I alluded to a relatively new funding phenomenon a couple weeks ago when I said I was donating to an autism project fundraising effort, but the crowd-sourcing website Kickstarter merits more discussion. Crowd-source funding has been around for a while now, but Kickstarter takes it from a loan platform to a pure investment model, and that’s something new.
The more traditional loan model is easy to explain using Kiva, one of the world’s most respected and vetted social lenders, as an example. A loan opportunity is listed on the Kiva website; usually the money will be sent to a Third World or developing country for the purpose of helping support a moneymaking project for a struggling entrepreneur. With minimum investments set at $25, Kiva puts together group loans (“crowd-sourced”), compiling pledges until the entire amount is reached, at which time the person is funded. Kiva warns that the entire investment is at risk, and interest payments are not a part of the plan. You loan money, you (hopefully) get it paid back, and then (Kiva hopes) you loan it again.
I have never lost a dime, and it is well worth the money to help buy a pig for a woman so that she can support her family of four by breeding more pigs, or to help a young man in Africa start his business. I have reinvested my initial loan four times already, bought and invested more shares, and view it as social investing.
Kickstarter is a little different. You invest the money, and though you don’t get your money back, you get the satisfaction of knowing you helped kick-start a creative venture. Since its inception in 2009, Kickstarter has funded over 89,500 projects, raising over $517 million, with a success rate hovering around 44%. While the entity reports that “11% of projects finished having never received a single pledge, 81% of projects that raised more than 20% of their goal were successfully funded.”
Brian Raffel, president of Raven Software, referenced Kickstarter during his speech at the most recent IB Icons breakfast, noting that it is a vehicle for funding gamers who want to sell all or part of their game to Raven. (“The best part about the funding being that it is private investment that isn’t a loan and never has to be paid back,” Raffel clarified.) While he is a supporter of the Kickstarter movement and mentality, Raffel acknowledged it also exponentially increases the number of overnight competitors that could rise up by the bootstraps.
How? In a real-life example relevant to Raffel’s comments, on March 7 – the day before his presentation for IB – the Orange County (California) Register reported, “Just six hours after launching the online [Kickstarter] campaign, Brian Fargo and his inXile entertainment reached the $900,000 goal to make a role-playing game called Torment: Tides of Numenera. The donations kept coming. By lunchtime, the campaign passed the $1 million mark, two hours quicker than fundraising for OUYA, a game console that went on to earn $8.6 million on Kickstarter.” (Continued)
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Just as Kiva makes loans in developing nations, Kickstarter has carved out its own niche (the creative class) and way of doing business, for which it will retain a fee of 5% of funds collected. As explained on its website, “The filmmakers, musicians, artists, and designers you see on Kickstarter have complete control and responsibility over their projects. They spend weeks building their project pages, shooting their videos, and brainstorming what rewards to offer backers. When they’re ready, creators launch their project and share it with their community.
“Every project creator sets their project’s funding goal and deadline. If people like the project, they can pledge money to make it happen. If the project succeeds in reaching its funding goal, all backers’ credit cards are charged when time expires. If the project falls short, no one is charged. Funding on Kickstarter is all-or-nothing.”
Rather than interest, rewards are expected by Kickstarter backers. For example, in return for the $100 I invested in the autism project, I will receive a CD with video of the kids involved doing the project. Had I pledged $250, I could have appeared in the film with them. Each project puts forth its own inducements to participate, since it has to hit 100% in pledges to get any funding at all.
Expect to see many variations of crowd-source funding as a result of tightening bank loan practices. This creative, private-sector response to the need for innovation + funding is noteworthy, and until the government figures out how to regulate or tax it further, it’s a brave new world.
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