Kickstarter: Crowdfunding Creative Projects
Crowdfunding creative projects in the arts through an online platform.
What is Kickstarter?
Kickstarter is a funding platform that sources investments from individuals for creative projects in mediums such as film, music, design, technology and games. Investments are sourced from individuals, who choose what they will invest in. Since its founding in 2009, Kickstarter has been the platform through which more than 90,000 creative projects have been funded, for over $2 billion invested dollars1.
However, investments are not made into companies (which in many cases with an artist is the individual) but rather into specific projects. The criteria for a Kickstarter project is as follows:
1) It must have a clear goal or deliverable that will eventually be finished and have an end product
- The end product of the project is very broad – examples of final products currently funding include a line of natural chocolate bars or a video of dancing around the world
2) The Creator is responsible for specifying their funding goal and designating “rewards” for different donor/backer tiers
- Rewards can be as simple as a thank you note. However, most projects use rewards tied to the product, such as a sample of the product, an inside look at the making of the product, or a one-of-a-kind experience
- 3) If the funding goal is not reached, no capital is received
- Prevents Creators from being left with a commitment to produce a project that is only partially funded
- Donors are more likely to help spread the word to get a project they like fully funded
Creating and Capturing Value
Kickstarter creates value by acting as a common platform for potential backers. The majority of initial funding for a project is driven by friends and family of the Creator. These first backers often then drive the buzz around a project by promoting it on various forms of social media. Backers are often also attracted by the unique rewards offered. Once a project has enough commitments to surpass the funding goal, it will fund and backers will be charged. If it does not reach the funding goal, backers will not be charged and the project will not receive any Kickstarter funding. Kickstarter receives a 5% fee on funded project dollars collected as well as approximately 3-5% processing fees. Recently, Kickstarter became a B corp for tax purposes – which is a for-profit company that is also measured by social impact and have specific goals for adding social value3.
Transforming Assets into Value
Kickstarter is a relatively low overhead business. They are located in one location in Brooklyn with only 118 employees. Of these employees, half are assigned to designing and coding and the other half to working with the community. There is a high emphasis on protecting the community and making sure that any suspicious activity is flagged and followed up on before a project is funded. The value of the platform hinges on the company’s ability to protect users and monitor for projects that might be fraudulent or not in compliance with the criteria of projects and the site. If Kickstarter loses control over the perceived quality of their site, it could potentially impact the willingness of backers to commit to projects if they are concerned about the legitimacy of the projects. Historically, roughly 9% of funded projects fail2. Kickstarter is transparent with their data so that Backers know historical funding and project fail rates so that they can best assess the probability of not receiving their reward or the project failing to reach completion.
Alignment of the business and operating models is highly effective. The competitive advantage of Kickstarter is the community that knows and trusts the Kickstarter brand. The business model is driven off of the dedication to high quality projects and not taking a fee on any capital until the funding of the project occurs. Based on a 5% fee on funded projects since its founding, Kickstarter would have received approximately $100 million in fees. While the business model is arguably very scalable, and scaling up would result in higher fees received over time, the company must be careful to maintain high standards for quality and authenticity of projects and protect the image of the brand in order to maintains backer comfort with the platform.
Sources:
- Company website: kickstarter.com
- “Nearly 1 in 10 Kickstarter projects fails to deliver rewards,” Dec. 07, 2015. http://www.entrepreneur.com/article/253649
- “Kickstarter Focuses its Mission on Altruism Over Profit,” Sept. 20, 2015. http://www.nytimes.com/2015/09/21/technology/kickstarters-altruistic-vision-profits-as-the-means-not-the-mission.html?_r=0
Super interesting post!
I think the piece you brought up about the community and fraud prevention is especially insightful. Given that I would imagine Kickstarter alone provides very little additional visibility to any given project (each project seems to build their own awareness via viral campaigns and the mainstream press) the only thing preventing someone from listing on indigogo is probably the additional layer of legitimacy the kickstarter brand provides. I wonder if kickstarter could refocus it’s business model on further building that legitimacy angle rather than simply acting as a funding platform. Kickstarter could not take any fees from the initial fund raising but instead get a small amount of equity in the launched company. Or maybe a project could pay slightly higher fees to get a dedicated “kickstarter advisor” that would help directly interface between the creators and the community.
Either way, definitely an interesting and critical component of our new internet economy!