I can hand the "risk" of a startup over to KS investors who don't need to be compensated for taking on this significant risk. If the product takes off, great, sell shares to someone and be rich and throw our KS backers a small bone. If not, oh well, it wasn't my money.

I think i'm worried more about less generous people taking advantage of Kickstarter as an interest free loan, not the attitude or intentions of individual backers.

So you're worried that people will use Kickstarter as it is intended to be used...

Kickstarter backers are absolutely not investors. If an entreprenuer uses Kickstarter to start a project that goes on to make millions, while the backers only get their "small bone" it's working exactly as intended.

Stengah wrote:

So you're worried that people will use Kickstarter as it is intended to be used...

Kickstarter backers are absolutely not investors. If an entreprenuer uses Kickstarter to start a project that goes on to make millions, while the backers only get their "small bone" it's working exactly as intended.

I'm not worried about a company or individual taking KS money, releasing a product that product takes off, that company then takes money based on their successful launch/acquisition/investment, whatever.

I'm worried private equity, angel and seed investors, other Gordon Gekko's of the world will find a way to use Kickstarter as a cheap source of capital to fund what really is the riskiest part of the business, the beginning. Those earliest investors generally receive the highest return on their investment (if you gave $100K to Zuckerberg when he was in his dorm room you're a lot richer today than if you bought $100K of stock when it went public last year). In the case of Oculus VR, Spark capital has managed to put itself in the Series A position, which is generally the highest potential return (and risk) position outside of the founders/angel investors, but by relying on KS, it has basically been able to put itself in this high reward position with significant risk mitigated.

As a KS backer, you've probably done as much to help Spark Capital as you have for the developers of Oculus, and while you may have gotten a thank you note, or a prototype from Oculus, I assure you, you will get zero from Spark Capital.

If that's the intention of KS, then maybe I'm the naive one here. I'd much rather give $100 to some kid who can't afford a Maya licenese, submission costs, or server hardware, but has a great game and just wants to release it than to someone who just wants it as seed money so they can get a big payola from the equity markets or acquisition.

If we were to peer into a parallel world, I have a feeling that Oculus VR would still have gotten a Series A out of Spark without a Kickstarter, it just would be for way less money, and a few more years down the timeline.

By no means would I see a Series A as a "pay day" for the original founders - sure, they might have sold some of their personal shares in the company to free up shares for Spark, but I always see a Series A as "ok, you've got some legs here, lets see where you can run with some extra cash". It's more "fuel in the rocket", and up to the execs and board to direct where that money goes.

For Oculus, it'll probably be more money into R&D and manufacturing, so they can hit the market with the v1.0 consumer gear. This also gives them some room to spend on the other aspects of the business: marketing, customer service, and channel development/partner enablement - the "soft" areas that still need to work to make the product/company/niche viable.

Startups don't get pay days until they exit "successfully" - whether that is getting acquired, going public, or attaining a positive run-rate. Hopefully the founders and Spark are on the same page as far as an exit is concerned, but there's still a load of work to be done before then.

To me, a Kickstarter should be about delivering the project goal - sometimes that's a product, sometimes its an event, but whatever it is, I'm giving money to help make that happen. Ideally, every cent that is raised from the KS campaign should go towards making that goal the best it can be (minus the fees from KS and Amazon, and anything the creator outlined as costs, of course). I'm not a fan of thinking that KS creators would "pocket the money", unless the project was explicitly "pay my salary for a year so I can quit my job and do this hobby as my job".

If the goal gets done, and a business grows out of it, that's totally awesome. I sincerely hope there's not a single Oculus backer who is now "butt hurt" that the founders took $16m in funding to continue making their project into a successful company.

McIrishJihad wrote:

By no means would I see a Series A as a "pay day" for the original founders - sure, they might have sold some of their personal shares in the company to free up shares for Spark, but I always see a Series A as "ok, you've got some legs here, lets see where you can run with some extra cash". It's more "fuel in the rocket", and up to the execs and board to direct where that money goes.

This is true, and maybe I spoke with a little too much hyperbole. That being said, what can happen in Series A is initial lenders (even if it was someones mom or brother-in-law) either get paid out in cash + interest, or given more stock if they want to "let it ride" to the next level. Original founders/employees get paid back for their sweat equity when they worked for free for the first 2 or 3 years, again with interest. The bank gets their loan paid back with interest or the 2nd mortgage a founder had to take out gets paid back because the founder got some cash considerations, heck even the credit card company may get paid back, with interest.

Everyone who helped get the company to this stage has gotten paid back with interest, except the kickstarter backers, who were the biggest contributors to date. All this would be fine if the product was selling like hotcakes and the company was turning a profit, but instead its almost as if the Kickstarter was used as a "free" and significant pre-Series A investment that now has no rights or expected return associated with it. Even if that wasn't the original intention, I already see private equity/VC types salivating at the thought finding a way to take advantage of free money.

Carlbear95 wrote:

Everyone who helped get the company to this stage has gotten paid back with interest, except the kickstarter backers, who were the biggest contributors to date. All this would be fine if the product was selling like hotcakes and the company was turning a profit, but instead its almost as if the Kickstarter was used as a "free" and significant pre-Series A investment that now has no rights or expected return associated with it. Even if that wasn't the original intention, I already see private equity/VC types salivating at the thought finding a way to take advantage of free money.

That was the original intention. A lot of people come in to Kickstarter with preconceived (and erroneous) notions of what it is. But all you need to do is sit and read and you'll know exactly you should expect. The most you will get for your money is what's written on your reward level. The least you'll get for it is absolutely nothing. You are not a lender. You are not a founder. You are not an investor.

It seems like you want Kickstarter to be something it's not. It just is what it is.

Quintin_Stone wrote:

That was the original intention. A lot of people come in to Kickstarter with preconceived (and erroneous) notions of what it is. But all you need to do is sit and read and you'll know exactly you should expect. The most you will get for your money is what's written on your reward level. The least you'll get for it is absolutely nothing. You are not a lender. You are not a founder. You are not an investor.

And in the eyes of a savvy investment community (who's in it to make money) you could be viewed as a pile of irrational investors who are more than happy to throw money at something with no binding obligation or even expectation of return. If I can find a way to take your money and make extremely risky bets that offer me (as the "investor") significant rewards while owing you nothing in return, thereby passing the risk of investing in an early startup to a group of backers who don't need to be compensated for that risk.

I'm fine with KS backers forgoing any notion of investment or return, but are KS backers equally fine with VC and PE (not the founders) taking advantage of that belief?

It seems like you want Kickstarter to be something it's not. It just is what it is.

Actually quite the opposite. I don't want Kickstarter to become an investment vehicle, but for it to remain in the "innocent" realm of garage development and arts/crafts. IMO, The fact that Spark Capital was able to take advantage of KS "generosity" starts to push this in the wrong direction.

Carlbear95 wrote:
Quintin_Stone wrote:

That was the original intention. A lot of people come in to Kickstarter with preconceived (and erroneous) notions of what it is. But all you need to do is sit and read and you'll know exactly you should expect. The most you will get for your money is what's written on your reward level. The least you'll get for it is absolutely nothing. You are not a lender. You are not a founder. You are not an investor.

And in the eyes of a savvy investment community (who's in it to make money) you could be viewed as a pile of irrational investors who are more than happy to throw money at something with no binding obligation or even expectation of return. If I can find a way to take your money and make extremely risky bets that offer me (as the "investor") significant rewards while owing you nothing in return, thereby passing the risk of investing in an early startup to a group of backers who don't need to be compensated for that risk.

I'm fine with KS backers forgoing any notion of "equity" or return, but are KS backers equally fine with VC and PE (not the founders) taking advantage of that belief?

It seems like you want Kickstarter to be something it's not. It just is what it is.

Actually quite the opposite. I don't want Kickstarter to become an investment vehicle, but for it to remain in the "innocent" realm of garage development and arts/crafts. The fact that Spark Capital was able to take advantage of KS "generosity" makes me think it may start going in the wrong direction.

Again, you prove my point. It is not in the innocent realm of garage development and arts/crafts. There's already been no shortage people creating kickstarters while salivating over the idea of free money.

Quintin_Stone wrote:

Again, you prove my point. It is not in the innocent realm of garage development and arts/crafts. There's already been no shortage people creating kickstarters while salivating over the idea of free money.

Heh, well if that's the case then I guess at least between you and me we're in agreement, and confirms my personal standpoint on why I don't care for kickstarter for big products.

From a business standpoint, since we're in agreement that its a bunch of irrational investors giving away free money, you and I should get together to come up with a business plan that takes advantage of all these chumps and collect arbitrage profit