A little over two years ago I wrote a blog post titled The Downside of Kickstarter, wherein I described a Kickstarter campaign that was a deliberate ruse to scam investors. I won't go into all the details, because you can read that post in its entirety if you're curious, but here's the summary: it's pretty easy for a swindler to create a Kickstarter campaign for a startup company with no intention of providing any reward for his/her investors. (To this day I fail to realize why these hucksters are not guilty of mail fraud, wire fraud, and/or conspiracy to commit fraud.) But there is one thing that I should repeat from my previous post about the way that Kickstarter works for investors:
"Participation on Kickstarter is simple: you pick a project you think looks appealing, and then you choose the level of your pledge to help bring that project to life. Depending on how much you give, you generally get something in return - which is typically the completed product before it is released to market."
Having said that, here are the details for another situation that took place recently. A few years ago I pledged to a campaign that was seeking to create a new type of mirror for bicyclists (see Sehen for the details). As an avid cyclist who has nearly been killed on several occasions by careless motorists, I was intrigued by this company's mirror design. In the interests of full disclosure - I received my "backer reward" a long time ago, and I must admit - the Sehen mirror was a much better design than other mirrors that I had tried. However, I received my reward so long ago that I thought the campaign had ended successfully, and I wasn't aware that I was one of the minority of investors who received a reward.
With that in mind, I was somewhat shocked when I saw the following video on YouTube from Arkady Borys, who founded the startup company that created the cycling mirror.
Despite the fact that Arkady's video was the most-detailed explanation that I have seen for any Kickstarter campaign of where the money went and what went wrong, several of his backers were still screaming for "refunds" and calling this a "scam." With that in mind, I wanted to offer some additional perspectives about what it means to back a Kickstarter campaign.
As I have explained elsewhere, Kickstarter is not a product catalog - it is a business investment. When you are pledging for a campaign, you are not buying a product - you are investing in a startup company that is attempting to bring a new product to market. Each startup offers several rewards to their backers/investors, with the understanding that each backer/investor will receive their rewards ONLY if the company succeeds. When backers submit pledges for a campaign, they agree in the terms and conditions that they might not receive a backer reward if the company fails, and if so - the manufacturer is only required to provide an explanation of what happened.
Think of it this way: let's say that you were walking by a new restaurant that was still being built, and you decided to stop by for a few minutes and give the new owners $50 to help them get started after they promised that they would try to serve you a free lunch some day in the future. However, their business folded before they could make good on their promise, and they sent you a text message to let you know why they wouldn't be able to honor their part of the deal. That sort of situation would essentially be the same thing as backing a Kickstarter campaign for a legitimate startup company that fails to bring their product to market despite their best efforts.
In the specific case of the Sehen campaign, backers weren't buying a product from Arkady; backers were helping Arkady launch a company. He tried, and he failed. Unfortunately, that happens every day with small startups.
For what it's worth, I have invested in several Kickstarter campaigns, and a few haven't come to fruition - that happens from time to time. In a few of those situations, the startup provided some sort of cheesy "We ran out of money" explanation, and that's all that the backers will ever see of their investment. On the contrary, the explanation that Arkady provided in his video was extremely detailed, and he takes full ownership for every bad decision that he made. In addition, he provides a great deal of behind the scenes information about the percentages of funds that were absorbed by Kickstarter and the other companies that were involved with launching in his campaign; that information was extremely useful for me to consider when I am deciding whether to back other campaigns in the future. Arkady's backers should be thankful that he took the time to provide them with as much information as he did, because it was far more information than he was required to give, and his video was a great deal more informative than other failed campaigns.
As I read the comments that were posted to Kickstarter after Arkady posted his video to YouTube, there were a few backers who were demanding that Arkady should refund any pledge funds that weren't used. Those people obviously didn't pay attention to the video; Arkady very clearly explained that 50% of the pledge funds were consumed by companies that were associated with launching the campaign (think of those as startup fees). After Kickstarter and the other campaign-related companies took their cuts, Arkady's company was given the remaining 50%, which was quickly spent on production costs for the product. Once Arkady's company ran out of money, they took a loan to keep going. Then another loan. Then another loan. In the end, there were was no money left to return to investors; all of the pledge money was spent a long time ago. With that in mind, my advice to backers who are still demanding that any unspent funds be returned to investors would be for them to spend 30 minutes of their time to watch Arkady's video and pay close attention to the details that he provides, because he explains everything.
In closing, I truly feel sorry for any backers/investors who did nor receive their rewards; and I don't mean to sound patronizing since I received mine. However, I think Arkady went above and beyond with regard to letting his backers/investors know exactly why they may never receive their rewards. It is unfortunate that this situation happened, but that is one of the risks that backers must be willing to take when investing in a startup business, and the losses that Arkady encountered are part of the risks that entrepreneurs must be willing to take when starting a new business.
There is a sad epilogue to the story that that I told in my original Downside of Kickstarter post: after all of the public outcry that took place in the wake of that scam, it appears that the person who was behind the fraud, Brent Morgan, took his life. That news was extremely sad for me to hear. I will admit, I wanted "justice," but only in the sense that I wanted Mr. Morgan to face criminal charges in a court of law for defrauding his investors. However, it appears that his guilt was overwhelming for him, and I truly feel sorry for his family.