In early March, Kickstarter quietly sent shareholders a dividend. In the wider world of business, such an action would be unremarkable. More than 80 percent of the companies in the S&P 500 pay dividends, and many smaller companies do, too. But divvying up quarterly profits with shareholders is unheard of among tech startups. People who follow the venture capital industry were hard-pressed to come up with a single example of a VC-backed startup that has ever paid regular dividends. Doing so would be a rejection of the industry's basic math. VCs bet that they can find the few companies that will generate enormous payouts by going public or getting acquired; the rest fail. There's not supposed to be anything in between. "It sounds strange for a VC-backed company as it means they're taking out and distributing money versus investing it in the business," said Anand Sanwal, the chief executive officer of research firm CB Insights.
Paying a dividend, which the company didn't make public, is just the latest example of Kickstarter's heterodoxy. Last year, the company became a public benefit corporation, officially making the greater good part of its mission. Kickstarter has promised to allocate five percent of profits to charitable ventures and pledged not to use loopholes or other legal strategies to reduce its tax burden. Furthermore, the founders say they have no intention of taking the company public. “More and more voices are rejecting business as usual, and the pursuit of profit above all,” they wrote in a blog post at the time.
Kickstarter has shunned the IPO or acquisition path from the get-go. That didn't stop Union Square Ventures managing partner Fred Wilson from backing the company when it was a fledgling operation with about half-a-dozen employees. Still, he had a question or two for Perry Chen, one of the founders. “I said, 'You know, we’re investors, so at some point we’re going to need to make a return on our investment, and how might you imagine that happening,'” Wilson recalls. Chen floated the idea of a dividend. “I did the math, and I thought about it, and I concluded that there was going to be a lot of cash flow, potentially, to dividend out,” Wilson says. He talked to his investors and convinced them to accept the unorthodox arrangement. Chen and other Kickstarter executives declined to comment.
When a Union Square Ventures investment succeeds, it tends to pay off suddenly and spectacularly. The check the VC received in March—Wilson wouldn't divulge the sum—is the first in what should be a steady drip of income. Wilson says he can’t determine how long it will take to recoup the investment because it’s unclear how much future dividends will be worth. “It’s still speculative, still early days to know how this is going to play out,” he says. “Come back to me in five to 10 years.” But clearly he can’t wait forever. Like most venture funds, Union Square’s is set up to operate for a decade. It will have to sell its Kickstarter stake eventually.
The ticking clock is one reason why other venture investors are skeptical of the Kickstarter model. Seth Levine, a managing director at the Foundry Group, says that any company asking for money from his firm must have the potential to return at least three times the initial investment. Levine is comfortable pushing against the standard model; his firm just became a public benefit corporation itself. But that doesn't exempt it from basic economics. “Can they get their investors four, five, six times their money back with dividends over a relatively short period of time?” he wonders.
Pressure from VCs often prompt startups to swing for the fences—prioritizing high-risk, high-reward moves over dull sustainability. Kickstarter feels no such burden. The company has been profitable since its second year. Quick profits may sound good to people outside the startup world, but venture investors may see them as a dereliction of duty. A dollar taken as profit is a dollar not being dedicated to exponential growth. Kickstarter's growth is slowing, both in terms of the number of projects that get funded and the total amount of money flowing through the system. The money dedicated to successful projects doubled in 2013, compared to the year before. Last year it increased less than 1.5 times. By Silicon Valley standards, that’s a worrisome trend.
And what about Kickstarter employees? One great attraction of joining a tech startup is getting an equity stake that can become astronomically valuable if the company goes public or gets bought. But such promises are seen as increasingly unrealistic. The dream fades each time the value of a billion-dollar company dwindles, and with each revelation that those equity shares aren’t worth as much as they once seemed. Kickstarter's decision to never IPO means the people who work there must satisfy themselves with small dividend checks. Perhaps that's better than waiting for a hypothetical payday that never materializes.
Kickstarter isn’t the only place pushing at the edges of the standard venture capital model. One VC firm called Indie.vc funds companies without taking an ownership stake. Instead, it buys an option to convert its investment into an ownership stake if a company goes public. Companies that stay private pay the firm cash, allowing it to recoup up to five times the initial investment. (Wilson is an Indie.vc backer.) Other startups trying to avoid venture capitalists have used a financial instrument known as redeemable preference shares, which the company sells to investors with an agreement to pay a set return after a set period.
This is fringe stuff, and Wilson predicts it stays that way. “It may be a growing piece of the mix, but I don’t think it will be how all companies will operate in five or ten years,” he says. “99 percent of entrepreneurs are quite happy with the system as it is now. And, frankly, so are we.”