Kickstarter vs. Microfinance

With the traffic to my Peter Molyneux post and a lot of discussion on Joystiq and elsewhere on this subject, I thought I could slow down this weekend and look at Kickstarter again from the perspective of whether or not it can be defined as Microfinance, and if it may have been hijacked by unscrupulous big business…

 

Microfinance has been around for a while, so let’s talk about it for a moment.

Traditionally, banks and investors have often steered clear of smaller businesses with a small turnover, because the actual costs involved in investing or lending outweigh the financial benefits that they would otherwise see. For example, it costs the same to manage a turnover business of $1000 per month as a business with a million dollar monthly turnover, which means that when it comes to smaller companies, or individuals seeking a capital investment in their start-up, the traditional means of funding is often stacked against them. Banks are businesses as well and they seek to at least break even, and when the management of these small accounts doesn’t match up with the gross turnover of a business, they will often find themselves lacking in the desire to continue to fund it; it is not financially in the interests of themselves or their other customers to consider this as a viable path.

Now, Microfinance is most often seen as a means of investing in third-world individuals and businesses, as a more charitable investment opportunity. It still carries the inherent risks that come with lending money; the investor is often seeking a return on their investment and the individual or individuals in question are usually quite grateful for the small cash loan/investment that they receive, as it is often more reasonable than turning to a lending facility that can charge anything up to 100% interest per month on any moneys borrowed. In such a situation, the small business can enjoy an easier credit facility and the investor can keep track and keep tabs on the growth potential of the business in question. It’s often the same as financing any big business, just on a smaller scale, hence Microfinance.

But just because it shot to attention in The Simpsons a few years back, do remember that Microfinance is a real and present means of funding in the Western world for smaller businesses. The rules are largely the same as they would be for larger investments; those giving their money expect a monetary return from their initial investment, either over the long-term by consuming a proportional slice of the company or by charging interest on the moneys loaned out. Those receiving can skip the complicated and unwilling financial sector, which is still in disarray from the Banking Crisis of the last few years and still finding itself unwilling to lend to small businesses. Microfinance has become a huge business in itself as a result; people looking for good ways to create wealth and those looking for capital investment can forego the middle men of banks and building societies and come to their own arrangements and agreements as to the manner such moneys will be repaid.

And I’m assuming I’ve just forced some of you to fall asleep.

There is a valid point to be made in this; Kickstarter isn’t really an investment, not in the traditional sense and certainly in a lot of cases, the overall return and financial benefit is being deftly skewed away from those willing to invest the capital and towards those asking for it.

Now, this isn’t always a bad thing. If a small business or start-up company needs capital and is looking for it on Kickstarter they can use it to their advantage; with the rules of the website explicitly stating that Kickstarter and its owner, Amazon, can accept no responsibility over how funds are used, as long as the people asking for money can deliver on their actual promises in the pledging amounts, then they may find themselves able to make money that can benefit them in the long-term, removing from them the impetus of having to pay back hundreds if not thousands of investors individually. If someone believes a CD and artbook is worth a $500 expenditure, then that is their own decision is it not? Something is only worth what someone is willing to pay for it; as a collector of old video games, this is especially a true point. I’ve sold a selection of games over the years, rare collectibles, from a Symphony of the Night Collectors Edition set (which netted me £450) to a mint-condition Resident Evil 3: Nemesis (£320). Are these games worth that kind of money? Probably not, as much as I am a collector I am also a massive cheapskate. But I can say that if these people are happy to pay that money for these items for their own collections, who am I to argue?

Kickstarter is quite a good idea in this sense; as long as people don’t expect more than they are promised, then they can walk away feeling happy that their money is going to a worthy cause or a company that is trying to make something for others. Remember one key point here in the Kickstarter world; a project is looking most of the time to be wholly funded by the community, not part-funded, which means that a project asking for $250,000 expects the whole project to cost $250,000. Any extra sales from traditional or digital sources mean that the money is pure profit; with no financial overheads to repay the money they make can be invested back into a new project or invested into another persons project. It can save smaller studios from the stresses and strains of an industry that isn’t always cheap or easy to break into, even for the average indie developer. With fees for some services ranging from betwen $100 to $10,000, the era of small bedroom programmers is a distant memory. Kickstarter can be a fantastic means for talented individuals struggling to find traditional means of funding or places to work to get their foot in the door. Again, as long as they hold up their end of the bargain, the people pledging their moneys can’t really complain. Everything is there in black and white, and if they are happy knowing that any profits are wholly owned by the company itself, then that’s the risk they take. As not all projects will get finished, sometimes things can go wrong or getting items out on time can be tricky. It’s a risk, but one with a fairly sound basis.

So I fear we must move onto the issue of bigger names and studios getting their noses in the trough.

Now, Peter Molyneux is not alone in this; for all the spanking I gave him, let us at least broaden the spectrum a little. You have the Oliver Twins, the creators of the 80’s classic Dizzy. These men are not poor; they have for over two decades run the countries most successful independent games studio, Blitz Games. They do a lot to help new talent find their way into the industry, so they are clearly no strangers to microfinance themselves. And yet, to make a new Dizzy game, they are asking for £350,000. You have the likes of Chris Roberts, who had his own crowdsourcing means running for a new Star Citizen game. He had made over half a million dollars from that before it crashed, but rather than boot it up again – he turned to Kickstarter, asking for the full amount again. Legal? Of course. Cheeky? Hell yeah. Brian Fargo, a veteran of the industry and the man who birthed the Fallout franchise, was looking for a million dollars to do a sequel to Wasteland.

All these people have industry ties, the names and impact to get investment from traditional means and bags of experience. So why would these people use Kickstarter, itself supposedly to help smaller companies find sources of finance where none would otherwise be available?

There’s a very good reason why. And it goes back to what I said earlier – it is a full project funding drive. Their money isn’t on the line – ours is.

Now you might consider that a cynical viewpoint but really, ask yourself why industry veterans who have spent decades in this world of games creation are finding it harder to find traditional means of funding. They would argue that publishers and investors want to play it safe, and sink their money into brands that they feel are more likely to give them smaller returns. This may be a fair viewpoint, but some may want to ask why they aren’t going to publishers – the problem here is, some projects are.

There’s a slightly seedy undercurrent now that some of these projects are finding themselves being partially funded behind the scenes as well, and are not being perhaps as up-front with the disclosure of this information as would be legally required if there were actual monetary investment opportunities on our end, as the people handing the money over. And it isn’t just the fact that publishers are desperate to grab a slice of the Kickstarter pie as they have zero financial risk on the line, and can take a slice of the profits as well as a share of the intellectual properties on offer. Disclosure in finance circles means that there can be no secrets, no quiet backroom deals. This is what got Facebook into trouble when it was first floated on the stock market; it had told a select portion of investors to sell up fairly quickly to capitalise on the sudden jump in share price, and when they were caught, the prices crashed. Innocent, smaller investors were the ones finding the money they had invested was now worth significantly less than when they started. Disclosure means we have all the facts at our disposal, whereby we can choose whether to invest or not.

This is not a legal requirement on Kickstarter, because it’s not an actual investment opportunity and therefore it is down to the individual projects how much of the behind-the-scenes stuff the community is privy to. Most are actually quite transparent so please don’t think I am painting the whole of Kickstarter as a bunch of devious people who are sticking their fingers into many different pies. But to deny that some funny deals are being made would be quite wrong.

Then you come to the issue that some of these projects actually have the money they are asking for to hand; they are being led or run by people who are themselves multi-millionaires. This goes back to the lack of risk; and therefore if such a project is funded, and makes profits, then that profit goes straight into the bank accounts of people who already have a large quantity of money stashed away. Whilst there is certainly a lot of love for some of the franchises being bandied about, there is a reliance on quoting these names and showing off your credentials in order to distract from the overriding question that should be on your lips; “Why can’t you invest that money yourself?”

And this goes back into the Microfinance issue. For Microfinance is designed to benefit the smaller businesses, the smaller games studios who quite frankly desperately need funding that isn’t tied to an exceptionally risky investment draft. What is happening with Kickstarter is with the millions of dollars swinging around every single day, people who otherwise have the means to fund their own projects are finding it easier to use the service for their own benefits as well, and the more this happens the more damage it can do to the smaller businesses who are reliant on the financial capital that the service can provide to them. We’re heading into an era of the Super Pre-Order. Where you put your money down, often huge amounts for the smallest things, and find yourself being taken advantage of. Like a project that will give you the first three DLCs for free if you invest $250.

Except, $60 game. Three DLCs at, say, $20 each. That’s $120 total. This coming from the community that a few years ago was in uproar over being charged a tenner for horse amour, or for a bikini costume for their favourite fighter game gal.

It is important that we know this. It is important that we are wise to this, and aware of what is going on because everything is happening so fast that it would be very easy for us to entirely miss the pitfalls that such a funding mechanism has laid out for us, the consumer. What was once a goodwill community that wanted to grow has now mutated beyond all recognition; where the sums of money being shunted around are vast and where much of what is being offered as rewards isn’t anywhere close to the actual value of the money being pledged, not by any stretch of the imagination and likely items that never will appreciate in value enough to cover the monetary drain that it puts on people.

We must also accept that some of these projects are cynical; being pushed by studios and names that could quite easily fund it themselves or find more traditional means of finance. That our love of these game titles and names being wheeled out is simply a ploy to get us to invest over the odds, ensuring that our hearts win out over the fight with the common sense in our heads. That some of the deals are, frankly, not worth the time it took to type them onto the screen.

That is not to say that Kickstarter can’t still be a force for good in the world; smaller studios are still for the moment getting as much attention as the big boys, and as these big projects swing by they share screen time and attract some interest. But if we continue to just recklessly fund these projects, with such vast amounts of money, then we’re going to attract more and more bigger names into the arena who will all want a piece of the pie, and that would eventually drown out the smaller projects, the smaller games that should be pushed in-between these bigger brands. Much like the games industry being unwilling to fund smaller projects and newcomers, the Kickstarter games world may soon be no more than a mirror of the very industry it was trying to inject some new life into; where the known commodities are the ones who are guaranteed the funding and the smaller projects are just ignored because no-one is interested in them anymore.

Kickstarter began on a wave of good intentions. Those good intentions have now become big business; Amazon take a 5% cut of these projects, so it isn’t in their financial interests to stop them after all. It’s making a killing from us pledging millions of dollars into these projects. Good intentions have made way for pure corporate greed once more, and it is actually quite sad in a lot of cases to see this happen because it was something that could, and should, have had a nice place in the world. It was once a lush green field with the promise and potential to do so much good.

But with so many building on the land, and so many of us willing to pay for the goods and services being offered, the field is now a town. There is no greenery anymore. It’s built on the same Capitalistic principles that any business is built on; attract big business. Take a cut. Eventually, Kickstarter is going to find itself shunning the smaller projects much like the banks used to shun the smaller businesses; because compared to the money they could make on these bigger names, the smaller ones are contributing far, far less to their bank balance. They will become a liability, and therefore will no longer find themselves the main focus of this once-golden means of finding investment capital. Why have market stalls in the middle of a bustling high street?

Even if Kickstarter was once capable of calling itself a Microfinance device, it is no longer capable of using that claim. And the world of Kickstarter is now fraught with the kinds of complications, secrets and issues that it once wanted to avoid. Projects are becoming increasingly higher risk. People are getting less for their money, and being asked for more in turn. Businesses that should be capable of their own finance arrangements are turning to it to absolve themselves of any financial risk at all, seeing it as a means to make pure profit from nothing at all. It’s the business equivalent of turning lead into gold.

If you want to continue using Kickstarter, promise me just one thing; don’t rush into those pledges. Use your head, not your heart, to decide if that $100 burning a hole in your pocket could otherwise be put to better use. These projects, these businesses want your money and are very happy to tug at your heart-strings and use nostalgia and honeyed reminders of days gone by to convince you to part with your money. In so many of these cases, the projects are hardly in the alpha stages and therefore once funded, if you realise they’ve taken your money to turn your favourite 90’s game into a cheap first-person shooter then you, my friend, are shit out of luck. Look at what they are offering, and consider if it is worth that price to you.

If we can’t stop big business taking advantage of Kickstarter, then we need to start being selective. We need to shock some of them off it, and back to where they belong. Because if we continue to just give them money, we’re going to destroy traditional investment opportunities. Which is great for the shareholders and CEOs. But bad for those who actually want to make a proper monetary investment into something.

Kickstarter is a bloated, warped version of what it used to be. The original intention is in there somewhere. But it’s getting harder and harder to find. Use your head. Otherwise we’ve just created new problems, rather than fixed the old ones – which will still be there, waiting for those forced to return when it all goes wrong. Let’s talk about the problems – why EA and Activision feel there is no real value in new IP anymore. Why THQ finds itself in such financial trouble when the output of games has actually been of decent quality. Whether the fees being charged by some are pushing studios into the arms of other machines. Why so many studios are being closed, or forced to close because they can no longer attain funding in the traditional sense. Let’s talk about these problems – real issues. Kickstarter is an illusion, a fantastic trick of the mind convincing us we actually have a say in how things will happen. I’d point you to the average MMO forum here but we all know which one I would be printing out endless links to, right? A userbase that feels it is control needs that sensation, and when it is lost, you get the World of Warcraft problem of people whinging, whining and threatening to pull their subs, funding, issue legal action etc. If the companies don’t burst the bubble, the amount of people with expectations of influence above their station will.

And it will go wrong. Mark my words. Without the legal measures and proper failsafes in place, or the responsibility from Amazon to properly monitor who is using its service, it will go wrong. Those seeking to take advantage of it will do so, and fully exploit it and find themselves branding the service in a poor light. Not that the light from Kickstarter is especially bright right now, but it can get dimmer still. It’s OUR money at the end of it all. People who want our money. And will do whatever it takes to make you part with as much of it as they can convince you to part with.

Remember we did fine buying games in the traditional sense from these people. If the industry has finance issues, then address them. Get them sorted.

Don’t ignore them, or we’re going to find ourselves in a bigger financial mess than any bank could instigate…

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