Kickstarter Just Did Something Tech Startups Never Do: It Paid a Dividend (bloomberg.com)

Joshua Brustein, reporting for Bloomberg: 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.

Comments

paying dividends is dumb

[ooloorie]

Tech startups need capital, and reinvesting the profits they make is an easy way of getting that. If they pay out their profits as dividends and then raise more capital by issuing more shares, they pay a premium for that capital and take a risk as well. Paying dividends also screws shareholders because dividends are taxable immediately, while the capital gains from reinvestment only are taxed when the shares are sold.

Re:paying dividends is dumb

[NotInHere]

Paying dividends also screws shareholders because dividends are taxable immediately

Kickstarter has declared itself a "public benefit corporation": https://www.kickstarter.com/bl...

According to TFA that includes to not exploit tax loopholes. Very sad that companies that "just" pay their taxes are regarded as "public benefit corporation", and are not the norm.

They use the infrastructure, they benefit from the state keeping them secure. And they expect to not pay anything for it.

According to TFA, Kickstarter is going down the "never IPO" path.

Re:paying dividends is dumb

[EnsilZah]

They serve text and and video, and in exchange they take 5% of the money pledged to projects.
I'm sure they have their servers and a team to maintain and keep their code and design current all covered.
So what exactly do they need capital for?
Do you expect them to branch into unrelated fields, build their own OS inside a browser, explore how 3D-printed IoT VR-goggles can be leveraged for crowdfunding just because they have some spare cash?

Re:paying dividends is dumb

[ooloorie]

So what exactly do they need capital for?

Advertising, insurance, buying out their competitors, for example.

Do you expect them to branch into unrelated fields

No, but they might branch out into related fields, like makerspaces, startup labs, business support services, insurance, legal services, escrow services, etc

Re:paying dividends is dumb

[Hylandr]

This guy gets it.

Just because you can afford to do something doesn't mean you are *compelled* to do it.

Do your ONE THING and do it well. The rest is Dividends.

I say bravo!

Re:paying dividends is dumb

[rgmoore]

US corporations also pay some of the highest taxes in the world, which is why many of them are moving overseas.

More accurately, the US has one of the highest nominal corporate tax rates in the world, which is why US corporations work so hard to exploit (and lobby to create) the many loopholes in the system. The US corporate tax system is an excellent example of a case where it would be far better to lower the tax rate and broaden the tax base by eliminating loopholes.

Re:paying dividends is dumb

[Darinbob]

Dividends used to be the standard way to get paid by owning stock, especially with blue chip companies. This is basic profit sharing to the shareholders. Now in the "new" economy it's all about growth, growth, and more growth. The money is made through speculation instead, hoping that the stock price rises and that you can sell it before it goes back down.

For example, if you invest in uncle Joe's restaurant you can ask that you be paid a percentage of the profits each year if there are any. So fine, pay $1000 and get back $5 a month, and when you tire of it sell of you $1000 stake to someone else. And you also get a bit of voting rights along with the other investors. As long as Joe is making a profit then you are making some money. And Joe gets $1000 to help pay off the cost of running the place in the early days. The shareholders in this model want the dividends. It's a good investment. That's basic capitalism.

On the other hand it would be naive to assume Joe's restaurant business will grow much, he'll get more customers maybe but there will be a natural leveling off. With luck there may be two restaurants someday, but you can't count on luck. It'd be really stupid and naive to assume Joe's going to have a big restaurant chain someday. And yet that's how startups work, everyone assumes that they'll be insanely rich someday, the utter morons will believe they'll be insanely rich even before turning a profit, and the truly deranged will mortgage their house based on this (which often leads to divorce). These shareholders don't want their investments diluted before they become insanely rich. This is all about making a risky investment in hopes of a big payout, no different than gambling at Vegas (except that the odds are better in Vegas).

Re: paying dividends is dumb

[Darinbob]

A lot of companies don't see the need to grow continuously. When the business is stable and now growing then paying dividends is the common to share profits with the shareholders. Who else do you give profits to other than the owners? Very often the person who started the business is desperate to get some of that money back (legally) to pay off bank loans used to start the business. So there's a mix of putting some profits back into the business and some profits to pay the owners.

A company that gives out dividends is a good sign, it says that the company is confident about profitability. You don't see this much in tech startups because tech startups are usually risky ventures run by risky people who are not funded by banks who want a regular loan payment but by VCs who want to strike it rich also.

Re:paying dividends is dumb

[Pfhorrest]

How about instead we don't tax the corporations at all, per se, and just tax the people who own them instead. If we implemented my other suggestion below, for all corporate profits to be mandatorily paid out as dividends (which can then be automatically reinvested or not at the shareholder's preference), and that would happen automatically, because dividends are taxable income. This would shift the tax burden onto high-income people, especially those who own and control big chunks of the economy, and away from small businesses that might be owned and operated by low-income people, while also not chasing away big businesses that could afford to move overseas, because the corporation per se is not taxed at all.

Re:paying dividends is dumb

[Pfhorrest]

The chief executive of the company would still have complete control over how the money reinvested in the company is spent, it would just be up to the shareholders collectively to decide how much of the profits to reinvest and how much to pay out to them.

Consider a company with a single investor, a sole proprietor, who is nevertheless not the actual manager of the company; he pays someone else to run the thing. But he gets to decide how much to pay himself out of the company's proceeds, and how much to leave in the company's coffers for the manager to work with. Of course he gets to decide that, he owns the company and if he can't take his money out of it what's the point in that? This is just extending that principle to a company with multiple, possibly myriad, owners.

Of course that sole proprietor would be stupid to take all the money and let the company die with no capital, but there's incentive for the investors in a bigger company not to do that either: by reinvesting their dividends, they grow their share in the company, and thus the size of their dividends, both in the percent of the company's profits they're entitled to, and in the profitability of the company overall. Those who just take their dividends and run get a diminishing share of a diminishing pie over time and are automatically cashed out of the process, leaving only the people with long-term interest in the company owning it.

Tech Company?

[friesofdoom]

Kickstarter is a tech company? Really? What tech do they manufacture and sell? I was obviously under the misunderstanding that they were a crowd funding company... Guess i was wrong and should be waiting for my new KickStarter OS or phone or something...

Or has the definition of tech company changed to any company that uses 'tech'? By that standard my dads building company is a tech company... He uses a computer too!

Re:Profitless companies

[NotInHere]

Its the biggest ponzi scheme in human history. I'd have liked to say that the burst of the bubble would be earth shattering, but since 2008 we know that if you succeed to bloat a bubble right in front of the eyes of the regulators (who do nothing), and the market's trust suddenly vanishes, the state will bail you out.

Either way, the funders have made the money of their lifetimes.

There's a reason..

[atticus9]

Start-ups don't pay dividends, there's higher return opportunities investing back in the company for share-holders. Paying a dividend means that all those opportunities are saturated so you might as well give cash back to investors than hoard it. It seems early to me, but maybe they've reached that point. I'd love to know what the yield was.

It's not unheard of for angel investors in general. They'll invest in 10 start-ups expecting 4~5 will fail, 3~4 will stay in business but never go anywhere, and 1~2 to be 10x successful.

SubjectIsSubject

[p0p0]

Kickstarter has been around since 2009. When is a company no longer considered a "startup"?

Re:SubjectIsSubject

[fibonacci8]

Right after chapter 11?

Re:SubjectIsSubject

[erice]

Kickstarter has been around since 2009. When is a company no longer considered a "startup"?

Generally, that mile stone is the IPO. Dividends begin some years after that, if ever. Since they are paying a dividend now, it suggests that Kickstarter does not intend to ever go public. Uber seems to be following a similar plan. I guess they don't want the scrutiny and regulation that comes with being a publicly traded company. I can understand that but on the other hand, some of those regulations are there for good reason.

Paying Dividends earned from Scams

[OverlordQ]

All the money they're paying out to investors comes from all those scams projects that earn KS a nice percentage.