Why is Kickstarter's crypto dream hard to realize despite receiving a $100 million secret investment from a16z?

Written by: Leo Schwartz, Jessica Mathews, Fortune Magazine

Compiled by: Luffy, Foresight News

In early December 2021, employees of the crowdfunding startup Kickstarter received news of an unexpected windfall: an investment firm wanted to buy some of their shares. This news caused quite a stir within the company, as many employees had long given up hope of selling their equity, despite having accumulated it over the years.

The Kickstarter they were working for at that time was vastly different from the hot startup of 2009, which launched viral projects like Cards Against Humanity and Peloton. At that time, Kickstarter was widely praised by entrepreneurs and the public alike, even achieving the coveted startup milestone: its name became a noun, as people referred to "Kickstarter" as synonymous with internet crowdfunding.

The company's anti-corporate leanings and grassroots spirit attracted celebrity investors and helped shape the early New York tech scene. Its events, from film premieres to rooftop festivals, and viral fundraising campaigns, demonstrated that creative business ideas could find funding outside of Silicon Valley, and that artists could gain support from fans.

However, more than a decade after its launch, Kickstarter had lost its former glory, and the CEO was replaced in quick succession. By 2021, Kickstarter offered little to potential investors and was rather troublesome. The startup's growth had plateaued, and the company profited by taking a small commission when a project on the platform reached its funding goal. Following a fierce union movement, the once-thriving culture of the company had vanished, replaced by a cultural atmosphere that was detrimental to its development. Many believed that the new shareholders would inherit ownership of an outdated brand.

For Kickstarter's employees and early investors, this unexpected investment felt like a chance for a comeback. After all, this was not a small funding round to keep the lights on, but a staggering $100 million investment, valuing the startup at $400 million. But there was a catch: the expectation was that Kickstarter would attempt to pivot into the blockchain space, as its new donor (the crypto fund of venture capital giant Andreessen Horowitz) sought to catch up with the latest hype cycle.

This windfall could be the impetus the company needed to realign and get back on track. Instead, the pivot to blockchain sparked a sharp backlash from the creator and fan community that the company relied on, leading to significant project losses and reputational damage. This turmoil indicated that even the most promising startups could lose their way, while also highlighting the challenges of pursuing a mission-driven agenda on a venture capital foundation.

Trouble in Paradise

When Kickstarter launched in 2009, it was a pioneer among a group of New York startups (like Etsy or Foursquare) that challenged their West Coast counterparts by focusing on art and culture, in contrast to the developer-centric ethos of Bay Area projects like Google and Facebook.

The idea for Kickstarter (where artists or creators seek funding from the public for their new albums, board games, or comic books) came from Perry Chen, a former DJ who founded the company after struggling to raise funds to host a concert during the New Orleans Jazz Festival. The company's most notable early investor was Fred Wilson, who had invested early in companies like Tumblr and Twitter, and whose Union Square Ventures is one of New York's most iconic venture capital firms.

Kickstarter began in a stylish loft with tin ceilings in Manhattan's Lower East Side, its front door covered in graffiti and adorned with a sticker that read "Eat Shit." The company gathered users through various events, hosting its first annual film festival on the roof of an old American can factory in Brooklyn in 2010. Clips of projects funded by the platform were screened, including dances inspired by endangered plants and animals, while a brass band supported by Kickstarter performed for guests lining up to buy crowdfunded pies and artisanal sodas.

Early employees recall that the company valued creativity and social consciousness, unlike typical Silicon Valley startups that prioritized growth at all costs. This Brooklyn startup did not take the typical venture capital path of achieving hockey-stick growth through losses; instead, it charged a 5% discount and fee on successfully funded projects, allowing Kickstarter to turn a profit in its second year.

The model gained widespread attention on the internet and achieved breakthrough success, including Phoebe Waller-Bridge's BBC comedy "Fleabag" (which later won an Emmy) and the VR headset Oculus Rift (which was sold to Facebook for $2 billion). In 2013, after the popular series was canceled by Hulu, Veronica Mars showrunner Rob Thomas turned to Kickstarter to raise $5.7 million for a movie. This was the largest amount ever raised for a project on Kickstarter, proving its mission to return authority to creators.

"Art for art's sake is really important," a former Kickstarter employee told Fortune, "whether a project can deliver returns to investors shouldn't just depend on its success."

Kickstarter made it clear early on that it was not a path to wealth, yet investors still poured in significant funds, including a $10 million round in 2011. Early supporters included Meetup co-founder Scott Heiferman, Vimeo co-founder Zach Klein, and actor David Cross from "Arrested Development," with Chris Dixon (now a16z crypto founder) also joining as an angel investor.

Everyone seemed to understand that Kickstarter was not built for massive returns. In a 2013 blog post, Wilson noted that Kickstarter didn't need help from venture capital firms (though they still contributed): "It never needed to take outside funding, nor did it do much to optimize its profitability." Another early investor told Fortune that they invested because they "just liked the idea," never expecting it to yield financial returns.

However, the good feelings from early days on Kickstarter would soon be replaced by another emotion: a pervasive sense of chaos. As Kickstarter co-founder Yancey Strickler took over as CEO in 2014, the company began implementing a CEO rotation system, although Chen would retain a management position for the next few years.

Then in 2015, Kickstarter took the rare step of becoming a public benefit corporation, a type of for-profit organization that agrees to meet social and environmental standards. A podcast produced by employees described public benefit corporations as a legal structure that could protect Kickstarter from investors attempting to exit or sell the company. "Reorganizing as a public benefit corporation blurred the lines between personal values and corporate values," one employee stated on the podcast, "our founders often described public benefit corporations as a structure that allows the company to operate like an organization that is not solely profit-driven."

When Chen resumed the role of CEO in 2017, he reinforced this message, reiterating previous statements that Kickstarter would never go public or be acquired. The posturing of the company's priorities began to irritate employees. "I did feel extreme fatigue and burnout, and I think employees had little confidence in Perry," one employee said.

Despite Kickstarter having figured out how to be profitable early on, the company seemed unable to take off. In 2016, the number of crowdfunding projects on the platform stabilized at around 19,000 per year, showing no signs of growth. The funds raised from projects, from which Kickstarter took a cut, fluctuated annually, peaking during the pandemic at nearly $814 million.

Number and amount of projects funded on Kickstarter over the past decade

An early investor told Fortune that Kickstarter had always struggled to find a balance between growth and adhering to its new charter, which required it to take on socially valuable but costly obligations. Despite carrying a noble mission, the competing priorities of the company led to dysfunction, making it difficult for employees to find career development paths.

In 2012, Kickstarter spent $7.5 million to purchase a building owned by a pencil company in the trendy Greenpoint neighborhood of Brooklyn, which quickly became a template for tech offices in the mid-2010s, featuring a rooftop garden, sunroom, and cinema. On Saturday nights, employees would come over with friends, but still find people hanging around. On the other hand, there was a laid-back work culture, with projects stagnating and some employees working only a few hours a day.

Meanwhile, the company continued to struggle with its growth strategy. In 2016, it acquired a startup called Drip in response to the rapidly growing crowdfunding subscription platform Patreon, but this move did not succeed, and Kickstarter's plans to address its rising competitors were also scrapped.

One investor remarked, "Coming up with something that doesn't conflict with their certain missions isn't the easiest task." "It feels like this has been going on for several years."

Dissatisfaction began to emerge among employees, many of whom joined the company because of its mission, describing it as a "dreamy, noble atmosphere." They knew that, due to Chen's commitment to never sell the company, their equity in the startup would never increase.

In March 2019, tensions in Kickstarter's work culture erupted in the form of a union movement, an unprecedented step for full-time employees at tech companies at the time. New CEO Aziz Hasan, another leader succeeding Chen, called an all-hands meeting to respond, stating that the company would not voluntarily recognize the union. Kickstarter fired two employees leading the union movement. The two immediately turned to lawsuits, accusing the startup of illegal retaliation.

Kickstarter's clumsy handling of the union push shattered the illusion of it being a unique startup. This move drew condemnation from Kickstarter creators, including David Cross, who called on fans to support the union on Twitter. Supporters of progressive projects funded through the platform, such as Current Affairs magazine, threatened to withdraw their funding. Shortly after acknowledging the union, the company laid off 18% of its 140 employees, with Hasan citing a decrease in new projects on the platform.

In early 2020, the pandemic forced Kickstarter employees to leave their Greenpoint headquarters and begin working remotely. During this time, the platform experienced a brief surge as people stuck at home sought ways to support creators. Meanwhile, venture capital flowed into other startups at record levels and valuations, while cryptocurrency prices soared to historic highs, with Bitcoin reaching $69,000 in November 2021. Just a month later, Kickstarter announced its blockchain plans and proposed a $100 million acquisition offer.

The Blockchain Gamble

Kickstarter was precisely the type of company that caught the attention of emerging venture capitalist Chris Dixon. Dixon ran a recommendation startup called Hunch in the early 2010s and regularly wrote on his widely read blog about wanting to return to a more equitable internet era. He and colleagues at Founder Collective (a small venture fund founded by New York tech founders) had already invested in another company called 20×200, which aimed to "democratize art" by sharing revenue with artists.

Dixon and his co-founder at Hunch, Caterina Fake, both invested in Kickstarter in 2011, helping the startup become a darling of the New York tech scene. Soon after, Dixon joined Andreessen Horowitz, where he became enamored with blockchain, viewing the technology as a way to bring the internet back to its open-source roots. The firm would establish a separate division called "a16z crypto" in 2018, focusing on blockchain investments.

In his new role as head of a16z crypto, Dixon secured up to $2.2 billion from its third fund and kept in touch with Chen. According to a source, board members of Kickstarter, including Chen, reached out to Dixon in the summer of 2021 to discuss new investment in Kickstarter, proposing the planned blockchain pivot as the impetus for the deal. For Dixon, the prospect of bringing a familiar name like Kickstarter into the Web3 realm was too enticing to pass up.

This deal was not an injection of funds to purchase new equity in Kickstarter, but rather took the form of a tender offer, meaning all new cash would be used to buy shares owned by other shareholders, with no cash flowing directly to Kickstarter. Instead, it allowed employees and early investors to cash out.

According to insiders, the round of secret financing totaled $100 million, led by a16z crypto, with some other smaller investors, including Yes VC, an early-stage firm led by Dixon's former co-founder Fake, who is also a co-founder of photo site Flickr.

While this was a hefty check for a company with slim revenues, it was not uncommon for a16z crypto. Dixon had also made other whimsical bets to realize his vision for the crypto network, such as co-leading two rounds of funding for a startup called Dfinity in 2018, totaling over $160 million. (Dfinity soon fell into controversy after its launch, with its token plummeting 95%.)

In return for a16z's generous funding, Kickstarter would attempt to become a Web3 company. This grand but unlikely plan required moving its entire platform to a blockchain called Celo, another a16z portfolio company. Kickstarter would operate as an open-source protocol rather than a tech company.

Meanwhile, users would be able to create their own mini-platforms around niche interests like anime, attracting more people and sharing profits through Kickstarter. This structure echoed other models like Farcaster, requiring donors to pay with cryptocurrency, but necessitating Kickstarter to create a brand new open-source version of existing software built on a blockchain that had never been tested with a large consumer application.

Few in the crypto industry viewed Celo as a top blockchain project, but it did have a "negative carbon" footprint, allowing Kickstarter to adhere to its environmental mission statement. Celo co-founder Sepandar David Kamvar joined the Kickstarter board in August 2022.

This deal did not require Kickstarter to follow through. Nevertheless, an employee working at Kickstarter during the tender offer stated that the company clearly communicated internally that a16z was involved, and that the venture giant invested in Kickstarter because the company was willing to venture into Web3.

The tender offer information reached employees' inboxes on December 8, 2021, the same day Kickstarter revealed its blockchain plans. They could sell up to 32.49% of their shares at $7.41 each, a significant increase from the price employees had paid, and if others did not participate, they could opt to sell more shares. Kickstarter would even cover the related fees.

For some employees, this acquisition was a pleasant surprise after years of turmoil. "This is a once-in-a-lifetime opportunity," one employee recalled thinking after receiving the acquisition offer.

Taylor Moore was one of the union organizers who was fired, and he felt anxious about the news.

"The leadership at Kickstarter talks about Perry Chen and some of his sycophants like the classic story of the emperor's new clothes, completely out of touch with reality," he told Fortune, "while the people doing the real work know this is a foolish idea."

Despite Chen's newfound enthusiasm for blockchain, the announcement provided little in the way of specifics, and the timeline set for this transition was less than a year. This raised concerns within the Kickstarter community, who feared that amid the hype of the cryptocurrency market, the plan would lead their beloved project platform into a get-rich-quick scheme. Some users expressed worries about the environmental impact of the blockchain pivot, as it could generate a massive carbon footprint, even though Kickstarter chose Celo for its climate-friendly reasons.

Isaac Childres, founder of a popular tabletop game company, wrote in a June 2022 newsletter, "What we see in the cryptocurrency space is almost all rampant fraud, theft, and financial loss," announcing that future projects would turn to other platforms for crowdfunding.

Much of the community's anger was directed at employees, who expressed their skepticism in group chats. Meanwhile, the company decided to hire outside consultants to announce the news of its blockchain venture, leaving many employees unprepared for the sudden influx of sharp criticism from users. Given Kickstarter's convoluted history of launching new initiatives, doubts arose about its ability to achieve a significant technological transformation. "This is just unbelievable," one employee said.

The blockchain plan seemed difficult to realize, and the reality soon proved that to be the case. Within months, executives stopped mentioning the issue, and no part of the platform was transitioned to operate on the blockchain. "It felt like Drip," said a former employee, referring to the beleaguered competitor Patreon. "They announced it, and then it just fizzled out."

In 2022, Kickstarter hired another CEO, Everette Taylor, marking the fifth leadership change in a decade, as he took over after a series of events including union organizing, the blockchain launch, and the company parting ways with about 40% of its employees. According to a Kickstarter spokesperson, Chen quietly stepped down as board chair and began a transition plan to leave the board entirely last year.

New CEO Taylor immediately made it clear that blockchain was no longer a priority for the company, telling TechCrunch on October 4, 2022 (a week after taking office), "We will not be committed to moving Kickstarter to the blockchain."

Although Dixon and a16z crypto declined to comment on this article, Dixon recently stated at the launch of his new book "Read Write Own" that despite the public's clear disdain for blockchain technology, it is a long-term game. Meanwhile, Kickstarter did not completely dismiss it. After announcing the news in 2021, it established an independent public benefit corporation called Creative Crowdfunding Protocol, staffed by two employees, including a former operations manager from Kickstarter. Today, its website lists two software engineer job openings in Bangladesh, and Celo still lists Kickstarter as an "ecosystem partner."

This shift did not harm Kickstarter, and a16z's funding undoubtedly helped the company build some goodwill with employees and investors. However, employees stated that this was yet another distraction preventing the company from emerging from its slump. The collapse of the blockchain initiative ultimately alienated users and employees, with many believing that Kickstarter's glory days were over.

In an interview at a Celo event at the end of 2022, Kickstarter COO Sean Leow insisted that the company still believed in the protocol. When asked if he saw any gaps in the vision, Leow replied, "I would say 95% is a gap right now."

Kickstarter declined to allow Leow, Taylor, or other executives to be interviewed.

A Winding Path

Kickstarter may have achieved the rare honor of becoming a household name, but the company has lost its former luster. "When I say I work at Kickstarter, everyone's instinctive reaction is, 'Oh, is that still a company?'" said a former employee who joined in 2022.

Today, Everette Taylor continues to seek new revenue sources, launching initiatives to help creators with logistics and taxes. The CEO is also trying to reintroduce Kickstarter to the public, including through magazine interviews and conference appearances, emphasizing his role as a Black CEO and the company's commitment to diversity in its executive ranks.

A year after Taylor joined, Kickstarter appointed a new CFO to help boost revenue. According to company data and internal emails sent by the CFO, while total fundraising amounts have increased, revenue has declined since 2019. "They've been talking about this," said a former employee, "it feels like every all-hands meeting is an emergency." A spokesperson declined to provide Kickstarter's revenue figures.

Ultimately, the new products did not address Kickstarter's fundamental problem: the number of projects funded on the platform has stopped growing over the past decade. Taylor's more corporate approach to a company whose internal motto was once "Fuck the single culture" drew criticism from five former employees interviewed by Fortune. In early 2023, Taylor became a spokesperson for a Chevrolet advertising campaign and joined the board of a publicly traded online luxury marketplace in February.

"Many people are frustrated with the CEO making sponsored content," one employee said, "it feels like a betrayal of the company's values."

The prevalence of fraud on the platform is another ongoing concern. Over the past three years, the Better Business Bureau has received over 100 complaints against the company, many of which involve scams or users never receiving the products they supported. Last year, the Ohio Attorney General reached a settlement with a Kickstarter scam user who raised funds under the guise of a sea turtle conservation charity, only to turn around and invest the money in cryptocurrency. The scammer agreed to repay the duped donors and not conduct crowdfunding activities in Ohio for five years.

Due to Kickstarter's mechanics, projects can receive full funding without launching, and Kickstarter takes a cut from that. According to Fortune, an internal estimate suggests that revenue from fraudulent projects could be as high as 18%, a concern echoed by past actions from state attorneys general and the Federal Trade Commission, who investigated scams on Kickstarter. (Kickstarter itself has not been accused in these lawsuits or complaints.) A spokesperson denied this estimate, stating that the company has taken "extensive measures" to address fraud issues, including new detection software and processes.

Now, with prices soaring, cryptocurrency is regaining popularity, and open-source protocols could still provide solutions to Kickstarter's tricky problems. As Leow mentioned in a late 2022 interview, the immutable ledger of blockchain and its traceable addresses and transaction histories could help address the platform's challenges with fraud and trust.

However, Kickstarter's biggest problem may be that time has passed. "I feel like they are outdated," a former employee told Fortune. "Why would people still go to Kickstarter when there are so many other more viable ways (like becoming a TikTok influencer) to raise funds?"

Kickstarter does provide a niche market for independent creators who want to create a board game with a detailed set of instructions or a clock that writes a new poem every minute using AI.

"Since its launch in 2009, creative projects on Kickstarter have pledged $8 billion," a spokesperson stated. "Looking ahead, we will continue to work in a community-centered way."

The spokesperson noted that the company's position in the creator economy is different from platforms like TikTok. They pointed to recent projects funded by social media influencers and films funded by Kickstarter that were recently screened at the Sundance Film Festival.

However, competitors like BackerKit have attracted disgruntled users in the wake of the blockchain scandal, while Kickstarter continues to lose top creators. In February of this year, fantasy writer Brandon Sanderson, who launched the largest campaign in Kickstarter's history, announced that his next project would be crowdfunded on BackerKit.

Ultimately, Kickstarter failed to reinvent the rules of investor and community support; instead, every time it attempted to leap to a new level, it was tripped up by its own idealism.

A recently departed employee stated, "People want it to be a marketplace and to be a household name again." "I feel like we are stagnating because our reputation is getting worse."

After the pandemic, Kickstarter never moved back to its 33,000-square-foot brick headquarters in Greenpoint, instead choosing to sell it for $29.5 million. After months of searching, Kickstarter is negotiating with a potential buyer.