Sep 06, 2013

Could PayPal kill crowdfunding?

Paypal froze $45,000 raised by the indiegogo crowdfunding campaign of a company called Mailpile, and demanded an itemized budget and developmental goal dates be submitted to PayPal for approval before the funds would be released. PayPal has done almost the same thing, when they refused to release the $30,000+ raised by SomethingAwful for Hurricane Katrina relief. There have been other instances of the company seizing (I think that is a fair term) funds raised by start-ups and conditioning release on production of the product starting. The Kafkaesque aspect of this demand, obviously, is that those funds were raised to cover the cost of product production - in essence, you can have the money you need to start production once you have started production. With PayPal inserting itself as an iron fisted gatekeeper on crowdfunding, can crowdfunding even continue to be a viable way to fund new products? Will this type of authoritarian oversight (which raises the question to me of who is watching the watchers) kill crowdfunding?

I agree with jack about the possible need for Paypal to be regulated if it is going to behave badly. On the other hand, if Paypal gets too out of control, it may find itself losing business to a new competitor. That might be the best solution over the long haul.

To be fair, PayPal has released the funds in both of the instances you cited, although one has to wonder whether they would have budged if not for the media attention paid to their actions.   Also, there are other crowdfunding options besides indiegogo, although indiegogo has a number of benefits over other options such as the lack of an “all or nothing” policy. I do think PayPal could be a problem, and if they start demanding more and more from start-ups just to release the funds that they have raised, PayPal almost becomes a regulatory organization that profits off holding other people’s money as long as possible. I’m not generally a fan of regulation, but if PayPal is going to behave in this manner, they should be regulated like any other financial institution. As it is they have the power to stop start-up companies in their tracks, and there is nothing to prevent it from happening at PayPal's whim.

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