If A Project Funded By Online Backers Never Takes Off, Should Everyone Get A Refund?

As is the case with many emerging Internet trends, we’re all learning as we go with online funding sites like Kickstarter. Kickstarter allows small business owners with big dreams, artists without the cash to create and other entrepreneurs to raise money by pitching to the Internet community. But what happens if the project never becomes realized — should backers get a refund or chalk it up to an unfortunate outcome?

CNN notes that Kickstarter has mostly excused itself from being responsible when projects go awry. In response to an NPR piece this week, Kickstarter stated on its blog that it’s all up to those donating the money in the first place and those responsible for the projects.

“Kickstarter does not investigate a creator’s ability to complete their project,” a team of Kickstarter’s top officers said in the post. “Backers ultimately decide the validity and worthiness of a project by whether they decide to fund it.”

While Kickstarter does make sure projects meet all its various guidelines before they’re published on the site, it’s up to donors to decide whether or not to ultimately fork over cash. Some backers are fine with delays or projects that never become realized, but others might demand refunds instead of simply throwing away their money.

Kickstarter seems to be more in the camp of those patient backers who see themselves as helping someone out.

“The number of creative projects that have been funded and produced on Kickstarter in the past three years is enormous. Many could not exist otherwise,” reads the blog post. “But of course not every project goes perfectly. Delays do occur, especially with more complicated projects. Some creators get in over their heads dealing with processes that are new to them. Most backers support projects because they want to see something happen and they’d like to be a part of it. Creators who are honest and transparent will usually find backers to be understanding.”

Okay, folks — what’s it going to be?

Kickstarter to users: Backer beware [CNN]
When A Kickstarter Campaign Fails, Does Anyone Get The Money Back? [NPR]

Comments

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  1. YouDidWhatNow? says:

    Here’s the thing kids…you’re giving money to a startup in the same manner in which a VC does – only on a much smaller scale. The startup promises you certain things for your money…but then if it ultimately fails and can’t give you those things, well, better luck next time.

    If you can actually prove you were defrauded, then fine…otherwise, this is the way startup investment works. Which is to say, it frequently doesn’t.

    • Bsamm09 says:

      Are you given ownership or a creditor position in these businesses?

      • MrEvil says:

        In a way you’re given status as a creditor if you meet certain thresholds. The various “perks” levels.

        Even then you’re more than likely not going to see your money again if the startup fails, much like a real VC.

      • humphrmi says:

        Perks instead of ownership. Take, for example, the Ouya kickstarter project. They raised $8.6 million on Kickstarter. The lowest backer level for the project was $10. What’s the percentage you own? one one millionth of the company?

        At least the $10 backers get something, they could reserve their username. Not very tangible, but not useless if you’re a gamer. $99 backers get an Ouya console. Not bad for .0001% of the total project investment. If you bought Sony stock a year ago, you’re feeling pretty miserable about that investment today; and I bet you didn’t even get a free PS3 for that investment.

    • Gehasst says:

      Bingo. You hit the nail on the head. You are funding a project. That is all. If I fund a local project for a hotel, hoping to reap the rewards, and they fail, I loose my money. Same here.

      And no one is forcing you to hand over your money.

    • roman says:

      However, a VC is buying an ownership stake in the company, hoping for a share in profits and increase in the value of their stake. If the company fails, then the value of that stake goes to zero. But most kickstarter projects are promising a product (at some future date) for a price. So is a kickstarter pledge more like a pre-order of a new product or an equity stake in a company? Is there a difference?

      • The Beer Baron says:

        It would essentially be an investment in which the promised return would be whatever perk your donation amount gets you in lieu of stock certificates. With stretch goals, you may actually end up with a larger return on that investment than you originally planned. Look at the recent Reaper Miniatures Kickstarter. An early contributor at the $100 level would receive 30 figures, but as the amount went higher and they surpassed their stretch goals, figures were added in order to encourage early contributors to share the link and get their friends to contribute. At close, that initial $100 got a contributor about 240 figures. It might not be entirely accurate to call it a stock market in microcosm, but it seems to work on similar principles, at least in buy-in/potential reward. If the project falls through, it falls through, just as if I had bought stock and the company subsequently failed.

    • Cerne says:

      First comment gets it perfectly right. Kickstarter is a risk, do your research and don’t give any money you can’t afford to loose.

    • TotallyCrazy says:

      Still, i think thats different from a business showing off an idea than a random dude with an idea thats wanting to show off a rough sketch to get money and run.

    • prismatist says:

      Exactly. Don’t invest if you don’t understand the risks. That kind of behavior is what led to that last recession.

    • Chuft-Captain says:

      Exactly. If they made a legitimate effort to make the project happen, then they have done their part. You were never, ever guaranteed that they would succeed. The only situation in which a refund is reasonable is if the project’s organizers acted in bad faith.

  2. MutantMonkey says:

    This is essentially investing which is a bastardized term for gambling. If you gamble and lose your money, tough shit.

  3. sir_eccles says:

    Just write it down as gambling losses on your tax return.

    • MathMan aka Random Talker says:

      Can you deduct gambling losses? Seems like it’s more of negative investment income to me.

      • Darury says:

        I know in some states you are allowed to deduct losses up to the amount of winnings you have to claim from gambling.

      • Bsamm09 says:

        It’s neither. I read the source article and it seems like you are simply donating. It’s neither gambling or investing without a chance of returns.

      • humphrmi says:

        On your federal taxes, you can’t take a net loss on gambling. You can use gambling losses to offset wins, but you can’t come out ahead (tax-wise) from a gambling loss.

    • MrEvil says:

      IIRC you can only use Gambling losses to offset your winnings to the IRS. The losses won’t take away from other sources of income.

      • Torgonius wants an edit button says:

        It depends on your situation, but usually (and I’m no tax attorney, specialist or anything of that sort.. this is just based off a conversation with a friend who is a professional poker player) you have to list your occupation as ‘professional gambler’ and file as if you were self-employed.

        For a hobby player, you can’t deduct your losses. For a pro, your losses can offset your winnings, but filing this way is pretty much waving a red flag at the bull that is the IRS. You had better have meticulous records that document everything if you go that way.

        • Bsamm09 says:

          Winnings are reported pg one of your 1040. Losses are deductible up to winnings on Sch A. In order to file a Sch. C and be a pro… difficult I hear. I believe there is a CPA or tax lawyer who has a website dealing with this. Read it a few years ago but nothing really stuck.

  4. Blueskylaw says:

    So when we buy stock in a company (Let’s call it Bank of AmƎriKa), and that stock tanks because of extreme greed, hubris, and complete ineptness and disregard for the common good, should stockholders get their money back?

    • MathMan aka Random Talker says:

      After all assets of the company are liquidated and the debt holders are paid, yes, the “residual” does go to the commom shareholders.

    • Loias supports harsher punishments against corporations says:

      Yes, but this situation rarely involves any of those things, let alone more than one.

  5. AtlantaCPA says:

    I’m having trouble with the language used here – backed a project “that never happened” (the poll question) sounds like they were going to start a hot dog truck but never even tried, just decided to scrap the idea after getting your money. In that case a refund is kind of reasonable. But backing a project that just fails, that’s just the brakes.

    The wording of the article is ambiguous.

    • Blueskylaw says:

      I’m guessing this means that they raised money and sometime during the process of business formation they may have needed more than investors were willing to lend, the idea wasn’t good after all, the company is sued before they even become operational/profitable, they suffer a catastrophic loss and have no insurance, etc.

      The list is endless.

    • crispyduck13 says:

      Came here to say that. I guess “never takes off” could mean you collected money from investers based on a sweet prototype CAD drawing and then never did anything beyond that. Hard to prove though.

      I’d treat this like investing in stock, if you win you win, if you lose you lose.

  6. RedOryx says:
  7. nishioka says:

    A real VC would probably want to see the work you’re doing, what’s been accomplished, how big and how stable your team is, and how likely you are to meet those objectives before they’ll jump on board. Typing in $10 and hitting submit on a website bypasses all of that and turns a calculated risk into an uncalculated one. So if you’re willing to throw money into a startup sight unseen, especially the 12 of you who pledged $10,000 or more to Ouya’s Kickstarter campaign, you should also be willing to accept the risk that goes along with it.

  8. KyBash says:

    In the 1970s, I had an idea for a computer-controlled device. I tested a few things to make sure it’d work. The problem was, it’d need a dedicated computer 24/7, which I couldn’t afford. It had to wait until I upgraded my pc, when I could use my old one. That’s when I found I’d have to write a new OS. That was possible, but it meant a lot more time and work than it was worth, so the idea got scrapped.

    I suspect a lot of projects hit similar snags — everything looks like you can just connect the dots, but once you start, a major problem you couldn’t anticipate is revealed.

    Does Kickstarter, or any of their ilk, have provisions for someone spending 10% of the money, finding they can’t do the project, and refunding the remaining 90%?

    • Blueskylaw says:

      So how did your idea for a computer “mouse” ever turn out?

    • shepd says:

      1970s, upgrading a PC… /me calls the tale far fetched!

      Unless we include the Altair (definitely not something we’d call a PC, it’s a box with switches and some light bulbs), your first computer would have been made in 1976, and nobody would have considered upgrading for quite a while after that since you don’t upgrade something that never existed until yesterday! The first possible “upgrade” path would have been the Apple I (1976) -> Apple II (1977).

      Not saying you’re wrong, just saying perhaps your dates are a little off.

      • KyBash says:

        The upgrade was to IMSAI 8080 from a homebuilt (as in soldering chips to boards).

        Why do you think I’d have had to write a new OS?

        • shepd says:

          Well, then you win.

          Although, back then, it wasn’t all that odd to consider writing a new OS even for machines that offered a decent keyboard/tv interface.

          But while the IMSAI was technically a PC, not a lot of people would consider it a PC anymore than a PDP11 is a PC. But homebuilt has to be fun! I never did get that opportunity, and nowadays it’d be a pain to source the ICs if you wanted to follow old schematics. TTL being everything but dead nowadays. I’m still sore my parents dumped all of my Byte magazine collection (which spanned every one they ever printed! GRRR!) before I left. I did manage to save issue #1, though.

          What idea were you working on, anyways?

  9. AustinTXProgrammer says:

    If the project gets canceled it would be reasonable for the remaining money to be refunded proportionally to the investors. Given the informal status of some of these businesses I can imagine it would require a bit of the honor system.

  10. Bsamm09 says:

    Source article says “donating” and “donors” multiple times. Here’s a few words of advice:

    If someone comes to you for a business venture and asks for money as a donation, tell them to pound sand. Either a stakeholder or no-go.

  11. Back to waiting, but I did get a cute dragon ear cuff says:

    I voted for It’s the thought that counts…

    Wrong reason, but right outcome. You are investing in a business venture. Your investment gets you some possible future benefit, hopefully worth at least what you invested.

    If the business venture fails, for whatever reason, you lose your investment. If it succeeds you get the benefit. That is capitalism. If you don’t want to take the risk, fine. If you do, great. It is YOUR CHOICE.

    I invested in a fairly safe bet, and got what I was promised. BUT, I did my research and knew what I was investing in.

  12. speaky2k says:

    Most (if not all) of the Kickstarter investments I have seen offer a deliverable after receipt of funds. So as long as you got that deliverable (sometimes a postcard, T-shirt, Hat, signed book/artwork) then even if the Kickstarter instigator does not do what they said they were going to do with the money, you got what you were promised. That is the way I look at it if I were to invest: “Would I pay $25 for a simple T-shirt with a logo so that the money on top of what the T-shirt (or whatever the $25 level is) cost could be invested?” If the answer is yes, invest, if no then I don’t bother with the cause.

    • StarKillerX says:

      Well as the one question in the poll states “It’s the thought that counts” even in a case as you describe.

      If the person had no intention of even attempting to do the project stated then it’s fraud, but if they tried and were unable to do it, for any reason at all, then it was simply a bad investment.

  13. evilpete says:

    the difference between a failed Kickstarter company and a failed VC funded company is that when the VC funded company fails the VC can take ownership of the IP and other assets ( hardware, patents etc.)

    With Kickstarter funded companies all the developers get to take home free laptops and the project owner keeps everything else ( tools, IP, and other assets )

    • Bsamm09 says:

      Correct Kickstarter is for suckers. I have two VC clients and when one of their ventures fails, they can at least deduct the loss of the stock (hopefully §1244 applies), partnership units or debt.

      • Loias supports harsher punishments against corporations says:

        VC is thousanding, hundreds of thousands, or millions of dollars.

        Kickstarter contributions usually range from $25-$100.

        Can I do VC for that amount?

  14. jeffpiatt says:

    kick starter is an micro venture capital site they all normal people to pay in to start-up companies it’s an investment but it confuses people since the donation tiers can offer an product and if the venture fails you get nothing.

  15. HogwartsProfessor says:

    So if I went on there to get a book self-pubbed (which costs money I don’t have) and asked each person to give $5 up to the cost of pubbing, and it got made but didn’t sell enough to make the money back, a free ebook (costing that $5 if they bought it) wouldn’t be enough? They would want a refund? What if I only kept the amount I would need for the book publishing and didn’t accept any other donations?

    Not that I would do this, but I’m trying to understand how it worked. Okay, I did think about it. Damn you honesty!

    • Loias supports harsher punishments against corporations says:

      As a Kickstarter company, you have to know what funds you need to in order to fulfill your rewards promised. You don’t use the money to hopefully jump start the product to later make enough money to “pay back” the contributors for their assistance. The money they are putting in should go directly toward their own rewards.

      And if a campaign fails (doesn’t mean the monetary objective set ahead of time) all contributions are refunded automatically.

    • InsertPithyNicknameHere says:

      That would depend. Did you lay it out as “pledge $5 and you get a free copy of the ebook”? If you did, then you’ve fulfilled your requirement as a project creator.

      Here’s a project that was for precisely that – getting an ebook published: http://www.kickstarter.com/projects/mcahogarth/black-blossom-a-fantasy-of-manners-among-aliens

      In the most recent update, the author points out that she has enough for the rewards and for various of her own personal expenses (e.g. a new computer to do her writing and illustrating on). And, as long as she actually provides the rewards that she promised, nobody has any right to dictate what she spends the rest of the money on. If the book never sells a copy beyond the kickstarter, that’s not really a concern one way or another from a backer standpoint.

      The real issue would be if she raised the money but then wasn’t able to actually produce a book. That’s when backers start to clamor for their money back.

  16. axolotl says:

    Um, yeah Kickstarter money is a donation, not an investment. As long as you got your “reward” or prize or whatever for donating your chosen amount then you got back what you were promised.
    If you want a return on your money then buy shares/stocks/etc..

  17. InsertPithyNicknameHere says:

    I’ve taken to viewing Kickstarter a bit like gambling – I give my money, and I gamble on the fact that I will get the promised reward(s). Of course, you can do some research to determine if something is likely to be a good bet or a bad bet. Of the over 125 projects I’ve backed, less than 5% have failed to deliver in a timely fashion or communicate delay reasons properly.

  18. custommadescare says:

    I think it’s really up to the creator and the project they are working towards. I know, personally, what I am planning to do with with my project donations (trying to open an ice cream shop, but struggling to find a lender).

    Since there is a very realistic chance that we won’t be able to get the financing, we’re going to hold on to the funds until it is an absolute no and then refund that back to those who supported us. We put cash into an account to help cover the cost (on Indiegogo, there’s a 9% fee if we don’t meet our goal), which we will have to cover.

    Since it takes money to build an idea / project, it’s hard to anticipate what the true costs will be as things come up, expenses weren’t baked into the idea, additional fees and licenses arose, etc.

    But, as the creator, it is our job to communicate that status back and be open and honest about what is truly going on with your project.

    If people are willing to invest their time and money and support something you are creating, they are certainly entitled to know what is going on.

    In other words, don’t be a dick.

  19. sparc says:

    i’m of the camp where… you’re gambling with these kickstarters and you deserve nothing in the end except maybe a lump of charcoal when it doesn’t work out.

  20. Professor59 says:

    Once it is discovered that more than half of all Kickstarter projects are scams, it will implode on itself.

    • InsertPithyNicknameHere says:

      More than half, huh? Just out of curiosity, where are you getting that number? I mean, it’s not been my own experience, but it’s certainly possible that I’ve been a combination of lucky and somewhat savvy when choosing who to back.

  21. oldtaku says:

    Nah, you’re not entitled to your money back.

    It’d be nice to get some back if the project creator decided it wasn’t working, had money left, and was honorable about it, but you’re risking it all by choosing to back.

    Choose wisely – I’m picky, so none of mine have failed to deliver yet.

  22. prismatist says:

    It’s called venture capital. Not all ventures work and if they don’t, you’re out the money. If you don’t want the risk, don’t invest. It’s investing without understanding the risks that led to that last charlie-foxtrot of a recession.

  23. Budala says:

    There isn’t a ‘your own fault for not doing enough research before investing’ option for me to vote in the above poll.

  24. QuadEddie says:
  25. sebastian tombs says:

    I got burned by zioneyez on Kickstarter – never again will I give a dime to these type of fund raisers and scam artists. I thought I was investing money in what I was told was a legitimate product but Kickstarter and similar crowd sourcing websites seem to be an ideal haven for con artists and scammers.

  26. pecan 3.14159265 says:

    There’s the other side of things, where you only give money to Kickstarters that you believe will work and are close to meeting its goal anyway. One of the best ways of doing Kickstarter funding is what Neil Gaiman and Amanda Palmer did. Their Kickstarter campaign was to fund their joint tour, and the recording and production of a CD based on it. The project was feasible, professionally run, and had tangible markers of success. The tour was one marker, the CD production was another. The Kickstarter backers could believe these people would do what they aimed to do, do it well, and had the ability to see the progress in the way of their tour dates and the eventual CD release.

    • Nogling says:

      I just got my backer package from Amanda Palmer’s latest Kickstarter.

      My roommate got her backer package from another KS project she backed a few months ago.

      I’ve backed a handful of KS projects – and in each case, I got the perk I was supposed to. One was delayed, but the project creator was very upfront about communicating the delay.

      Crowdfunding platforms are donations – which means, if the project fails, you’re out the money. Amanda Palmer’s KS was the largest donation I’ve made – $25. I figured it was worth the risk – particularly since she has an established track record of making good on her promises. And that right there is the key – donate to causes/individuals/projects that you feel comfortable supporting, and keep in mind that it is a DONATION. It’s not a pre-order, or a capital investment. The incentive to donate is the perk being offered.

      Oh, and my backer package that I got in the mail yesterday? It had extras, because she exceeded her goal by such an extravagant amount. Which is one of the reasons why her future projects will get more of my money.

  27. elangomatt says:

    I want another poll option between gimme my money back and it’s the thought that counts. Something like “I’m not happy about losing my money, but I knew the risks going in”. I am actually part of a Kickstarter right now that is looking like it is going to fall through. The product was supposed to be delivered in July. The company said they shipped to the backers on Aug 15th, and then on Aug 29th he posted something basically saying “yeah, so I didn’t actually ship them on the 15th, but I really did ship them now!” Now a week+ later, nobody has reported receiving anything yet. It was only $20 so I don’t really much care either way now.

  28. Mr. Spy says:

    So jaded. And rightfully so. But I think optimisticly when dealing with Kickstarter. The ideas that Kickstarter brings out are often worth the risk. The games that are coming out of Kickstarter are wonderful and well worth a $20 risk.
    Well… As long as the people have a trustworthy record. And/or they have already put a lot of time and effort into the game, so that you believe they can succeed.
    Now, if they tried, failed and know they are going to fail. Then, I would rather they return the remaining funds, even if it means accepting defeat.
    Now fraud, on the other hand. Nail em to the wall.

  29. David says:

    Sorry, but Kickstarter projects are not an investment. No way. Investments don’t work this way. Heck, even the Kickstarter terms of service say that the project creator must either send the rewards or refund the money.

    Still, the real problem is that Kickstarter doesn’t even try to help. They should require project creators to communicate regularly. Too many of them just go silent, and you simply can’t assume “no news == good news”.