19 August 2012
After a recent crowdfunding panel at Venture Draft in St. Louis, I fear that both the government and the community place unjustified faith in the success of the JOBS Act. Confidence that the crowd wishes to purchase equity does not correlate to the success of Kickstarter and other crowdfunding efforts that are based on pre-orders.
On Kickstarter, the "crowd" essentially pre-orders products or services, while knowing that the company could very well fail before finishing product development or order fulfillment. The model appeals to consumerism - those who are willing to risk money gain access to the latest gadgets. The payoff for this risk is tangible, for early adopters are rewarded with new products like a Pebble or an OUYA. When the consumer receives the product, they do not continue ties with the company, and nuances like financial outlook are not of concern to them.
Politicians expect the overwhelming fundraising history of Kickstarter to carry over into a Post-JOBS Act world when consumers purchase equity instead of goods. While the passage of the bill will not eliminate this pre-order model, the hype behind the JOBS Act is driven by the assumption that current crowdfunding momentum will transfer to equity-based crowdfunding. This will simply not be the case.
Consumers are willing to rely on their own purchasing power, not that of others. If a consumer puts $100 into a project now on Kickstarter, they hope to receive a cool gadget. If a consumer puts $100 into an equity-based crowdfunding project, they receive a slip of paper and the hope that the person next to them buys the product when it is released. The current crowdfunding model has achieved such success because it requires consumers to act like consumers. An equity-based model asks consumers to act like investors, which is nonlinear and untested.
One untested scenario that could crush all public support for the JOBS Act is the failure of a major Kickstarter project. While this has not yet happened, it is reasonable that a project that has raised millions of dollars on Kickstarter could declare bankruptcy before delivering on their promises. This would destroy consumer confidence in crowdfunding, and the crowdfunding tenets of the JOBS Act, plus the dozens of startups relying on its new rules, would likely fail.
While the JOBS Act only opens doors, do not expect it to be the panacea of startup funding. Asking consumers to be anything but that is untested, and investing lacks the allure of online shopping.