This sounds a lot like the piracy argument, where 1 pirated game equals 1 lost sale. It's bullshit.
The truth is that I have bought lots of games for 3 to 6 dollars that I would have NEVER bought at full price. So instead of getting $0 from me the developer got a few bucks from me just for curiosity.
Video game stories are dumb but that's okay because they are video games and I don't turn on a video game expecting Of Mice and Men or War and Peace or even writing on the level of Breaking Bad. I am totally cool with this, I just want to PLAY something fun and engaging.
I don't expect the show Justified to have seamless multiplayer with balanced skill trees and I also don't expect Headshot Combat 3 to have really natural sounding dialogue and graceful character arcs.
The money doesn't belong to PayPal, they have no legal right to hold it hostage. This is obvious because when companies go public about it PayPal immediately backs down and releases the funds. Someone should skip the "going public" and just go straight into lawsuit mode, maybe that would stop them from pulling this kind of caper in the future.
As for unsatisfied consumers asking for refunds when a project dies or doesn't turn out how they want PayPal just needs to tell them "No."