No, You Don't Deserve a Refund

NPR ran a piece this weekend called “When a Kickstarter Campaign Fails, Does Anyone Get Their Money Back?” and accurately concluded that, generally speaking, they don’t.

And I think this is okay.

While this might sound like a cold way to treat generous people I’m pretty sure it’s entirely fair (assuming the crowfundraiser didn’t flat-out scam their backers). Lots can happen between the funding of a project and its coming to fruition and the risk that something adverse happens during that period is one that project backers willingly expose themselves to and which they’re compensated for with the promise of a “reward”. It’s classic: Risk —> Reward.

An example: 

Let’s say a campaigner wants to raise money to start a new line of hand bags. Their campaign page features sketches of the bags, videos of the founders  and, of course, an array of tiered “rewards” that campaign supporters will receive for financially backing the project. All of the rewards are variations on an opportunity to pre-buy the bag at a discount. That is, the “reward” for being an early supporter of the hand bag company is the sum of (i) the value of the bag and (ii) the difference between the regular retail price and the discount price. (If the retail price is $100 and you get it for $75 then the net value of the reward is $25.)

Except, that’s not a complete description of the reward.

The real reward is either (A) the sum of (i) the value of the bag and (ii) the difference between the regular retail price and the discount price if it ever gets made or (B) nothing, if the bag never gets made.

It is a campaign backer’s willingness to expose themselves to the risk that scenario B occurs that entitles them to their reward. The corollary is that if the risk comes to pass they have no claim to compensation.

So now let’s assume that the campaign met its campaign goal, received the money from Kickstarter, spent all its money in a good faith effort to produce the handbags but is not able to deliver. What should happen?

My feeling is that nothing should happen. The project backers took the risk that the project creator would fail and now that the creator has, in fact, failed they are in no position to complain. There are lots of differences between getting “rewards” and getting equity in exchange for investing but in this crucial way they are similar: You run the risk of losing your investment.

So, a general rule: A project creator who spends his crowdfundraised money on the project does not owe his backers a refund if he fails to deliver.

One exception to this general rule: If the handbag people didn’t spend all of the money in their failed attempt to produce or can somehow recover the cash (sell off the bolts of leather and sewing machins, et cetera) then I do think they should reimburse their backers on a proportional basis with whatever they’ve got left or can recover. Analogizing to the equity situation, this is like the winding down of the company and backers should get their proportional share of whatever is left over once all “senior” people have been paid. (Aside: Maybe there’s an opportunity for an enterprising person to buy these ‘claims’ for pennies on the dollar and try to recover en masse.)

Bottom line: If what you want is a guaranteed opportunity to get some object that is going to be produced then you should wait until it has been produced and pay full price. If what you want is an opportunity to pre-order that object at a discounted rate then you should be prepared for the prospect that it never gets made and that you might not get anything for your money.