by : Business, November 2011

Kickstarter: Fresh Money by a Deadline

Kickstarter: Fresh Money by a Deadline

Kickstarter, a for-profit company that started in April 2009, broke into the “crowdfunding” market with a new take on financing projects in music, film, art, technology, design, and other creative ventures.  One of its founders, Perry Chen, wished to organize a concert for The New Orleans Jazz Festival in 2002 . Chen was prepared to risk $20,000.  At the time, there was no way to find investors, or to assess the risk of the project.  Both problems would lead to Chen’s own market solution, and by 2005 he had teamed up with Yancey Stickler and Charles Adler to form Kickstarter.

Before Kickstarter was launched, there were other types of funding sites, charities, peer-to-peer lenders,  and investment firms operating in the Internet.  However, none of them used the concept that Kickstarter became known for.

Kickstarter is a funding site where the investors get a return based on the amount of their donations: from a T-shirt, signed poster, or a CD to a private dinner, concert invitations, and beyond.  Kickstarter’s goal is to inspire people to want to be a part of the project they are so passionate about.  In a New York Times article, Perry Chen explained it this way: “It’s not an investment….  It’s something else: …a sustainable marketplace where people exchange goods for services or some other benefit and receive some value”.

Also, Kickstarter has an all-or-nothing deadline. When someone creates a project, they set a goal for the amount they would like to raise and the day they would like to raise it by. If that goal is not reached, there is no money to be had and the investors are not charged. This system is beneficial to both parties since the creator will know if there is a need for their product/service, and the investor will know that they are investing in a project that will be successful.

When looking at the website, it is easy to wonder how the projects are selected because they seem so random and diverse.  There are successful projects in every category.  At first, the founders thought they could let everyone vote on the project proposals. They changed their mind when they realized they were really running a popularity contest and not an exchange with money. The decision was made to review all the projects by a board of members before they went online—which protected investors. On the website there are project guidelines and steps for starting a project.  The important thing is to be creative, straightforward, have unique incentives, and to make the investors feel a part of the enterprise.  Kickstarter is unique because it develops a relationship between the creator and the investor.  More than four-tenths of all the projects on Kickstarter are successful in meeting their goals.

When Kickstarter was launched, the first projects on the website were from the founders’ artistic friends.  They wanted to support Kickstarter. In the last year, there has been a continuous flow of creative proposals to choose from, good incentive platforms, and an increase in spontaneous supporters and contributors.  On the site’s homepage, a daily  “Project of the Day” is always featured. There is tab to discover projects, organized into categories and by city of origin. Another recently added element is the addition of the so-called ‘curated pages’.  This is where famous foundations, charities, and businesses in the creative community emphasize the projects they wish to support.

Growth has been impressive.  In its first sixteen months , Kickstarter had 200,000 backers.  It took only three months to double that amount. Currently, Kickstarter accommodates an astounding 75,000 new backers each month.  Kickstarter is a for-profit company that takes a 5% cut out of every successfully funded project.  Amazon.com eats into that as well, as they charge for processing all their financial transactions.  But, Kickstarter’s profit driven business is opening opportunity for many at a time of economic crisis.  Access to banks and capital markets has always been hard, but the company appears to have engaged new investors both to finance good causes and to afford market oriented solutions for new business opportunities.

This month, Kickstarter received its one-millionth financial pledge.  Overall, nine-tenths of all their investors appear to have supported a successful project.  This shows that backers are funding enterprises that reach their goals and become funded, which in turn will entice them to become a part of another project that could possibly become successful.  According to Music & Copyright, repeat-users make up one-third of the total funds pledged in successful projects, compared to one-time users that make up two-thirds. This demonstrates that a large number of new investors are joining Kickstarter and that many are returning. The most common pledge amount is $25 dollars. However, investors can pledge as little as $1 if they like.  The more unique, interesting, and interactive the incentives are, usually the higher the pledges will be.

Kickstarter can be used to benefit numerous creative projects in music. Since its creation, it appears to have contributed an estimated $13 million to the music economy (Hypebot).  Much of this sum has gone towards financing private EPs, recording an album, making a music video, funding a tour, and even creating a new radio station.

Kickstarter could be financing the music industry even more in the future. Record labels are taking  much less risk with artists.  Here, the consumer can be a part of the solution, becoming actively involved in supporting a favorite group or a new interest.  Nevertheless, it is not uncommon to hear that Kickstarter is a fad that will be over soon.  Consumers can get tired of paying for a band’s shows, merchandise, and recording projects. The argument against this notion is that this is an age of consumer-artist exclusivity. Opting in to the den of an artist’s abode and creativity will always convey a sense of belonging to something bigger than the mundane—even if most people can only contribute very little.

 

By Haven Belke

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Comments

  1. Michael Stevens says:

    Very nice article – I’ve supported 3 music projects on RocketHub.com – from all around the world. It’s a completely different feeling from buying a CD – it’s actually buying into a career.

    I’ll be launching my next project with RocketHub soon.

  2. Great website! You should have a look at http://www.mymicroinvest.com an equity based crowdfunding platform concentrating on high potential european startups. The website will be launch by February 2012, you can already vote for your favourite startup. Regards, Gui

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