advertisement
advertisement
advertisement

Why Kickstarter Decided To Radically Transform Its Business Model

More than two years ago, while on vacation in Florence, cofounder Perry Chen sent an email that ended up changing the company forever.

Why Kickstarter Decided To Radically Transform Its Business Model
[Photos: courtesy of Kickstarter]

One afternoon, while on vacation in Florence at the end of 2014, Perry Chen flipped open his laptop and began to type some of the thoughts swirling in his head. A year earlier he had stepped down as Kickstarter’s CEO and into the role of chairman. Since then, as the amount of unread emails in his inbox dwindled and the meetings on his calendar approached zero, Chen began to think at a higher level about his company’s purpose.

advertisement

During that year Chen also got back to his roots, the type of life that had inspired him to launch Kickstarter. For the first decade of his career, he had been an artist and musician; then he took crowdfunding to the next level—work that would earn him a spot on Time’s 100 Most Influential People List in 2013—and he was suddenly thrust into the life of a CEO. For five years he spent nearly every hour of the day putting out fires and doing his best to keep his head above water as the company entered a phase of hypergrowth. As the high-profile chief of a booming company, he repeatedly told employees that Kickstarter should exist for generations. But now that he wasn’t so wrapped up in the day-to-day operations, he decided to ask the question of why.

In Florence, he began to write words that would eventually serve as the foundation of the company’s new charter. In between hours spent relaxing with his sister and brother in-law’s family, Chen would come back to his Airbnb, open his laptop, and continue to edit his thoughts. After writing and rewriting for a month in a text editor, he copied the 1,000 words into an email and sent it to his cofounder, Yancey Strickler. Its subject line read: “existential kickstarter.”

Chen told me, “I wanted to ask myself, Why? People’s time is so precious. Yancey is putting his life blood into this. And the team. There has to be a purpose. Not everyone has that luxury—for some it’s just putting a roof over their head—but if it can be more, then let’s make it more.”

Over the next few months, the two cofounders had a series of long conversations and email threads about the future of Kickstarter. They both agreed that they had achieved the goals they initially set out to accomplish. The next stage of the company’s life should be about furthering the mission. They also agreed that they weren’t interested in continuing to exist for financial reasons; money had never been a huge motivation in the first place. Instead, they felt that the company should exist for two reasons: It should continue to innovate and build products that improved the lives of artists, and they should lead a new movement of corporate governance.

In the two years since Chen and Strickler had those conversations, Kickstarter has undergone a change that makes it unique in the technology industry. At the end of 2015, it announced that it would reincorporate from a C-Corp to a Public Benefit Corporation (PBC), vowing that it would never sell the company or go public. Both announcements were radical in the cutthroat world of Silicon Valley. In a world of “grow as fast as you can and then cash out,” Kickstarter took a defiant left turn.

Change Starts At Home

Today there are an estimated 5,000 benefit corporations in the U.S. (a tiny minority compared to the 1.7 million C-Corps), though that number is growing as idealistic millennials enter the entrepreneurial class. In 2015, Etsy became the first B-Corp certified company to go public. And in February this year, Laureate Education became the first benefit corporation to go public.

advertisement

Last month, Kickstarter released its first annual benefit statement. As required by all PBCs, it reported on what many refer to as a company’s “second bottom line.” In the statement, it revealed that the company pays a higher than average tax rate (25%), employs an equal number of women and men (in an industry where 75-25 splits are the norm), and pays its executives less than five times their average employee, compared to the 95-times industry average. Rather than recruit from predominantly white Ivy League schools, the company hired 100% of its interns from organizations like Coalition for Queens, a nonprofit devoted to bringing diverse talent into the technology industry. “If we’re saying that we want to build a more safe and equitable world, that starts in your own backyard. Change starts at home,” Strickler told me.

Given the unusual structure of a PBC, there is a lot of confusion about what it means and how it changes the way a company operates. The primary difference between a C-Corporation (the most popular form in corporate America) and a PBC is in the company’s purpose and the board of directors’ accountability when it comes to following that purpose. A traditional corporation exists solely to maximize shareholder value. If a company’s board fails to do this, by paying employees a living wage or choosing to purchase products with a lower environmental impact that detracts from profits, they can be sued by the shareholders for failing to deliver on their “fiduciary duties.” Advocates of the PBC say that this scares executives from making decisions that would benefit employees, the environment, and the communities in which they exist.

The board of directors at a PBC, by contrast, is bound to its founding charter that must include a “general public benefit.” They may optionally include a “specific public benefit.” Kickstarter exists to make the world around them better, but also to make it easier for artists to bring creative projects to life. Given the choice, they’d be obligated to pay living wages even if the market didn’t require them to, because employees’ interests are valued as highly as shareholders. Advocates say the PBC structure creates rules that better align with society’s interests.

For most, the idea of a corporation existing for public benefit is a radical idea. But in fact, it’s a concept that dates back to the start of this country, and today’s typical corporation is a departure from such a model. Rick Alexander, who helped draft Delaware’s benefit corporation legislation before becoming nonprofit B-Labs’s head of policy, told me, “At the beginning of the 19th century, if you wanted to start a company, you had to go to the legislature and get a law passed to incorporate your company . . . But in order to get that advantage, they had to get something in return like a public benefit.”

From Public Benefit To Pure Profit Motive

The earliest corporations in America looked very different from today’s multinationals. They weren’t even private entities: The courts made no distinction between a public corporation like a city, and a private corporation like a bank. At that time most corporations were set up to build infrastructure like roads and canals. According to Joel Seligman’s A Brief History of Delaware’s General Corporation Law of 1899, “In 1790, nearly half the charters were for the improvement of inland navigation.” They were also few and far between. In 1790, there were 37 corporate charters granted in the U.S.

advertisement

In 1819, the Supreme Court ruled in Dartmouth College vs. Woodward that the state could not repeal or revise a charter. In other words, corporations were no longer to be seen as arms of the state. Then in an era of liberalism, President Andrew Jackson passed a series of laws making it possible for anyone to create a company. And thus the modern corporation—free from government control—was born.

For advocates of the PBC form, the problem isn’t that companies are free from government; it is that the board of directors at a company is legally required to make selfish, short-term decisions that come at others’ expense. In order to truly understand this concept—lawyers refer to it as “shareholder primacy”—Alexander told me that you have to look at what many regard as the most important case in corporate law: Ford vs. Dodge.

In 1916, Henry Ford, who had recently announced his “Five-Dollar Day” wages, decided to invest the company’s profits into a new factory that would employ more people at his high wages. He said the decision was about doing “as much good as we can, everywhere, for everybody concerned . . . [a]nd incidentally to make money.” After announcing the decision, two of his minority shareholders, John and Horace Dodge, sued him for failing to maximize shareholder value. Ultimately the courts sided with the Dodge brothers. They ruled that a board of directors had a “fiduciary duty” to maximize shareholder value. The case had an influential outcome: It set a precedent that other courts would later follow. As a result, would-be altruists are warned by their legal teams that doing right by society is a dangerous game.

In 1970, economist Milton Friedman, who would become famous six years later upon winning the Nobel Prize in Economics, brought the concept of shareholder responsibility to greater light when he wrote a story in the New York Times magazine titled, “The Social Responsibility of Business is to Increase Its Profits.” In it he criticized socially conscious businessmen, writing “They are–or would be if they or anyone else took them seriously–preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” He argued that when companies don’t maximize economic efficiency, they must raise prices. He said this was equivalent to imposing a tax in order to do a public good; and any entity that imposes taxes should be democratically elected. If Ford vs. Dodge created the legal precedent to scare off the socially conscious entrepreneur of the 20th century, Friedman gave them the intellectual argument to put altruists to shame at any cocktail party.

When A Company’s Culture And Values Deteriorate

In 2006, while the cofounders of Kickstarter were whiteboarding initial mockups for Chen’s idea in New York City, another group of entrepreneurs was getting its start 100 miles south in Wayne, Pennsylvania. That July, Jay Coen Gilbert—who had previously started the retail footwear company AND 1—and two of AND 1’s former executives, Bart Houlahan and Andrew Kassoy, launched a nonprofit called B-Lab. At AND 1, they watched their company grow from $4 million per year in revenue in 1995 to $250 million by 2001. But as the footwear industry consolidated and Nike took aim at the bootstrapped company, they were forced to bring in investors. In 2006, they sold the company, and within months they watched the culture and values of the company deteriorate.

advertisement

Before the sale they had given their employees generous parental leave benefits and equity in the company; they donated 5% of their profits to charity; and they enforced strict rules on their overseas suppliers to ensure fair wages and safety. As soon as they lost control of the company, all of that was stripped away. With B-Labs, their mission was to help usher in a new era of corporate governance where companies did right by shareholders and the world around them simultaneously.

Kassoy told me, “The culture and the law of business had over a long period of time become one about maximization of value for shareholders. And that made it nearly impossible to expect even a business that was doing lots of great things to continue to do that over time.” He and his cofounders started to think about how they could change the culture and enable socially conscious entrepreneurs. “When we started, we thought there must be an easy fix for this, and a company could just take a shareholder vote and amend their corporate articles and have some language in there that they’d be accountable to more than just making money, and that’ll be good enough. And it turned out we were pretty naive about corporate law.” They went and spoke to Delaware’s chief justice, Leo Shrine, who told them that the state’s corporate law wouldn’t allow a company to make those changes. “And that’s when it became clear that we needed a change in the statute,” Kassoy said.

Two years later, after hiring a policy team and working with dozens of lawyers to draft a model legislation, the company convinced California assemblyman Mark Leno to introduce AB2944, a bill that would create a new corporate form. But the Corporations Committee of the California Bar vigorously opposed it and convinced Governor Arnold Schwarzenegger to veto the bill.

The B-Lab team didn’t give up. Two years later, they convinced Maryland senator Jamie Raskin to pass Benefit Corp Legislation into law. On April 23, 2010, Maryland became the first state to introduce the new corporate form. Over the next few years more states followed, but everyone involved knew that only one state mattered: Delaware. Ever since Delaware passed the country’s most company-friendly legislation in 1899, the state has been home to the U.S.’s (and arguably the world’s) most important companies, thanks to its shareholder-friendly legislation. By 2014, 60% of Fortune 500 companies were incorporated in Delaware.

On August 1, 2013 Delaware’s General Corporation Law was amended to allow for the creation of Public Benefit Corporations. Shortly afterwards, Michal Rosenn, who had recently started working at Kickstarter on the legal team, was invited to a party hosted by one of Delaware’s economic councils. “I started to read about PBCs and thought this might be something that makes sense for us. It was so aligned with our values and mission,” Rosenn told me.

“Existential Kickstarter”

Then Strickler and Chen received an email from Albert Wenger, who was a partner at Union Square Ventures, the firm that led Kickstarter’s last round of funding. “Albert reached out to Perry and me, as PBC was about to become legal in Delaware, to say, ‘Hey, here’s this new instrument that’s available. It’s very fitting of where you are. You guys should go for this. This is your destiny,’” Strickler said. But at first he and Chen weren’t sure. “I think when he first shared that, we thought, Albert’s more radical than we are.”

advertisement

Shortly afterwards, Chen sent Strickler the email titled “existential kickstarter.” When I spoke with Chen about the email, he hesitated to emphasize its importance. “In a way it can seem like there are many actions and decisions that seem independent, but for us, it’s just one decision, and these are all the pieces that fit that decision.” Yancey agreed that it wasn’t the catalyst, but said it was a moment where they both looked up and questioned their purpose as a company. The decision to become a PBC was a natural fit. As Chen describes it, it was a way of institutionalizing a mission and a set of values.

By the summer, Chen had drafted up the first version of Kickstarter’s new charter. Strickler told me, “I remember he had written this sentence about not legal but esoteric tax-avoidance strategies. Everyone kind of sat up straight in the chair with that, and everyone thought that was cool. That was one where it was like, Here’s a line. I think our instincts always guided us to be on the right side of that line but actually saying, ‘Hey, here’s a line we don’t want to cross.’”

Chen and Strickler were convinced, but could they get the successful company’s board members and investors to agree with their new direction? After they drafted the charter, all that was left was the reincorporation and board approval. In order to reincorporate as a PBC, a company must get two-thirds of shareholders to approve. Strickler, Chen, and the company’s third co-founder Adler (who now serves as an adviser to Kickstarter) almost had the full two-thirds because they only raised one round of VC funding. Still, they needed to let everyone know and convince at least one large shareholder. “We were nervous. We felt like no one should be surprised. But how well a job have we done at communicating these things?” Strickler remembers.

They called investors, explained the mechanics, and reassured them that the change didn’t mean Kickstarter would no longer pursue profits. Instead it would pursue those profits responsibly, with society’s interests in mind. To their delight, the decision received unanimous approval. On September 21, 2015, the company’s three cofounders penned a blog post announcing the change. It began, “Kickstarter Inc is no more. We’re now Kickstarter PBC.”

What Are Our Priorities?

Most people that I spoke with at Kickstarter were reluctant to say that the company had changed as a result of the reincorporation. There is a belief within the company that the PBC charter was a codification (three people used this word) of a set of values that had always existed. Katherine Pan, the company’s director of community support, told me, “This ties into how startups have to change organizationally at a certain size. I was employee No. 37, and we were a very small, tight-knit group of people. There weren’t any codified rules or processes. I guess we were lucky in that we all seemed to be on the same page. But what I do appreciate about the PBC is that we can articulate what we’re about and what our priorities are.”

In addition to communicating their values to those outside of the company, she said the charter also helps employees make decisions. She highlighted the diversity-focused summer internship program. “We had a summer intern last year, and we took that very seriously. The PBC charter helped change the focus. Usually when you hire an intern it could just be pretty meaningless work, but we went the opposite route and made it a learning opportunity and helped her present her own work to the rest of the company. It is quite a departure from how most internship programs work.”

advertisement

She continued, “In the past, we’ve had diversity task forces meet regularly. One of the results of that was we set up this section in our library at Kickstarter with resources and books for people that wanted to learn more about [diversity]. I think there’s no silver bullet to solving problems of inequality. The best thing we can do is encourage everyone to be open and question things, always.” She said employees regularly have conversations about diversity and aren’t afraid to do so.

Wenger, the partner at USV that first introduced Kickstarter to the idea, has been an advocate for the benefit corporation movement since he first heard about it. He told me, “There are now a great many businesses that have network effects. When you’re building a network, there’s a question of what your responsibility is vis-à-vis the participants in that network. One of the things that we believe is that if you organize a network, you should be a good steward of that network.”

He also sees the benefits of the PBC form to investors. “Often what happens is founders say, ‘Look, you investors are going to come in and screw up the mission of the company’ and I want to have board control. They effectively want to be made king or queen of their company.” He pointed to examples like Google and Facebook, where founders control a majority of voting shares. This, he argues, is good for preserving the mission, but bad for corporate governance. If founders retain a majority of voting shares investors have no ability to remove a CEO.

Does Saving The World Make Money, Too?

However, there are skeptics in the venture capital community, too. Angel investor and founder of Gust, David Rose, is by far the most vocal. He is so passionately opposed to PBCs that when we talked, he had to repeatedly apologize for cursing. His argument is a more socially liberal version of Milton Friedman’s. Like the renowned economist, he believes a company’s only social responsibility is creating profits.

“You see all these wonderfully minded folks who want to save the world and make money at the same time,” says Rose. “And I just posit that it is not possible if you go into it with that approach. I’m a great believer in saving the world. I want to save the world. I try and invest in only things that will improve the world. But they are businesses. If society wants to save the world, society will value saving the world, and you will be able to make money doing it. And the only way a business is going to be self-sustaining is to be able to generate profit. It’s capitalism.”

advertisement

Rose also points out the immense hurdles that founders already have to jump in order to succeed. “As an investor, I often get pitched things like, “We’re going to make eyeglasses and give 10% of our profits to charity. And I say, ‘Jesus Christ. Do you know how hard it is to make money as a business?’” His primary argument is that a company can’t have its cake and eat it too. It should either be a for-profit company, focused solely on maximizing enterprise value, or a nonprofit, focused solely on improving society.

I asked B-Labs’s Rick Alexander what he thought of Rose’s objection. He gave an example from the 2008 financial crisis: “If you were an investor in the early 2000s, and you were looking at risk and reward, you might say to Merrill Lynch and Citi, take a lot of risk on all these securities, because that’s a good bet for me. As an equity investor, I’ll have a lot of the upside and very little downside since the losses will be socialized. If you look at what executives at those companies did, they took what was probably a decent risk from the point of view of their shareholders. But what they did was put so much risk on the financial system that it killed everyone’s portfolio.” In Alexander’s view, when everyone acts without concern for the externalities they create, society suffers.

Rose isn’t sold, however; he believes in a corporate karma of sorts. “If you’re an energy company and you’re going to optimize purely for economics, and say, ‘Screw the workers,’ well guess what? People aren’t going to buy your product. You’re not going to exist.” Later he offered another example. “The perfect counterexample to this is Google.org. Google is a C-Corp. And yet Google.org does charitable things. Google is not optimizing for charity. Google is optimizing to make money. As a part of that, they have Google.org, which is doing all kinds of amazing things.”

Even the PBC’s biggest advocates say that it will take time to see it become widely adopted. Wenger told me, “I think people need to have the right timescale expectations. These are not things that happen overnight. These are things that happen over the course of years, and even decades.” He echoed some of Rose’s thoughts, pointing out how difficult it is for companies to survive in the existing system. “It is a form of innovation, and a lot of startups are already innovating in the thing that they are doing, and so I think the adoption rate is going to be slow.” Both Wenger and Alexander agreed that the success or failure of today’s PBCs will decide whether or not the movement as a whole succeeds.

While Kickstarter never intends to IPO, they hope to be the success story that Wenger and Alexander believe is needed in order to see wider adoption. “I think our most ambitious idea here would be that us doing this can maybe become a model for other companies in our space,” Strickler said. Chen echoed his sentiment, but clarified, “In the end, it’s not about a PBC movement. It’s about, “How do we have a society that can have these large powerful actors—companies—work without their hands tied? I think that people are realizing that the world is complicated, and if the mandate of large corporations is to extract large amounts of value, it’s going to be problematic.”

Michael Thomas is a writer based in Denver. He writes about innovation, history, and business strategy on his blog, Insatiable Fox

advertisement

This story has been updated.