Finally Getting Klout
August 14, 2013
Fragile: Sage Observation from Paul Graham
August 24, 2013

bad-news 
 
Ordinarily it takes an act of God to make me spill a drop of my morning coffee, but reading the news this morning nearly caused a grand-mal seizure:

“Jilted Kickstarter Backer Neil Singh Is Now An Assistant Attorney General Of Arizona”

 
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.
 

http://www.crowdfundinsider.com/2013/01/8590-kickstarter-lawsuit-neil-singh/


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.
 

Ripple Effects

 
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.
 
 
 
 

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10 Comments

  1. Neil Singh says:

    Mr. Cornell: If you suffered a grand mal seizure, there probably isn’t a medical term for my condition on learning that you’re a professor of both entrepreneurship and journalism, at my alma mater no less. The fact-checking you did prior to writing this blog post is nil. And the “entrepreneur” you are feeling so protective about, to epileptic heights apparently, quietly deposited a check for more than $35,000 into his own, personal checking account that he used to buy groceries and party on weekends, refused to explain to anyone how he apparently lost all of it, and subsequently announced that he was taking some time off in Costa Rica. This is the martyr and role model to whom you pledge allegiance when you feel passionate about entrepreneurs? Should your students aspire to such business practices?

    The factual misstatements continue. I did not “sue him into bankruptcy,” as the very blog that you linked to above clearly explained, which you would know had you actually read its updated posts and my interview. My “lawsuit” was filed in justice court, not the Superior Court of Arizona where “real” lawsuits are filed, and I demanded the whopping amount of $70 from the defendant. Hopefully you’re wondering how a $70 claim could drive someone into bankruptcy, because the answer is that it can’t. Large amounts of credit card debt that had nothing to do with me or Kickstarter, on the other hand, will do the trick.

    You also mislead whatever readers you have regarding the terms of service published by the Kickstarter website, and also mislead them by failing to specify what the representations and promises by Seth Quest actually were. In fact, Quest made no representations at all that he was only providing “perks.” He made specific, concrete, and contractually binding promises to deliver his widgets to over 400 people in exchange for $50 a piece, plus a $20 “shipping charge” that was completely fabricated out of thin air and was falsely held out to his consumers as a bait-and-switch scheme to increase his raw dollar intake. Again, I ask, is this your role model for how to successfully run an entrepreneurial project?

    What my employment has to do with “entrepreneurship in Arizona” is equally baffling to me, but you are entitled to personally attack me in the blogosphere if you wish, as is your constitutional right. Still, I have to point out that you didn’t get this part right either, because there’s no such thing as “Arizona’s new Assistant Attorney General.” There are over 300 Assistant AG’s in this state, as there are in every other state in the country. And lest there be any more confusion than the thick layer of it that your post created: I’m writing this comment on my own behalf strictly as a private citizen, and not in any way associated with or on behalf of my employer.

    Thanks for reading.

  2. CJ Cornell says:

    Actually – the factual misstatements you cite, are from passages taken from several articles – particularly the (widely distributed) Inc. Magazine article that, in its first sentence stated “eventually forcing that entrepreneur into bankruptcy.” I don’t see anything published where you approached Inc. Magazine about their misstatements or any retractions on their part. While it is possible that all of the sources got it factually wrong, this story has been published so often it is hard to see where so many facts have been reported without any corrections. But if there are facts to be corrected, certainly they should be, and I would love to hear the more accurate account of events.

    While I never would use this kid as a role model for entrepreneurship, there are 2-3 issues here:
    1) developing new products are risky. Backers – whether donors or investors – always run a risk that a project might not turn out as planned.
    2) Kickstarter is not a store. The fact that you contributed to the project without fully understanding Kickstarter is something that, at least in print, you have indeed come to terms with.
    3) assuming that, because the project didn’t work out, that something nefarious or illegal happened is rather impulsive – as is filing a lawsuit. You may have felt wronged, even swindled, but there does not seem to be any evidence of the kid doing anything illegal – if there was, certainly yoyu have it within your means and expertise to pursue criminal charges.

    The nature of Kickstarter is indeed that all ‘rewards’ are perks – not purchases. Kickstarter is pretty clear on this (so each and every project creator does not have to restate the premises of Kickstarter, just as each seller on ebay doesn’t have to explain the bidding process to newbies who might become disgruntled).

    Of course this entrepreneur is not a role model for a successful project – but in many ways he is a role model for what might happen with a poorly executed project. A cautionary tale. This is why potential contributors get to communicate, ask questions, and do a little due diligence before putting money in. Just as this entrepreneur was very inexperienced, clearly you were just as inexperienced with crowdfunding and with Kickstarter. Unlike others, you had the time, means and expertise to file a lawsuit.

    I am not the only one who has been alarmed by this situation. Others writing about it make the same point. We can’t all be underinformed rubes. Your new position in Arizona prompted headlines in the crowdfunding press (which is how I picked up the story).

    Just as I don’t like to see that young entrepreneur’s life ruined over a poorly executed project, I want to make anyone else’s life or reputation more difficult.

    My larger point (which apparently was not made clear) is still what I want to be the takeaway: There are not enough people in the public sector who understand entrepreneurship, the entrepreneurial experience, new companies or risky innovations – but they are in a position to either nurture or destroy nascent new companies and their founders – in subtle and direct ways.

    I think my last paragraph says it best: I wish you well, really, in your new job (congratulations), and I hope you might become more supportive of entrepreneurial efforts (especially here in Arizona), and my hopes that this support – not cynicism – will be contagious.

    BTW – I appreciate you taking the time to comment and to clarify …

    CJ

  3. Neil Singh says:

    Thanks for responding, and I appreciate your kind sentiments. I’d propose that the snark in your original post and the snark in my first comment are a wash and that we call things even for the sake of having a civil discourse about this very interesting topic. Inc. doesn’t have a comment section and I simply didn’t bother complaining about any additional clarifications from that author, but I did very aggressively comment online (as I am here) to correct other media sources that wrote misstatements about this story. The one you linked to, Crowdfund Insider, was even gracious enough to allow me a full-blown telephone interview. With few exceptions though, yes, I’m afraid there is a gang of uninformed rubes who ran around sloppily telling my story. In the comment sections of many of them, most readers seemed angriest about details that were completely distorted in the articles, like the false notion that I actually received my refund but decided to “sue him into bankruptcy” anyway, just to be a vindictive lawyerly jerk.

    Another detail you have overlooked or not come across in your googling my story, however, is that my legal action resulted in my securing the internal emails and documents showing exactly what Seth Quest was up to behind the scenes. It is based on that documentation, which I’ve always openly offered to anyone to look at, that I assert as a proven fact that he deposited the money into his personal checking account (which means he intermingled funds), and then refused to tell anyone what happened with the money. It is also a fact that he moved away from San Francisco, after filing for bankruptcy, and hung out in Costa Rica for a while. We still do not know what exactly he did with it. While you strangely suggest that I should have unleashed law enforcement on him, I didn’t want to ruin his life either, as I’ve often said.

    While I’m a lawyer with the luxury of getting angry at people who take other people’s money only because of “the principle,” there were backers you can find the comments of on Quest’s Kickstarter page who were angry because $70 is simply a lot of money to them. Some bought his widget for their ailing, elderly relatives. One bought it while dealing with a terminally ill parent and was truly distraught over being ripped off and mistreated in exchange for delivering his hard-earned $70 in the midst of such a personal crisis. When Quest tried to duck responsibility for the project failure by demanding that anyone who wanted refunds had to personally email him, I later discovered that over 80% of his backers did exactly that. (A fact that he, of course, did not voluntarily disclose.)

    While you state your desired takeaway is that “there are not enough people in the public sector who understand entrepreneurship,” it’s still unclear how my story supports that point (setting aside the fact that I’ve been in the private sector the entirety of my life and career until 4 months ago, and that I have a degree in finance.) I used a vessel of the private, free market economy — the process of civil litigation by one private individual against another — to remedy a simple breach of contract. Without rules of commercial practices and customs, and without the ability to enforce sales contracts, American industry and entrepreneurship would come to a crashing halt.

    The takeaway to your post could have been much simpler, I submit, and along the lines of what you actually acknowledge in your follow-up comment: Seth Quest’s handling of this affair is a cautionary tale. Don’t do what he did. But if you do, prepare to be held accountable.

  4. CJ Cornell says:

    First off, I would be very happy to find out more detail from you, the facts of the situation from your end, attempt to find out the facts directly from the other sources, and write a detailed article setting things straight once and for all.

    However, there were few overarching points I want to make, and will continue to make:

    1. My fervent defense is not for this particular entrepreneur, and my criticisms about the situation are actually not meant to be focused on you personally. I am a proponent and unapologetic evangelist for entrepreneurs, entrepreneurship, innovation, innovators – and recently, for Crowdfunding.

    2. The above interests converge on a situation like this one, and touches on so many nerve points that, as an educator, it would be irresponsible not to comment.

    3. First and foremost, crowdfunding is still in its infancy – just like eBay, Amazon and Craigslist were in the mid-90s. And just like those platforms, crowdfunding platforms are going through the transition from being the purview of early adopters to attracting mainstream consumers. There are apt to be lots of misunderstandings and glitches I’m sure when it was in its infancy, eBay was sued by a few people for apparent misrepresentations – that were really just a fundamental lack of understanding about how auction sites work.

    Certainly in the early days of social networks, many firms and individuals tried to sue bloggers and site owners for defamation because of derogatory third-party comments. And we *still* hear stories about “Craigslist killers” or Facebook stalking portraying it as the dark side of these platforms.

    4. Most important: Entrepreneurship is risky. On crowdfunding sites you’re either funding something purely charitable or funding the innovative and risky. Maybe one day it will be different, but the very raison d’etre of crowdfunding sites is so projects can attract funding because the traditional funding sources deem them too risky.

    5. One major assertion of I do indeed take issue with: About the entrepreneur’s use of proceeds and the implication that he engaged in fraudulent behavior. While I am relying on 3 published sources and don’t yet have the first hand details of this situation, I suspect you don’t either. In the meantime allow me to make some observations:

    • MOST projects on Kickstarter are NOT from established companies – rather they are from enterprising young individuals looking to develop something new (by nature risky). So you are usually not buying, from an actual company. In fact you are never buying anything, you are contributing.
    • Most crowdfunding sites use PayPal or Amazon for payments. So, if a person conducts a crowdfunding campaign (perhaps with the intent of starting a new company to support the project) – then the proceeds get transferred immediately into the owner’s PayPal account. Then PayPal processes and transfers the proceeds into the owner’s personal bank account. There’s nothing scandalous or nefarious here. And of *course* this money is mixed in with their personal funds. Now then, certainly as the project makes to transition from a campaign into a company, mixing the funds is not a good idea (to say the least).
    • When a company or individual raises money for a project (just as for a charitable organization too) – not all of the money goes into material development of the product. There is always overhead (whether in salaries, admin fees etc). If the entrepreneur in question, instead, formed an LLC or established a sole proprietorship, and then paid himself a small salary while he developed the product – certainly you would not be scrutinizing that he spent his salary on food.
    • Most of this is why crowdfunding sites still should be the purview of early adopters. Just like Angel investors have to be ‘accredited’ (savvy with verifiable net worth) – because an inexperienced investor will make all kinds of assumptions and perhaps take inappropriate actions. Lots of new companies lose money from VC and Angel investment but so very few are sued because the investors understand the nature of the risk.
    • And last, according to those 3-4 published sources, the entrepreneur in question had indeed reached out to his supporters about either refunding the money or otherwise taking a different course – but after being sued, and the subsequent house of cards’- it put incredible pressure on his finances- like paying legal fees etc. After this I am sure the prospects for refunding the money quickly dwindled. Again, on Kickstarter – contributing is a risk. Kickstarter policy is that the creator should attempt to refund or otherwise make adjustments in the case of failed projects – but the creator is under no legal obligations to do so.

    The part that still leaves me alarmed – or at least very concerned – is the huge disconnect between the mainstream user (in this situation, you) and the entrepreneurial experience. Again, I am defending early stage entrepreneurship and the nature of risky, innovative projects – not necessarily defending this specific young entrepreneur.

    In Arizona we can rightfully brag that we have the country’s highest level of entrepreneurial growth – but not much else. This and other data clearly implies that our nascent ventures die early deaths. There a few reasons for this; at the top of the list is that our population (unlike Silicon Valley, for instance) lacks an understanding and experience about what entrepreneurship is all about, and has a general low tolerance for the delicate nature of early stage ventures.

    If entrepreneurs got sued every unsuccessful attempt to launch a product or raise money, they they will attempt neither. And we all are diminished.

  5. Neil Singh says:

    A “huge disconnect” between mainstream users and the entrepreneurial experience is evidenced by a guy who suckered me out of 70 bucks? Kickstarter spends millions, perhaps, to make sure that its URL is well-known and easily findable by “mainstream users” like myself. Kickstarter projects have as wide an audience from which they hope to generate cash as possible. In other words, mainstream users. In your desire to use me as your editorial prop, you appear to have lost sight of the simple fact that I was nothing more than the very end user that Seth Quest and Kickstarter sought to extract cash from. Who else exactly is the concept of crowdfunding hoping to depend on to prosper, in the years to come, if not “mainstream users”?

    The true disconnect here is in your failing to distinguish between true entrepreneurial spirit on one end of the spectrum, versus incompetence and dishonesty on the other. You may have a number of noble intentions and fantastic ideas about how crowdfunding can play a role in our economy and in the world of innovation. But dare I suggest that you need to pick better stories to illustrate those ideas. By attacking me, and let’s be clear that this is exactly what you did in your post, you publicly chose Seth Quest as the role model to symbolize the brave entrepeneurs whose courage you want to passionately champion. I simply submit that being repeatedly dishonest to one’s loyal customers is not an entrepreneurial trait worth championing.

    And as for the verifiable facts underlying that sentiment, I am more than happy to send you the entire documentary record of this series of events, which is easy since virtually everything transpired online and was captured through screenshots by myself and other backers:

    Quest didn’t tell his customers that they were “donors,” although he very easily and in plain English could have. He also could have disclosed and explained the risks behind sending everyone’s hard earned cash to him, as any ethical entrepreneur would, but he did not. When things soured, he could have taken me up, personally, on my very specific and public invitation to just tell us how little money was left, publish an accounting of where he’d spent the money, and come up with a fair distribution plan for refunds. Instead, he shut down his email accounts, stopped answering questions, made a number of misrepresentations about refunds, and then tried to disappear. At one point, when we figured out that he had issued refunds to certain people on his project’s Facebook page without letting his Kickstarter backers know, he deleted his Facebook page so no one could see it anymore.

    Every scrupulous business owner down to the nice guy who runs a hot dog stand by my office knows the fundamental principles of fairness in treating customers, and therefore in running a business. Quest is not your hero, anymore than I am your villain.

  6. CJ Cornell says:

    I’ll email you privately if you are going to give me info that I can write a more detailed story for a wider crowdfunding specific audience.

    FYI – the major point of contention that probably will never be resolved is this (from your last comment) “Quest didn’t tell his customers that they were “donors,”
    The thing is, he doesn’t have to reinforce that all contributions on Kickstarter are donations. No project on Kickstarter has to state this – because this is the whole overarching business model of Kickstarter. No more than I have to warn commenters here that their comments are publicly posted. If someone thought otherwise, it is certainly not because I deceived them. Regardless of any other details of this story, this is the one detail I suspect it will be hard for most in the crowdfunding industry to get beyond.

    Aside from that one point, this is certainly an issue that a wider crowdfunding audience should be able to hear all the details. It would be interesting to hear Quest’s perspective, if he’s willing to tell it. Either way, it’s an interesting story to tell.

  7. Neil Singh says:

    This is a direct quote from Seth Quest’s original Kickstarter page:

    “For a $50 pledge you are pre-ordering Hanfree. Hanfree will be constructed from the highest quality materials and made in the United States. When the Kickstarter campaign ends the retail price of Hanfree will be $79.95. Please specify if you have an iPad or iPad 2 when ordering (add $20 for shipping in the United States, $30 for Canada and $40 for international shipping).”

    Please oblige me by explaining which portion of this language makes even the remotest inference that sending in your $50 (plus shipping) constitutes a “donation.”

  8. CJ Cornell says:

    I agree that his language on his particular project page used unclear language, to say the least – and I believe it was this case that prompted Kickstarter to tighten up their FAQ text – in particular, they posted a seminal article called “Kickstarter is not a store” *note that the article was directed at new users who had some similar confusions about whether or not they were purchasing something.

    Again, please do not confuse me as an advocate for Quest. Absolutely not. His campaign was loose and sloppy (to say the least) – and definitely fodder for a long article detailing all of the ways he went wrong (thanks for the idea).

    In fact, I will go further and say that
    1) Kickstarter should indeed take greater pains to make people understand the ‘donation’ aspect (or contribution is a better term). It’s such an integral part of the crowdfunding process though, that I can see where it would seem so obvious that they would overlook stressing it. Even a PBS pledge drive (which is sort of what Kickstarter is modeled after) doesn’t use the term donation … and people ‘pledging’ $100 for the tote-bag understand that they are not purchasing it. Of course there are differences (the tote bag exists).

    2) Kickstarter should have automatically flagged his campaign before it launched, for the use of the word “pre-order”. And I think as a result of this case they do a lot more rejection of campaigns based on wording that might be considered misleading to the newbie contributor.

    FYI the term “preorder crowdfunding” is sort of an industry term that describes the motivations for a lot of contributors – to fund a product while it is in the concept stage in order to get early access to the product. Quest was stupid to use this as his official wording.

    You might want to check out how a lot of other similar concept-stage products impart their ‘preorder’ rewards on Kickstarter … just to gain some interesting perspective.

  9. Neil Singh says:

    His language isn’t unclear at all. It’s overwhelmingly *clear* that a promise to deliver a widget is being made, in exchange for the delivery of cash. Under 200+ years of black letter American law, that’s a contract. That you would initially suggest that “donations” were any part of this project, or later suggest that his wording is unclear, is why we have courts of law and exactly why I filed my lawsuit. People can think and believe and blog anything they want, but in a civilized society we have the right to challenge unreasonable and plainly wrong interpretations of contractual language in an orderly fashion before a judge, and let the truth prevail. Before Seth Quest declared bankruptcy, I’ll note here, he refused to answer my lawsuit and the court therefore awarded me and another backer a default judgment.

    I think you are also conflating Kickstarter’s position with your own interpretation of what crowdfunding should be, as opposed to what it really is. Kickstarter’s terms of service are the best evidence of the company’s intent. Its TOS includes language that reinforces the company’s point of view that Project Creators *are* directly liable to backers when they take their money in exchange for a concrete promise that is not kept. This is in direct contradiction to your suggestion that it is the backers who have “confusions about whether or not they were purchasing something.”

    There was never such confusion among the majority of backers of the Hanfree project. They knew they had “purchased” something. That’s why they supported and very closely followed my legal action, which also took the position that we had “purchased” something. It has uniquely been individuals vested with the crowdfunding industry who take umbrage with that position, because (I submit) they choose to ignore terms of service, and overlook basic concepts of doing business with consumers. Crowdfunding isn’t somehow immune from the rules and laws that bind all of our behaviors together: if you expect people to send you donations, you should be honest and up-front about it. Conversely, if you induce people to send you payments with promises of widgets in return, you’re expected to honor the promise.

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