Starting a new business is tough. Getting the initial funding to get things going is even tougher. Yes, there are VCs, angels and private investors. And yes, you can go to a bank and ask for a business loan (which is of course completely futile). But all of these funding options have something in common: a high entry barrier. To get funding through any of these methods, you need to have a decent business plan, a solid product development and sales strategy and at least some credibility in the industry. And when you are starting something new from scratch, you frequently have none of that. But here’s also Kickstarter.
A US based startup launched in 2008 (was called KickStartr at that time) and in principle it is a crowd funding service where people create “projects”, choose a deadline and a target minimum of funds to raise. Other people (general public) then pledge funds in return for “rewards”. The funds can be collected by the project owner only if the defined funding limit was reached by the deadline. Kickstarter provides specific guidelines that cover all key aspects and principles they want people to follow. For example, it is not possible use Kickstarter to raise money for charity.
From the nature of its model, there are several key differences between Kickstarter-style crowd funding and traditional methods. People pledging funds on Kickstarter do that in exchange for “rewards” as opposed to equity. These rewards can be anything from a thank you note, to one or more units of the product being funded, to a private dinner with the project owners. The rewards, their structure and value are not defined by the “investors” (public), but by the project owners. So it is up to them to make the rewards sufficiently attractive so that enough pledge their money to meet the funding target. From that perspective the people pledging money are more customers rather than “investors”. It’s therefore possible to think about Kickstarter as a platform that, for the most part, gives people a range of risk-based advanced purchase options for future products that at the time of purchase are not more than an idea or prototype.
But Kickstarter not only provides funding to start a company, develop a new product or service, but in fact also “automatically” brings first customers. The number of customers (pledgers) can range from a few hundred to tens of thousands. So contrary to other funding methods, a successful Kickstarter project gets not only the funding it needed (and frequently much more than that but also a basic customer base that can then help to spread the word and to increase future sales. This is a vital advantage for any emerging business.
Another interesting aspect is the size of the “investment” (or reward value). The amount of money individual customers pledge on Kickstarter is rather small — rarely more than 100 dollars. But given this low risk investment, the customers don’t have any way to scrutinise the project background, credibility of the owners or their business plan. All they have is the information provided on the project page — usually a short video and a brief description. This information is not validated by Kickstarter or any other independent body, so there is in fact no real guarantee that what the project owner promises or claims is actually true. That means that customers don’t really have any assurance (apart from Kickstarter’s credibility) that they will ever see the rewards they paid for. Moreover, by definition, many of the project owners have never run a business, have no real experience with launching products and therefore can hardly be trusted to deliver what they claim. Interestingly, the size of the pledge has no bearing on the amount of information customers get access to. Five dollars gets you the same level of detail as a thousand.
Yet, it seems to work really well. Through Kickstarter funding, a number of successful businesses and has helped build several new businesses have been build from ground up and many great products launched to the market. And Kickstarter itself, thanks to a 5% commission from every successful project is doing well too.
I am convinced that while crowd funding is still in its infancy, has inherent risks and is unsuitable for many kinds of projects, it also imposes by far the lowest entry barriers on new entrepreneurs (as virtually no funding is required to set up a kickstarter project). It has a great potential to drive development of new products that would otherwise struggle to see the daylight. And it’s great to see that even though Kickstarter is by far the largest and most prominent crowd funding platform, other, Europe based services (Crowdfunder, WeFund) have emerged too. They are still small, with limited number of projects and, admittedly, only a few of the projects the offer are really exciting. But it’s a start.
Even though there will always be a place for VCs and angels, in the near future crowd funding will become more and more a common form of funding of small to medium projects and businesses. I only hope that Europe and its entrepreneurs will not stay too far behind.