Crowdfunding and Kickstarter

From New Media Business Blog

(Redirected from Crowdfunding)
Jump to: navigation, search

Crowdfunding is the act of generating funds by appealing to the general public and getting many people to donate to a cause. Crowdfunding can be in many forms including donation pages for charities, micro-loan sites for aspiring entrepreneurs, and crowdfunding sites for projects. Recently, crowdfunding has become popular with sites such as Indiegogo and Kickstarter due to social media and the ability to promote projects through numerous avenues.

Kickstarter and Crowdfunding

Contents

Power of the Crowd

Through the recent years where the internet has surged in popularity, there have been an increasing number of instances where a large number of strangers banded together for a common cause - altruistic or otherwise. It has propelled regular people into super stardom, like Justin Bieber, and less notably, Tay Zonday and Rebecca Black. Millions of views on their respective Youtube pages have changed the lives of these people. However, not everyone benefited from the crowd. Numerous were the targets of cyberbullying, and some companies that were unpopular with the online demographic have also been negatively impacted.

Other examples of people positively and negatively affected by the power of the crowd:

Name
Reason
Impact
Link
Justin Bieber
Youtube singer that was noticed by mainstream talent companies.
Positive
Baby ft. Ludacris
Rebecca Black
Infamously sang “Friday”, which was greatly disliked by the internet, but improved her reputation enough to sign several other singles
Positive
Friday
Karen Klein
Video of her being bullied by children on a bus went viral, causing thousands of dollars of donations to be pledged in support for her plight.
Positive
Karen Klein - The Today Show
Dave Carrol
After his guitar had been broken by United Airlines, he created a music video and a song on youtube to express his discontent, and he became a hit sensation afterwards. United Airlines was also suddenly more willing to negotiate
Positive
United Breaks Guitars
Star Wars Kid
Private tape of subject pretending to be a Star Wars Jedi was released on the internet, becoming one of the first big viral “memes”. The Star Wars kid was bullied tremendously in real life after the release of the video, and had to take private school and seek counseling
Negative
Star Wars Kid
Vancouver Rioters
After the Vancouver riots during the Stanley Cup last year, thousands of anonymous tips flooded in, reporting instances of rioting, looting, and vandalism. This helped the police identify a large number of suspects that would have been impossible without the crowd
Negative
[Social Media and the Stanley Cup]


Most interestingly, there have been businesses and organizations who have begun to harness the power of the crowd. While virtually every business nowadays has some form of social media presence to try and tap into the crowd, one of the most notable examples of this is President Obama’s campaign in 2008 which relied heavily on social media and spreading the vote through internet channels.

Crowdsourcing

An Introduction to Crowdsourcing

Crowdsourcing refers to an action where a group of undefined members in an online community contribute to a project giving their expertise, knowledge, and resources in order to impact the project.

Notable Examples

Wikipedia is a free online platform that allows users to share knowledge. These users are able to create and edit existing content with references and verifications. Content is always updated and revised in a timely manner, and changes are recorded to prevent any false information. However, changes to controversial topics must be discussed and approved before posting onto the wiki page.

YouTube is another free online platform that allows users to upload, view, and share videos. Unregistered users are only able to watch and share videos via other social media such as Facebook, Google Plus, and Twitter. However, registered users can upload an unlimited number of videos and leave comments. Knowledge sharing is encouraged on YouTube, as there are many tutorials in a wide variety of fields such as computers, automobiles, and the arts.

Business Applications

Crowdsourcing has recently become more popular in business applications because of the availability of shared resources. Tortilla chip maker Doritios hosts its yearly Crash the Super Bowl campaign. This contest allows consumers to create and submit their own Doritos ads. The most popular video is decided by fans and the winner receives $1 million and their commercial shown during the Super Bowl.[1] Entrepreneurs and small companies tend to expose their ideas through social media and crowdfunding websites such as Kickstarter, hoping that the online community sponsors their projects in terms of monetary support, support, and exposure.

Crowdfunding

Crowdfunding
Crowdfunding is the act of sponsoring a project or a cause by gathering money from a collective group of people to meet a monetary goal. Most commonly, this is done by collecting small amounts from a large group of people through a shared, online platform. Today, crowdfunding is used to fund a variety of projects ranging from company start-ups, political campaigns, philanthropic organizations, disaster relief, and health research.[2]

History and Growth of Crowdfunding

While the concept has been around for centuries, web-based crowdfunding first appeared in the late 1990s when some charity causes and campaign projects were first set up online.[3] In 1997, fans of the British rock group Marillion independently raised over $60,000 to fund the band’s U.S. tour. Internet-based crowdfunding became possible when increased web connectivity allowed more users to interact with each other and share ideas.

The introduction of more Web 2.0 tools truly enabled crowdfunding to become more prominent. Kiva, a micro-lending website that allows users to lend money to entrepreneurs in developing countries, was able to effectively utilize a more social aspect on their platform. Entrepreneurs provide pictures and updates to their lenders via email or on their profile page on the Kiva website. Supplying many common social network features gave entrepreneurs a medium through which an emotional connection with potential lenders could develop.[4]

In recent years, Twitter and Facebook quickly became platforms that were able to support deeper social applications. Kickstarter believes that a large, collective group of people can fund any project if the idea is good and communicated well enough.[5] The website relies on the reach of a user's social media network to help spread the word of Kickstarter projects to generate “virality”.

Crowdfunding vs Venture Capitalism

How it Works

Crowdfunding allows small businesses to get started by gathering knowledge and resources from a large number of online users. The online community can freely contribute to a specific project, depending the degree of project attractiveness. Venture capitalists, however, favour big corporations that have a good reputation and financing credit. If they do decide to fund smaller projects, they tend to demand a large amount of creative control over the project. Corporation-based projects tend to be funded by banks and other financial institutions.

Project Success Rate

Projects sponsored by the online community tend to have a lower project success rate because of the numerous uncertainties. The project owner may not be able to deliver the original objectives or the project itself may lack sufficient funds. On the other hand, traditional projects tend to have a higher project success rate because the tasks are properly outsourced to experts. Also, projects are generally funded by banks and are monitored throughout the project lifecycle.

Business Industry

Most crowdfunding websites have limitations on the types of project undertaken. For example, Kickstarter bans charity projects because they may result in loss of goodwill. Venture capitalists, however, do not have such limitations as long as the project has a high likelihood of profitability.

Legal Issues

Crowdsourcing for equity is currently considered illegal in some countries such as Canada. Supports of crowdscouring projects are subject to fraud when project owners receive resources without the intention of meeting the goals that were originally stated. However traditional projects tend to be more secure because sponsors have the right to monitor the projects and sue.

Equity-Based Crowdfunding

In 2012, U.S. President Barak Obama passed the Jumpstart Our Business Startups Act and rewrote securities law to allow owners to receive capital from unaccredited investors. While equity-based crowdfunding in the US was handle at the federal level, it's overseen at the provincial level in Canada. The implications of this means that even if equity-based crowdfunding was approved in one province, it could be illegal in another province. Therefore to fully harness the power of the crowd, there would be need to be rule changes in each of the 13 provinces and territories to coexist.[6]There was an initiative in Canada started by Mr. Gary Stairs and others in the Canadian Advanced Technology Alliance campaigning to bring crowdfunding to Canada. They were advocating provincial governments to change their security laws to be more closely aligned with those in the US JOBS Act.[6]

Intellectual Property Exposure

Currently there is little to no intellectual property protection by the sites. As ideas can be copied as ideas are being posted, it is imperative for developers to file for patents, copyrights, and trademark protection or they will be subject to risk.[7]

Kickstarter

Kickstarter is one of the largest crowdfunding websites in the world and supports creative projects through a variety of genres, such as art, comics, dance, design, fashion, film, food, games, music, photography, publishing, technology, and theater.[8].

The company was founded in 2008 by Perry Chen, Yancey Strickler and Charles Adler.[9] Chen, the company’s CEO, came up with the idea in 2002 when he wanted to hold a concert in New Orleans but was worried about all of the money that could be lost. The company's first project was the Grace Jones Does Not Give a F$#% T-Shirt" and their first successfully-funded project Drawing for Dollars.[8] As of July 18, 2012, Kickstarter has over 7,000 projects live, 64,096 funded projects with $290 million funded to projects and a 50% success rate.[10]


An Introduction to Kickstarter

Model

Kickstarter funds thousands of projects by facilitating backers to support various ideas with monetary donations. Finite projects that foster creativity and are not for handouts, causes, or charities are given their own page on the Kickstarter website. Here they can promote their vision to backers, set rewards for various pledge levels, and showcase their project to entice backers to fund their idea.[1]

The website’s major philosophy is its “all-or-nothing” funding policy.[1] The project owner must set a goal amount and deadline for reaching the goal. If they receive enough pledges to meet the goal, then they get to keep the money they’ve raised. However if the goal is not reached by the deadline, they receive no money and any backers that might have supported the project are not charged. The “all-or-nothing” policy motivates both creators and backers to share the idea to the community to ensure the project’s success.

All successful projects receive every dollar they’ve raised minus 5% of funds to Kickstarter and 3-5% of funds to Amazon Payments for handling the transactions.[2] Kickstarter does not claim any ownership or intellectual property of the projects and the work they produce. The projects however, will remain on the website permanently and creators are responsible for meeting the expectations of all of their backers.

Case Studies of Successful Projects

DoubleFine Adventures

Double Fine Adventures' Kickstarter Pitch

Many of Kickstarters most successfully funded projects come in the form of independent (indie) video games. Since Indie games usually do not have the resources and a well known brand names behind the studio, they have traditionally had a lot of trouble gathering investment capital.

Double Fine, the studio behind the game, also ran into these problems. The lead designer, Tim Schafer, was an “industry veteran” of many famous games in the past, and under his leadership, the studio produced a fair number of games thus far. However, they wanted to have enough funds to create and distribute a game without having private investors sway the artistic and creative direction of the project. According to Tim Schafer,

“Crowd-sourced fundraising sites like Kickstarter have been an incredible boon to the independent development community. They democratize the process by allowing consumers to support the games they want to see developed and give the developers the freedom to experiment, take risks, and design without anyone else compromising their vision. It's the kind of creative luxury that most major, established studios simply can't afford. At least, not until now.”

With the rising popularity of indie games, DoubleFine Adventure made over $3.3 million dollars, making it the most popular video game project on Kickstarter to date.


Pledge Amount
Description
Number of Backers
$15
Finished copy of the game, access to the early beta-test and private discussion forums.
47946
$30
HD download of a documentary series and game soundtrack.
24636
$60
PDF of concept art book
1090
$100
Special box package with the game and documentary, a T-shirt, an original poster, and a mention in the credits
11530
$250
Autographed poster
900 (Sold out)
$500
Hardcover book with concept art, original photos, biographies, and others signed by Tim Schafer
149
$1000
Mini portrait of you painted by the game’s artist
100 (Sold out)
$5000
Larger original painting of art
10 (Sold out)
$10000
Lunch with the designers and a tour of the office
4 (Sold out)


Pebblewatch

The Pebble E-Paper Watch

Pebblewatch is an innovative watch by Eric Migicovsky that is one of the most well known end-products of the Kickstarter process. It is a watch that has the similar application functionality of a smartphone, and is meant to serve as a complement to such a phone for activities like running, listening to music, and swimming. Using bluetooth technology, the Pebblewatch could remotely sync up with smartphones to access content. The creators (names) originally developed a similar watch called the (name) that only worked together with android (source), the creators turned to Kickstarter to raise funds for their new prototype, which had the ability to connect to Apple iPhones.

Pebblewatch set the initial goal at $100,000 in capital with the deadline of a month. However, they ended up raising over a million dollars in around 28 hours. In a little over a month, they raised 10.2 million dollars and secured over 65000 customers. Pebble Watch remains the most well-funded project on Kickstarter to date.


Pledge Amount
Description
Number of Backers
$1
Exclusive updates
2615
$99
Early pre-order of a prototype Black Pebble Watch
200 (Sold out)
$115
Black Pebble Watch
40799
$125
Any colour Pebble Watch
14350
$220
Two black Pebble Watches
3800
$235
Early access to source code, as well as a prototype Pebble Watch a month in advance to begin app development
100 (Sold out)
$240
Two Pebble Watches in any colour
4925
$550
Five Pebble Watches
900 (Sold out)
$1250
Five Pebble Watches with custom watchface
20 (Sold out)
$10000
A hundred Pebble Watches in any colour
31 (Sold out)


Flint & Tinder

Flint and Tinder: Premium Men's Underwear

Although games and technology are the two largest sections of Kickstarter, there are numerous other categories for projects to develop in. Jake Bronstein of Flint & Tinder used Kickstarter to start a project about premium men’s underwear, with nothing more than the design and the materials. The money would be used for the production of the underwear itself.

Their three major selling points were:

  1. High quality materials
  2. Domestically (US) made
  3. Fairly priced

Surprisingly enough, Flint & Tinder’s line of underwear was a huge success, gaining over $290,000 in revenue and 5,578 backers.


Pledge Amount
Description
Number of Backers
$5
Three boxes of limited edition matches
50
$15
One pair of underwear
840
$36
Three pairs of underwear or one shirt and one pair of underwear
2863
$75
Two shirts and three pairs of underwear, or seven pairs of underwear
1084
$125
Three shirts and six pairs of underwear or 12 pairs of underwear
687
$3600
365 pairs of underwear
1 (Sold out)


Patent Disputes

Fan Funded (also the founders of ArtistShare) owns the U.S. patent US 7885886 “Methods and apparatuses for financing and marketing a creative work.” On September 30, 2011 Kickstarter believes that they are under the threat of patent infringement lawsuit. In February 2012, Fan Funded claimed that Kickstarter did not violate any patents, “Artistshare merely approached Kickstarter about licensing their platform, including patent rights.”

Kickstarter Analysis

Pros and Cons

Pros

There are numerous benefits of using Kickstarter, either as a creator or a backer. The staff filtering process ensures that only high quality projects are launched. During this process, creators are also given feedback on their project to maximize their chances of success.[1]. The Kickstarter “recipe for success” of interesting videos, photos, updates, great rewards and successful marketing is widely publicized on the website[2]. This helps creators learn how to effectively promote themselves and their idea and gives backers the best browsing experience along with its very efficient interface and design. Kickstarter does not take a portion of the project’s equity or intellectual property of the idea and the creator retains full control after funding. Finally it's “all-or-nothing” policy is very effective tool that ensures projects hit their fundraising goal. It prevents procrastination by both the creator and the backer to support and share the project to guarantees its success.[3]

Cons

Value must be exchanged with every pledge, whether it is a "virtual high-five" or a promise of a pre-order, there is no such thing as free money on Kickstarter.[3] While some projects become highly successful and raised far more than they anticipated, they are now burdened with the responsibility to meet the expectations they’ve given. If the project is a product, the creator must be ready to satisfy all of the orders they’re received through pledges and onwards. Backers also share some of the risk. After a project has been successfully funded, it is not Kickstarter’s responsibility to ensure all the backers get what they pledged for[4]. If the final product is below expectations, the backers cannot get their cash back. The website is still susceptible to fraud. Some projects may be fraudulent so backers must do their due diligence. More detail on examples of fraudulent projects can be found later on.

POV Analysis

Developers POV

The primary users of Kickstarter are usually small businesses or independent developers who have an idea for a product or service, but lack the funding necessary to complete it. With Kickstarter, they can find the funding that they need as well as create word of mouth for their project through consumers and sponsors. For more ambitious projects, they seek to use the backers that they acquire to help steer the direction of the final product itself. Thus, sometimes the act of having backers to one’s project adds additional value to the project.

Sponsors POV

While there is currently no consumer/sponsor information available for Kickstarter, the motivations for sponsors it are relatively straightforward. Some consumers are novelty seeking, and want to find the next biggest thing before the rest of the world can have it. For the more niche products, if there is not enough support from sponsors, the product will not be released at all, so they donate to try and support the product idea. Some see a company or a spokesperson that they greatly admire, and just want to support their cause (as was the case in DoubleFine Adventures, which will be covered below).

Another potential motivation for sponsors might be the prestige of being publicly seen as a project backer. Aside from tangible rewards, backers also get access to the project comments, where they can discuss with other backers. However, other users cannot see the amount the backer donated, so this motivation is limited at best.

SWOT Analysis

Strengths

Kickstarter Project Success Rates

Kicstarter's business model is one of their qualities. Projects receive funding through pledges that people deem innovative, this is a unique business model that allows up and coming businesses to receive funding while retaining complete ownership. As as their reputation improves and more projects become successful, this will result in a trickle-down effect and improve Kickstarter's reputation. Moreover, their success rate (43%, 46%, 50% in 2010, 2011, 2012 respectively) indicate that the success rate is steadily improving over the past three years which demonstrates an optimistic future. Kickstarter has the largest user base and recognition, which is a crucial element in this type of market. Lastly, they offer a diverse lineup including art, comics, dance, food, music, technology that their competitors may not offer

Weaknesses

There are two types of legal issues that Kickstarter is at the risk of. There may be the potential of fraud which includes copying content/graphics, unrealistic price claims, and failure to deliver projects. Also, there are patent issues as Kickstarter is battling with ArtistShare alleging that Kickstarter is infringing its patent. Since Kickstarter’s business model is relied heavily of creativity, there is no charity or cause funding. This may cause the loss of goodwill, and will not be philanthropic in the eyes of the public. Also, there is a single source/stream of revenue. If projects do not get completely funded, Kickstarter do not receive money.

Opportunities

International expansion is definitely one major opportunity that Kickstarter can take advantage of. Currently, Crowdsourcing for equity isn't legalized in Canada at the moment. Projects on Kickstarter are only limited in Canada and the US. Kickstarter may want to expand the location to other English speaking nations such as the United Kingdom and Australia to expand their market globally. Another opportunities lies in buying out or merging with competitors, as Kickstarters business strategy is similar to their competitor’s such as “PleaseFundMe”. As a result, Kickstarter will have greater exposure resulting in a greater network. 

Threats

There is low differentiation among competitors but if competitors can have provide better incentives for Kickstarter, it may be the demise of Kickstarter.

Future of Crowdfunding/Kickstarter

Expansion to Canada

Currently Kickstarter does accept project from various parts of the world, including Canada. On July 18th 2012, there were 54 projects from Vancouver being hosted on the site. From London (UK), there were 69 projects being hosted on the site. If Kickstarter can be involved with the support with changing security rules in Canada, then their company will also receive publicity as the ones heading this initiative. This will be a defining moment for crowdsourcing, with Kickstarter as the initiator.

Equity-Based Crowdfunding in Canada

100px‎

Although it is legal in Canada to accept donations for a project or have a share of the revenue, it is not yet legal (as of July 18th 2012) to accept crowd funding funds in exchange for equity in the company. This is due to many reasons. The first of which is that commercial matters such as investments are a provincial matter and the supreme court refuses to allow the federal government to impose a nationwide legislation regarding equity-based crowdfunding. Also, regulations regarding equity-based crowdfunding are still being decided upon in order to protect the investors from and inform them of the dangers.[5]

As of mid-June, a petition to legalize equity-based crowdfunding was released on the website “i-Canada”.[6] This petition has come into action as people who wish to see the Canadian economy grow fear that a lack of support and ability to crowdfund will force startups to move to the United States. This is especially true since many very successful stories are being widely publicized in the media after receiving large sums from websites such as Kickstarter. Also, on April 7th 2012, equity-based crowdfunding was legalized in the United States and a recent site, PeoplesVC.com, has opened to allow startups to exploit such opportunities.

Application for Corporations

As described above, there are many risks that are involved with crowdfunding. In terms of the developer, they must release information about their potential product early and expose it to the risk of being copied. This could be dangerous if the surrounding environment is competitive and competitors have the resources to imitate the product. Although there are many risks, crowdfunding offers many benefits and should not be avoided.

For an organization to safely use crowdfunding, the project should fulfill three criteria:

  1. The project should not be easily imitable by competitors.
  2. The project should offer a meaningful product mix that rewards contributors. To motivate members of the crowd to support projects and reduce freeriders, actual supporters must be rewarded.
  3. The outcome of the project should profit from the input of a crowd. Since the main benefit of crowdfunding is the harnessing of the power of the crowd, the project should profit from the opinions and resources of many.

Examples of organizations to possibly use crowdfunding:

Organizations with a Governing Body

Simon Fraser University

In organizations with a governing body, such as Simon Fraser University (SFU), a party is usually elected and dues are collected from the members. The governmental body then spends the money in ways that it believes will benefit the members.

This can also be observed in cities where taxes are collected spent on public programs. At SFU, this happens in the form of tuition or Simon Fraser Student Society (SFSS) Fees. The student fees that are collected by the SFSS are then distributed to student clubs or spent on projects that SFU believes students want, such as study areas or food courts.

For these organizations, the ways that they determine what members want is through surveys or intuition. Although these methods are somewhat effective, they can only estimate demand. This means that many projects end up unused or are otherwise inadequate for the members.

Through the use of crowdfunding, however, a more efficient system can take place. Members could support the project that they want to see and provide funding to make them a reality. This accurately gauges the demand of the project and ensures resources are not wasted.

Projects by organizations with governing bodies are also perfect for crowdsourcing since they fulfill the three criteria mentioned above.

In the case of SFU, a recent project was that of a number of restaurant expansions. In order to decide which restaurant will be given the right to open, the SFSS conducted a survey in order to gauge the preferences of the student body and then arbitrarily chose which ones to approve.

This system, however, risks poorly estimating the needs of the members. In contrast, a crowdfunding website with the restaurant proposals could have been opened. Here, students would support which restaurants they want to see expanded, and contributors would be given rewards such as recognition, discount cards, or other perks.

Organizations that offer content expansions

Some organizations, such as video game companies, offer a product where it is possible to expand the material through downloadable content (DLC). For these organizations, crowdfunding can be an efficient way to determine which content expansions will generate the most sales for the company.

In order to determine what the content expansions should be, companies may either

a) Already have a storyline in mind. b) Try to survey fans and see what they would like to see, c) May just spontaneous come up with an idea.

All of these methods may gather the general opinion of the crowd. However, it does not properly gauge demand as it does not measure how much each contributor is willing to give to the project.

Through crowdfunding, fans will be able to give input and show how much they are willing to contribute to the expansion of content. This is especially effective for content expansions, as a majority of the content, such as character models, particle effects, and so on, are already created as a part of the initial game. Thus, crowdfunding could potentially cover a larger proportion of development costs.

Content-Producing Organizations

EA Games

As opposed to merely games with potential for DLC, projects for content-producing organizations aimed at expanding their current product are also perfect for crowdsourcing. An example of one such company is EA Games.

For this company, their website states that their video game ideas are inspired "from many places. They can come from popular books and movies. They can come from the world of sports. And, they can be generated internally within the company. The truth is that game ideas can come from anywhere, and it's up to company leadership to make sure we choose the right ideas to turn into games.”[7] Once again, it is top management that decides which idea to use, which implies that a certain level of arbitrage in decision making in terms of video game funding still exists.

Instead of following this system, a crowdfunding system could be put into place which clearly measures the desires of consumers and extracts their willingness to pay for a product.

Again, to decide which expansions are made, a website could be set up which allows fans to contribute towards expansions that they wish to see. In exchange, they would receive recognition and accolades attached to their user profile, unique game items, and perhaps even input into the creation of the content. As expansions are cheaply made since most content is already made, gaming companies like EA could easily recuperate their costs.

External Links

References

  1. Kickstarter: Pros and Cons
  2. The Pros and Cons of Using Kickstarter to Fundraise
  3. 3.0 3.1 Kickstarter Youtube
  4. Kickstarter FAQ
  5. Federal Support for Equity Based “Crowdfunding”
  6. i-Canada Netowrk - Petition
  7. EA Employment FAQ explaining their model of business
Personal tools