My first, second and third reaction was “This is really bad news for Arizona Entrepreneurs.”
Arizona: The state celebrated recently for being #1 in the US for entrepreneurial growth, has just turned towards a cliff. Maybe I am being shrill, but read on:
Every month I give a dozen speeches and presentations on various topics in entrepreneurship and new ventures, and lately many of them have been on the subject of “Crowdfunding” for entrepreneurs. Crowdfunding is like any new disruptive platform or idea: First it is dismissed, and people call it impractical and stupid; Next it’s deemed dangerous and should be avoided; Then the incumbents decry that we all need protection; After the idea gains some traction, they call it a fad that won’t last; Finally the idea becomes mainstream and obvious. Right now, we’re in the ‘we need protection’ stage: “We” being you and me, the poor ignorant mainstream public too dumb to invest or contribute money to new projects – but not too dumb to buy lottery tickets.
Crowdfunding in the US
In the United States, equity-crowdfunding (investing) is not yet legal – but we’re getting close. Crowdfunding is almost exclusively contribution crowdfunding: People donate money to an exciting new project because the project creator is someone they believe in, or because they find the project exciting and want to help it be successful. As an added perk, crowdfunding projects offer “rewards” to contributors as incentives to donate at higher levels. The reward is usually some meaningful, but token perk – in that the perk has more emotional value than monetary value – much like receiving a logo tote-bag with your $250 donation to PBS. Other times, a crowdfunding campaign is trying to raise funds to create a brand new product – such as a programmable watch that syncs to your phone – many donors get very excited when an early version of the product is offered as one of the perks of contributing to the project.
One of the most interesting facts I like showcasing is that so far, in the history or crowdfunding, there hasn’t been one case of crowdfunding fraud: There have been attempts at fraud that the crowd filters out quite effectively. And there have been a handful of companies sued by the SEC for improper filing or registration. Most other crowdfunding failures are more in the category of “we tried, but it didn’t work out the way we hoped” outcomes. No cases of fraud, however, I do showcase one case where a Kickstarter donor sued an entrepreneur into bankruptcy over a $50 perk:
This Kickstarter donor thought he was actually buying a product, instead of supporting a project and getting a ‘perk’ in return. When it appeared that the project was not going as planned, and that he was going to received his perk late, his first reaction was to sue the entrepreneur.
Earlier this month we caught wind of the story of Hanfree, Seth Quest and Neil Singh as first reported by Eric Markowitz in Inc. It is supposedly the first time a Kickstarter backer had sued a project creator …
The lawsuit forced (Quest) into bankruptcy. From there, things only got worse. Later that year, Quest moved to Brooklyn, but because of the damage to his reputation, he could only find part-time work in what he calls a non-design-related field. To deal with his anxiety and hypertension, he picked up yoga and joined a boxing gym. These days, he’s doing better, but it’s a part of his life he hopes to move on from.
This led to me posing the question of whether or not Neil Singh was a jerk for putting Seth Quest through this over $70. To my surprise, last week Mr. Singh left a comment on my article in an attempt to set the record straight. “So, my answer to your question would be that I am not opposed to crowdfunding in general. I would probably be happy to contribute to some project that was interesting to me provided that I was pretty confident in exactly how it was being run and what was being promised and I knew what the probability was of actually obtaining the reward, whatever that would be.?”
The knee-jerk lawsuit subsequently drove the entrepreneur to bankruptcy and subsequently ruined his life (so far). Only later did this guy admit that he didn’t quite understand Kickstarter, and that he was contributing to a product innovation as instead of buying a product. This begs the question: What kind of uninformed dolt enters his credit card number without understanding … oh never mind … I have to choose my words carefully because this uninformed soul is now Arizona’s new Assistant Attorney General.
This one incident was enough to single-handedly change the face of crowdfunding forever: Kickstarter had since posted a new policy that discourages entrepreneurial product projects (“Kickstarter is not a store“) – thus ensuring that the vast majority of Kickstarter campaigns are film and arts projects, and not innovative products ideas that can fuel new high-growth entrepreneurial companies.
Now then, I am going to keep an open mind. Perhaps Singh is a reasonable guy, and now understands that his actions were perhaps a little rash or extreme, but here’s why this is bad news for Arizona entrepreneurs: While Arizona’s entrepreneurial growth rate is notable, it is also delicate. Most of these new companies never get beyond the initial spurt of growth (something we don’t measure). Our formidable entrepreneurial ecosystem is dominated by universities, accelerators – and government agencies. It’s the government component leaves me so deeply concerned.
Arizona needs people in government positions that understand how critical entrepreneurship is to our state and economy. More important, they have to have an innate understanding of the entrepreneurial culture and process. For instance, if an entrepreneur attracts funding from investors, and the company eventually fails – the entrepreneur is not a thief. Investors knew that this was a possible outcome. Suing entrepreneurs (and innovators) for failing after taking a risk is probably the single worst thing one can do to stifle growth.
While Mr. Singh is apparently not in a position to directly affect entrepreneurs – his new job is in defending the state against civil lawsuits in state and federal courts – I wish him well. I do hope he has learned a little from this prior incident, and that his perspective on crowdfunding, and on entrepreneurship is not contagious among his government colleagues.