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The Almighty Buck Businesses

Kickstarter Lays Down New Rules For When a Project Fails 203

An anonymous reader writes "In a blog post, Kickstarter announced several updates to its terms of use for projects. From the article: "Kickstarter has iterated on its policies several times since it launched in 2009, with the most recent wave of revisions surrounding the site's transition from only posting projects cleared by the staff to clearing all projects that meet a basic set of criteria. Even still, some projects lack clear goals, encounter setbacks, or fail to deliver, like the myIDkey project that has burned through $3.5 million without yet to distributing a finished product. The most recent terms revision is timely: on Thursday, science fiction author Neal Stephenson announced that a game he Kickstarted in 2012 with $526,000 in funding was officially canceled."
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Kickstarter Lays Down New Rules For When a Project Fails

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  • by Applehu Akbar ( 2968043 ) on Monday September 22, 2014 @08:27AM (#47963707)

    More transparency will be a good policy for Kickstarter. It's developing what is essentially a new stock exchange, and in the process is finding out what kind of reporting investors will truly find useful.

    • Regular finance account reporting of how the money is being used should be required. If you can't handle it, don't ask for money.
      • But KIckstarter, as a new financial market, has the opportunity to take the same innovative approach to the reporting area as it has to investing itself. Can it come up with a financial reporting system that investors will actually pay attention to, rather than toss in a drawer unread? THAT's what I'm looking for here.

      • by mysidia ( 191772 ) on Monday September 22, 2014 @09:12AM (#47964059)

        Regular finance account reporting of how the money is being used should be required. If you can't handle it, don't ask for money.

        Such production of reporting and auditing of reports has costs and could consume significant amount of project funds.

        It should be up to the backers and an agreement with the backers made in advance, regarding what will be required, not up to some random third party to decide what reporting will be imposed on them both.

        • Such production of reporting and auditing of reports has costs and could consume significant amount of project funds.

          Really? If they are not already tracking costs then they are not managing the development, its an integral aspect that cannot be separated. Reporting financial activities is not hard nor costly. If you can't keep a set of books, don't ask for money (or at least don't ask for a lot of money).

        • Regular finance account reporting of how the money is being used should be required. If you can't handle it, don't ask for money.

          Such production of reporting and auditing of reports has costs and could consume significant amount of project funds.

          Nonsense. If it's a serious project, they should already have an accountant or at least some form of accounting software - once you have that, it's pretty simple to produce a basic cash flow report. Regardless of what your business is, tracking the financials is

      • by arth1 ( 260657 )

        Regular finance account reporting of how the money is being used should be required. If you can't handle it, don't ask for money.

        Or, the opposite: If you cannot handle the risk of losing the money without getting anything for it, don't pledge the money.

        Kickstarter is meant to be risky. If there were no risks, the innovators would have gone to a bank instead.

    • Re: (Score:2, Informative)

      by Anonymous Coward

      stock exchange ... investors

      I think you really need to reconsider your idea of what service Kickstarter provides.
      Hint: There is no investment going on.

  • Risk aversion (Score:5, Insightful)

    by i kan reed ( 749298 ) on Monday September 22, 2014 @08:29AM (#47963715) Homepage Journal

    What kickstarter is afraid of, is something that can't be prevented: namely that people will need more money than they think to make something(or worse, that they happen to be scammers). Once the money is gone, no form of contract is going to get it back. And any scammer with their salt will run the money through a limited liability corporation, and pay themselves divdends/salary out of kickstarter funds. Then it can just go bankrupt.

    There won't be anything to reclaim legally. So if you're going to back a kickstarter project, you have to do it in a risk-accepting mindset. Which for me, it means I only back projects that create things that I absolutely know wouldn't end up getting made otherwise. For you, that might just mean "no kickstarter ever"

    • Wouldn't limiting the transfer of funds, via signed contracts or something, limit the risks of such a thing happening?

      • Two problems
        1. That creates a lot of overhead. Both for the projects and kickstarter. It makes kickstarter less profitable, and ironically, the honest projects more likely to fail.
        2. The projects presumably need the funds to make the things, or else they'd not be on kickstarter.
        3. Those that are slowly falling behind on their targets can remain in denial until, poof, the money's all gone. I mean, that's just human nature.

        • by sribe ( 304414 )

          Those that are slowly falling behind on their targets can remain in denial until, poof, the money's all gone. I mean, that's just human nature.

          I'd just like to point out that before KickStarter, this exact thing happened all the time, even though angel investors and VCs were far more involved in monitoring the companies they invested in than kickstarter could ever be. So yes, it will happen with KickStarter, no question.

          • I agree, but there is the distinction that those groups were taking calculated risks, usually hedged with other side bets, where a single big payoff is enough to cover the major failures.

            Whereas kickstarter falls somewhere inbetween per-purchase and charity.

          • But, smart VCs can impost their own requirements on the project and its management, can monitor all aspects closely and typically can decide to either continue support or cut off funding.
            • by sribe ( 304414 )

              But, smart VCs can impost their own requirements on the project and its management, can monitor all aspects closely and typically can decide to either continue support or cut off funding.

              And yet, what we're talking about happens anyway, which is my point ;-)

              • Sometimes the result is a complete loss for the VC, but more often they have a lien and can get some recovery, hold the assets for future use, and even get a tax benefit from the losses. Either way, they themselves have a lot more control along the way and many more pathways to recover investment.
      • by gnupun ( 752725 )

        Wouldn't limiting the transfer of funds, via signed contracts or something, limit the risks of such a thing happening?

        That's how venture capital is distributed to entrepreneurs, in chunks -- series A, series B and so on. So after completing phase 1, they get $X, after phase 2, they get $Y and so on. This is how Kickstarter should distribute funds to the creators. Otherwise, there is a chance the creators will simply take the money, stop working and give bogus status updates.

        When the creators create their sa

        • That might be a good idea for people to start doing that right now, even if Kickstarter/IndieGogo/etc themselves don't officially require it.

        • But then someone has to judge on whether phase X has been completed or not.

          Venture capitalists have legal contracts and the all important lawyers for when the two sides disagree on whether the requirements for a phase have been met. Kickstarter is not going to spend that sort of money and effort on each and every project.

          • by gnupun ( 752725 )

            Venture capitalists have legal contracts and the all important lawyers for when the two sides disagree on whether the requirements for a phase have been met.

            Right now it's completely a black box how backer money is spent. Maybe the creators should list itemized bills in their Kickstarter project page so backers can see if their money is being spent reasonably. Don't VCs also monitor how their money is spent? I'm not sure.

      • Wouldn't limiting the transfer of funds, via signed contracts or something, limit the risks of such a thing happening?

        Possibly, and it is how most non-kickstarter projects are funded. the problem is not in how funding is done, however; it is in KS desire to assume zero liability for failed projects. If they start deciding if a project deserves more funding then they open themselves up to lawsuits when the project failed. By taking a clear hands off approach they protect themselves while still getting their cut. A start would be for them to refund their 5% cut of the raised funds for failed projects.

    • No, they are trying to prevent themselves from gaining a reputation of being a place that's filled with Scammers. Something that's been well under way for a while now. And, to be honest, I'm not sure how they ever thought this wouldn't happened. As soon as I heard of kickstarter I thought it'd end up going down in flames. I'm rather surprised it's lasted as long as it has.

      What they need to do is make clear what your money is for. People seem to expect a lot more than they really get, and need to understand

      • my point of view has always been "i'm going to throw some money into this future product. I may or may not see any kind of product if I contribute, but i sure as hell won't see a product if i don't." that's when i really want a product to work out. If i'm just "kinda" into it, i'll just wait for them to release and order it then.

        • my point of view has always been "i'm going to throw some money into this future product. I may or may not see any kind of product if I contribute, but i sure as hell won't see a product if i don't." that's when i really want a product to work out. If i'm just "kinda" into it, i'll just wait for them to release and order it then.

          Right... the problem is a lot of people expect a lot more than that. They think that someone, somewhere is vetting this stuff, when the fact of the matter is you're giving a total stranger money so they maybe can do something you find interesting.

    • I've never given to a Kickstarter project and doubt I ever would. For me, the biggest question I would have for such a project is "If your project is so great, why can't you get money from a bank or VC?" If you can't give me a VERY good answer to that question, then you're probably either a scammer or just too lazy to seek out real funding--and either way, I wouldn't give you a dime.

      • Re:Risk aversion (Score:5, Informative)

        by sphealey ( 2855 ) on Monday September 22, 2014 @10:30AM (#47964813)

        - - - - - why can't you get money from a bank or VC? - - - - -

        Because not everything in the world is done in expectation of cash ROI? A good indie film will end up being shown at local and regional film festivals (and now, distributed as a DVD to Kickstarter backers). A _really_ good indie film will be invited to national and international film festivals - which will cost the producers money to attend (successful project with negative ROI). How does one obtain a bank loan or VC investment for such an endeavor?

        People apparently think Kickstarter and the like are mini Sand Hill Roads, whereas they are much closer to you kicking in $50 to your local community art collective.

        sPh

      • Re:Risk aversion (Score:4, Insightful)

        by gman003 ( 1693318 ) on Monday September 22, 2014 @10:46AM (#47965011)

        Often it's too little money for a loan.

        I've backed several book printings. The content already existed. All they needed was to go through the proofing process and have enough cash to do a print run. The former, while time-consuming, is fairly low-risk. With Kickstarter's "no money taken until you meet the threshold" setup, the latter is also pretty guaranteed.

        But despite it being a very low-risk proposition, banks don't really help with such a project. It's too little money - one had a minimum of $6000, and even the biggest was only $20K. Likewise, who wants to bring in VCs who will try to take over your business (if not just burn it for profit) for a small project?

        Really, I think you're wrong in that you think VCs and banks are a good judge of whether a project will succeed. They really aren't, in many cases, particularly for niche fandoms. And they might also not be good for the business, since they inevitably take a large chunk of the profits for themselves. Some of the projects I've backed could easily have self-funded - but they used Kickstarter to make sure there was enough demand for it to be profitable.

        I tend to treat Kickstarter as a sort of preorder system, with the caveat that I need some sort of proof that you actually know what you're doing before I will commit. Many of them have successfully done such things before. I kickstarted Exalted 3rd Edition, since the mere existence of two prior editions is a good indicator that they can make a third. I've kickstarted a few games from new creators that had fully playable prototypes (Superhot and Nothing To Hide). Those were riskier, but still a pretty acceptable risk.

        I do, however, shy away from any Kickstarter project that will need additional funding - like Clang, which took all that money just to build something they could show to VCs. That's like paying an entrance fee to a casino - sure, you might still hit the jackpot but those are some pretty long odds.

      • So no good idea ever has been ignored by capitalists (banks, VCs, businesses)?

    • Re:Risk aversion (Score:5, Insightful)

      by soft_guy ( 534437 ) * on Monday September 22, 2014 @10:32AM (#47964831)
      What is so wrong with a project failing? I really don't get it. This is a site to donate money for people to do a cool project. If none of the projects are allowed to fail, it would only be really conservative projects. If you aren't willing to take that risk, don't fund a kickstarter. It is not a shopping site.
      • by sphealey ( 2855 )

        - - - - - This is a site to donate money for people to do a cool project. If none of the projects are allowed to fail, it would only be really conservative projects. If you aren't willing to take that risk, don't fund a kickstarter. - - - - -

        /\ This

      • Because of the language of "pre-order" that's used in a lot of cases. It makes it sound like a sure thing, when it's really not. It's not a pre-order, it's a gift for funding their project's success (and is contingent on that success).

        The last kickstarter I gave to, was in an amount that was below any reward threshold. I just get to know that I did a tiny part in making something I really wanted happen.

    • by icejai ( 214906 )

      There won't be anything to reclaim legally.

      And this is the kicker. The only way contributers/funders can claim a stake/force a refund, is if the "contribution" is structured as a debt. ie. The funder is loaning the money to the company, in exchange for future delivery of the defined product (or collection of products, whichever the case may be for higher levels of funding). If the company goes bust or fails to deliver the product, contributors then become unsecured creditors, and then have a legal claim to whatever assets the group/company has.

      The p

      • It's not a purchase. It's not an exchange of money for goods. It's a monetary gift that will hopefully be met with a thank you gift one day. Too many kickstarters are just using the wrong language.

    • by Lumpy ( 12016 )

      I have backed well over 30 kick-starters and every single one delivered.

      The trick is having a brain when you fund one. Almost every one of the failed kick-starters had a LOT of red flags in the beginning.

      Yes this means you need to be educated and smart to be successful in Kick-starter backing.. Just like everything else in the world. The problem is there are a lot of noisy idiots that think that kick-starter is like ebay and they whine loudly.

      The stock market is 100% identical to Kick-starter. if you

  • Here is the text (Score:4, Informative)

    by gnu-sucks ( 561404 ) on Monday September 22, 2014 @08:30AM (#47963725) Journal

    It's not in the linked article, but here is the interesting part of the new rules: creators have to refund remaining money, and have to post status updates.

    Read it here:
    If a creator is unable to complete their project and fulfill rewards, theyâ(TM)ve failed to live up to the basic obligations of this agreement. To right this, they must make every reasonable effort to find another way of bringing the project to the best possible conclusion for backers. A creator in this position has only remedied the situation and met their obligations to backers if:

    they post an update that explains what work has been done, how funds were used, and what prevents them from finishing the project as planned;
    they work diligently and in good faith to bring the project to the best possible conclusion in a timeframe thatâ(TM)s communicated to backers;
    theyâ(TM)re able to demonstrate that theyâ(TM)ve used funds appropriately and made every reasonable effort to complete the project as promised;
    theyâ(TM)ve been honest, and have made no material misrepresentations in their communication to backers; and
    they offer to return any remaining funds to backers who have not received their reward (in proportion to the amounts pledged), or else explain how those funds will be used to complete the project in some alternate form.

    • Which means that nothing has actually changed. They're just codifying the cultural practice that was already in place:

      • No projects are guaranteed to deliver
      • Show that you used the funds appropriately
      • Give prorated refunds
      • You may get sued at any point
  • by guytoronto ( 956941 ) on Monday September 22, 2014 @08:30AM (#47963727)
    The T&C still gives creators a way to hold onto the money. Kickstarter has just shuffled some words around to make it appear as though they have some kind of control. Kickstarter is weird. People throw money at an unproven idea with literally zero chance of financial reward.
    • by Overzeetop ( 214511 ) on Monday September 22, 2014 @08:46AM (#47963835) Journal

      Financial reward isn't the goal of kickstarter backers. Never has been.

      • Re: (Score:3, Informative)

        by Anonymous Coward

        More than that - it *can't* be.

        Kickstarter has structured things such that backers are technically giving a donation to the project. The rewards are technically pledge gifts - like PBS tote bags. The reason for doing this is that the SEC has very stringent rules for investors and the companies they are investing in, which would mean that if Kickstarter backers were to be classified as "investors", most of the projects (and backers) on Kickstarter would be disallowed from contributing.

        By classifying things a

    • You pay for a product that might otherwise not see the light of day. In some cases it's worth the gamble, and I've gotten a few useful products through crowd-funding.

      For some projects, I'd be interested in getting a slice of the company (i.e. a chance at financial reward) instead of the finished product in exchange for my contribution. But I suppose there might be a lot of extra legal requirements for such a scheme.
    • by swb ( 14022 )

      Maybe it's just me, but it seemed like Kickstarter sort of started out as a way to get simple things out of the garage and into real products. The kinds of things too simple to really be considered big-picture tech startups that would attract VC or be easily salable to traditional financing.

      Now it seems like there's a lot of things on there that fit more into a conventional tech startup. It's great that Kickstarter can raise the money, but maybe there need to be transparency and reporting when you're talk

    • How is that wierd?

      People throw money at things like "ALS research" with literally zero chance of financial reward.

      And I'm sure someone somewhere has managed to ebay something they got on kickstarter for more than they paid for it. So though amazingly small there's probably a non-zero chance of financial reward.

      • My Kickstarter edition of Euphoria: Build a Better Dystopia was $49. Since it arrived just after we had a baby, I resold it at a flea market, new in shrink, for $140.

  • This is useful, but

    I've backed a project that's currently been running late. Like 18 months late. Updates are random, and while follow-ups are promised, they don't happen in timing promised ( https://www.kickstarter.com/pr... [kickstarter.com] )

    Big question is how do we deal with a zombie (dead, but not admitting it) project? According to the previous project, all backers seem to be entitled to refunds, but there's no mention in this post as to even how to flag this for KS staff.
  • I could be the man to make that alternative! I will make "CollectiveProduction" or CollProd!

    If only I had some money to start my project...

  • Well, everyone who puts money on some stranger's project knows they're running a risk with it, but they expect it to deliver at some point. Just make sure you're not kickstarting with the money to pay the kid's college and you'll be alright.
  • Nothing is new under the sun.

    The same ancient rule still applies: Caveat Emptor.

    If you throw money at someone with no contractual guarantee in return, there is simply no protection for your money. It's still your money - throw it at whomever you want. But don't expect sympathy because you "lost" it if the person wastes it, eats it, or somehow fails to execute what they said that that would.

    As kickstarter started generating large sums of money the conmen and shills naturally have taken notice.

  • by sphealey ( 2855 ) on Monday September 22, 2014 @08:49AM (#47963875)

    People should identify Kickstarter projects out of interest, enjoyment, or just a sense of fun, and contribute no more money than they would be willing to use as kindling to start a campfire. If you contribute $25 in hopes of seeing an indie film completed - great if it does, sad if it doesn't. If you contribute $100 hoping to get a new piece of hardware, don't expect anything other than some p% chance that you will ever receive that hardware or if you do it will work as dreamed. If you don't have the money to lose, don't contribute.

    One innovative and clearly risky hardware project I backed has people complaining that the base product shipped 2 months later than planned (hoped) and the premium product will be 5 months late. Um, guys: it was risky. There were commercial alternatives available at 10x the price. You knew that this was an attempt to create a mini-breakthrough, but you're griping because it was 2 months late and the associated app will need some point revisions? Get real.

    sPh

    • Agreed.

      Even if they have a great idea and the best of intentions, the people running the project may not be successful. Running a business is more difficult than most people imagine, and it may be even harder to run a business with discipline after receiving millions of dollars in free money, donated with no strings attached.

      When you donate to Kickstarter, you are neither making a purchase nor investing in the business. You're making a donation.

    • by OzPeter ( 195038 )

      People should identify Kickstarter projects out of interest, enjoyment, or just a sense of fun, and contribute no more money than they would be willing to use as kindling to start a campfire.

      In such a case you have now given the people running the kickstarted campaign free money with no responsibility to deliver anything. That in i itself would be a guiding beacon to all and sundry scammers to use Kickstarter as a huge legal loophole.

    • :) if i had mod points sir, you'd be getting them.

  • Screening process (Score:4, Interesting)

    by MindPrison ( 864299 ) on Monday September 22, 2014 @08:51AM (#47963893) Journal
    They should improve their screening process.

    Also, it's important to consider that funding a kickstarter project, is kind of like investing money in the lottery or purchasing one of those scratch lottery tickets. You may or may not win, the likelihood of actually winning is bigger than the lottery, but in reality very small, it's like going to the casino and betting it all on one of 3 rows.
    Kickstarter is a gold-mine right now for scammers as well. All you need, is a well thought out plan to CONvince a lot of people out there, and since most people aren't very technical...this isn't hard at all (thus, why we need a better screening process). Many of the funded projects gets WAY more than they asked for, and then GREED grabs them...they lack no skills when it comes to find a reason to use the extra money, and have you noticed how certain products doesn't get cheaper for the public even thought they receive MASSIVE support?

    Money baby! It's the shit.
    • How does this work in Kickstarter? You'd think the campaigners should receive only the amount they initially sought, with maybe up to 10% extra if the pledged amount exceeds that. Once the first backers receive the product, the rest of the funds can be released to fulfill those orders. And if there's a cost overrun, the 2nd tier backers can be given the opportunity to pull out or let their money ride, after which the project can receive additional funding from the remaining backers. That way, the projec
  • by OzPeter ( 195038 ) on Monday September 22, 2014 @09:03AM (#47963979)

    I have an investment that failed a few years ago due to probable corrupt practices (for example: an officer in one company was reporting to an officer in another company - but they happened to be the same person, so all sorts of dastardly things happened.).

    At the moment the investment is being wound up and all sorts of legal activities are being pursued in order to realize as many assets as possible that actually exist. The people performing the liquidation keep telling me that I will get back between 10 and 50 cents in the dollar of my investment, depending on what legal actions come to fruition and what the value of the reclaimed assets turn out to be, minus of course all the legal costs.

    To me this is the only possible way you can get money back from a failure like this, and I can't see how a failed kickstarted project should be any different - if the project fails, then call the owners of the project on it, and take legal means to reclaim as much as possible with the expectation that you will never get 100% back.

    • by u38cg ( 607297 )
      Yes, if illegal. If it's simply down to a business failure...
      • by OzPeter ( 195038 )

        Yes, if illegal. If it's simply down to a business failure...

        from the outside looking in you can't tell the difference between illegalities and mismanagement, but legal action in both cases has a certain ability to compel people to perform actions.

        Anyway, its normal business practice to liquidate to a failed company - regardless of how that failure occurred.

    • by sphealey ( 2855 )

      - - - - - if the project fails - - - - -

      If the project fails due to fraud, yes. Realistically some percentage of all speculative projects (40%-90%), whether funded through Kickstarter or not, are going to fail. That doesn't mean they or their principals were committing fraud.

      sPh

      • by OzPeter ( 195038 )

        - - - - - if the project fails - - - - -

        If the project fails due to fraud, yes. Realistically some percentage of all speculative projects (40%-90%), whether funded through Kickstarter or not, are going to fail. That doesn't mean they or their principals were committing fraud.

        sPh

        No it doesn't, but there are standard practices in the business world for winding up failed businesses regardless of how that failure occurred.

        • by jmauro ( 32523 )

          If your investments results in you having a claim on the assets of the company that failed and based on the seniority of your claim on the assets (i.e. some creditors will be paid in full before other creditors see a dime).

          Kickstarter isn't an investment vehicle. They're up front that you have no claim on the assets of a failed company\project and as such if it fails you won't get anything (and conversely if they sell for a couple of billion dollars you will get nothing as well).

    • Creators are responsible for their projects. When you back a project, you’re trusting the creator to do a good job, so if you don’t know them personally or by reputation, do a little research first. Kickstarter doesn’t evaluate a project’s claims, resolve disputes, or offer refunds — backers decide what’s worth funding and what’s not.

      Some projects won’t go as planned. Even with a creator’s best efforts, a project may not work out the way everyone hopes.

  • Comment removed based on user account deletion
    • by jmauro ( 32523 )

      But then in the next paragraph, they say "here are the terms of the contract between the creator and the backer". I suspect this would be very problematic to enforce. You can't be both arms length, and dictating terms to two parties of a contract without also being a party. It is a logical contradiction.

      Every lawyer does this every day when he or she is writing up a contract signed by other parties. The lawyer isn't involved unless one of the parties can prove that the lawyer performed malpractice in wr

  • Remember when people use to believe in their ideas enough that they'd put their own house on the line? With some Kickstarters, you see people with "I believe this needs to be done, and I'll do it if people pay enough so that I have zero liability and all of the financial gain."

    "Well, there's travel involved, and if I get an early flight, I'll need a coffee from the airport Starbucks. That's an additional $8...."

  • Comment removed based on user account deletion
    • by sphealey ( 2855 )

      The first link was to top projects, which is of interest.

      The second link claimed "most successful", but was listed in descending amount of dollars raised starting around $12,000,000 (million). If that's the author's definition of 'successful', great. The indie projects I back typically have budgets in the 5-10k range and about 80% of them produce a finished work. Who is to say which is more successful?

      sPh

According to the latest official figures, 43% of all statistics are totally worthless.

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