Why Kickstarter Can’t Change the World But Somebody Else CanBy http://profile.typepad.com/6p017d3d5c4165970c // November 10, 2012 in Crowdfunding, Guest Posts, JOBS Act
Note from Bill: this is a guest post by Danan G. Margason, an internet and transactional lawyer and a former rower for the US National Team. I asked Danan to write a post for our community because I was fascinated by what he told me about his parents wanting an alternative to a stock portfolio managed on Wall Street. Danan sees the potential equity crowdfunding might have for empowering people locally.
A few days ago Bill linked to a fascinating interview with Kickstarter CEO Perry Chen. The most revealing part of the interview, as Bill pointed out, is when Chen says that the “disruptive aspect [of Kickstarter] is the removal of the investment component. People are supporting projects because they want to see them happen. It’s so different than supporting a project because you hope it profits.”
In other words, Kickstarter doesn’t want to become a marketplace for equity investors—they want to abandon the equity model entirely.
For me this was a shock. While Kickstarter made similar claims when it started, I operated under the belief that Kickstarter’s only rationale for banning equity investing is that it’s illegal under our existing legal framework (this, of course, could change with the JOBS Act). I assumed, as did many others, that Kickstarter would adopt an equity model as soon as it had the chance. While it’s great that projects on Kickstarter raise an average of $5,000, that’s nothing compared to what could be raised if companies were able to offer equity.
But by now Kickstarter’s intentions are clear. The JOBS Act passed over 7 months ago and the Kickstarter team has had ample time to consider the pros and cons of adopting an equity model. They decided against it.
What does this mean for Kickstarter and for investors? To me, the key word for Kickstarter is “projects.” Chen says the word throughout his interview, and if you go to the Kickstarter website it’s plastered everywhere. Not once does Chen, or the web site, use the word “company.” This is because Kickstarter doesn’t want to bring companies, and their investors, into the fold. They simply want to be the go-to site for funding creative, interesting, one-off projects.
I’m disappointed. While I’m happy to offer kudos to Kickstarter for staying true to its vision, Kickstarter is squandering an opportunity to do something tremendous. I firmly believe that projects are worthwhile and deserving of funding, but projects also aren’t going to change the world. Investments and companies, I think, can.
My parents are a perfect example of how this would work. At a recent dinner for my dad’s birthday, my mom said she wished there was a way to sell their entire stock portfolio and reinvest the money in local companies. They wanted the things you would expect: more awareness of what they were funding, better relationships with the companies they love, and more money directly tied to their community.
But while my parents’ vision is a simple, powerful, and brilliant, it’s also virtually impossible to implement. Current securities regulations effectively prevent unsophisticated investors like my parents from obtaining equity in small companies. And even if systems allowed them the flexibility to invest, there’s no single resource that allows for objective evaluations of startup prospects.
For this reason, I think a company that can effectively facilitate investments in small companies will fundamentally change the way we do business. It would alter investment strategy by shifting power away from corporations and back into the hands of local consumers (and if done right, unaccredited investors would still be protected). The possibilities are astounding:
- Imagine a world where you could support your local coffee shop not just by telling your friends, but buy actually owning a piece of it.
- Imagine a world where instead of desperately protesting Wal-Mart’s demolition of the local grocery store, community members could rally to buy shares of the store and prevent its sale in the first place.
- Imagine a world where instead of waiting for a bank to loan money for a new neighborhood restaurant, you could encourage people at the block party to become investors and create the ideal restaurant for the area.
I thought Kickstarter, with its popular brand and useable platform, would be the company to make this happen. Sadly, it won’t.
Fortunately startups like Fundable and CircleUp are trying to fill Kickstarter’s void. Other models exist too, like the “Slow Money” movement that encourages people to invest in local food sources (supporters have raised over $20 million for 170 small food enterprises in the past 2 years).
But for an idea so groundbreaking, I’m surprised we haven’t seen more. During my lifetime I expect to see a fundamental shift in the way we invest. I expect local, socially conscious investing to become the norm, and Wall Street fund managers to become more and more obsolete. It’s possible, perhaps even probable, that it will happen over the next decade. It gives me chills with excitement, and why not?
The internet has cut the middleman out of nearly every industry. Wall Street investors are the obvious next target.
 I want to make a distinction between “unsophisticated” and “unaccredited.” While my parents probably qualify as accredited, they would, like most people, have a terribly difficult time navigating the world of venture capital.