How can entrepreneurs and artists raise money fast to launch a product -- and never have to pay the cash back? Hitting up friends and family used to be the only way, but now there's Kickstarter, an online funding platform with which "patrons" donate money to creative projects that catch their fancy.
Where online-lending platforms such as Prosper.com and Lending Club have helped small businesses get small loans for years, Kickstarter uses a "donor" funding model that means the money raised is essentially a gift.
This fundraising method is not for every business. Service businesses, for example, are pretty much left out in the cold here. But if you have a specific product or project that might appeal to art- and design-loving donors, Kickstarter offers a chance to skip the loan payments and find new prospective customers, too.
Funding the Dreamers
Cofounders Perry Chen, Yancey Strickler, and Charles Adler started Kickstarter in 2009 as a platform for making dreams come true. Company spokesperson Justin Kazmark describes the Kickstarter donation model as "sitting at the intersection of patronage and commerce." And commerce is flourishing on Kickstarter: Over $25 million has been pledged to 4,000 fully funded projects by more than 300,000 people so far. One early participant was Emily Richardson, who raised $8,000 to cover expenses for a round-the-world sailing voyage now underway.
While company execs bristle at Kickstarter's growing reputation as a business fundraising platform, entrepreneurs have been quick to seize on the site as a new way to fund their business endeavors -- and some are raising substantial sums. Funding categories include art, design, filmmaking, fashion, photography, games, and technology. As long as entrepreneurs focus their fundraiser on a specific product or project that fits into one of these categories, they can use Kickstarter to raise money.
Crafter Megan Dietz and seamstress Kelly Metzler turned to Kickstarter when the pair launched their Pittsburgh-based company last year. Wear the Shift creates custom-sized A-line dresses made to customers' measurements. The shift was a hit with the owners' friends, but the pair needed capital to buy equipment and hire seamstresses.
Dietz and Metzler started their funding search the way all Kickstarter participants do: by setting a goal amount for their fundraising campaign and posting text and video describing their project. They also employed a key Kickstarter strategy: offering rewards. Often, rewards are the products a company will make with the funds raised, usually at a discounted price. Wear the Shift offered donors $160 dresses for $80.
The results exceeded the startup owners' wildest dreams. Their lowest-priced donation level -- 40 dresses offered at $80 apiece -- sold out the first day. Their next donation level -- 20 dresses with a coordinating slip for $130 each -- sold out the second day. In mid-December, with several weeks left to go on their $5,000 fundraising campaign, Wear the Shift had already exceeded its goal, raising $6,700. The company plans to spend much of the funds on fabric, labor, and shipping to make and deliver the initial batch of shifts and to get the business up and running.
The first run of dresses won't create big profits due to the discount price donors got, Dietz says. But it gets the first shifts into customers' hands so Wear the Shift can get important feedback, refine their product, and start some positive buzz.
Finding validation for the company's concept, along with finding Wear the Shift's first paying customers, was an invaluable experience, Dietz says. "We wanted feedback as much as the money," she says. "Kickstarter was a beautiful way to kill both those birds with one stone and develop a community even before [we've launched]."
How Kickstarter Works
Businesses interested in the Kickstarter model should consider these details before getting started:
- You cannot get funding on Kickstarter simply for operating expenses. Funding is for creating or manufacturing specific projects or products only. This is a recent change.
- Kickstarter campaigns can be used for market research. If you're wondering whether there's an audience for your product, a fundraising drive on Kickstarter can also serve as a platform for promoting the product and finding potential customers.
- It's not free. Kickstarter takes a 5 percent cut, and donation processor Amazon.com takes up to 5 percent more.
- If you don't reach your funding goal, you get nothing. This is similar to how peer-loan sites work. Each campaign has a set time limit in which to raise its funds, and if the goal isn't met, the money raised is refunded to donors.
- If you get donations beyond your target amount, you keep it all. This is a major difference between Kickstarter and using a peer-loan site, in which case the amount you request is all you receive. In some cases, Kickstarter projects overfund, giving companies additional cash and product orders.
That's what happened to Chicago-based design firm Minimal, which unsuccessfully pitched two investors its idea for watch kits that turn an iPod Nano into a wristwatch before it looked to Kickstarter. Former Nike watch designer Scott Wilson heads the 3-year-old company, which has recently done projects for Dell and Microsoft's Xbox 360.
Minimal recently concluded what was planned as a $15,000 Kickstarter campaign. The company's first in-house product idea got some press coverage from tech blogs such as Gizmodo, caught fire with Kickstarter donors, and overshot its fundraising goal, raising $940,000 in mid-December, a record so far for Kickstarter. The company offered its basic TikTok model as a reward for $25 donors and its fancier LunaTik model to $50 donors, with bigger-ticket donors getting more than one watch or special limited-edition versions. In all, donors signed up to receive more than 20,000 watches as rewards.
"I thought it would be a really interesting experiment to see what people thought of the designs and how much interest there might be in purchasing one," Wilson says. "This entire process has been a wonderful discovery."
Tips for Kickstarter Success
Keep these tips in mind when considering a Kickstarter campaign:
1. Having a track record helps. The past design successes of Minimal's Wilson likely contributed to the positive outcome of his company's Kickstarter fundraising campaign.
2. Rewards don't have to cost you much. Kickstarter reports many creative types have succeeded on the site by offering "behind the scenes updates" on the making of their product for small donations.
"People like the feeling that they backed a project," says Kickstarter spokesperson Kazmark. Other rewards include being sent a thank-you note, getting autographs from the artist or designer, and being invited to a product-release party.
3. Structure rewards carefully. If you don't want to sell thousands of copies of your product at a deep discount, set a limit. While Minimal's mass-production capability allowed it to offer an unlimited number of its watch kits at the Kickstarter price, Wear the Shift didn't want to give up too much margin, so the company set strict quantity limits for its campaign's rewards."Make sure you have the tools in place to execute on the final result should it get funded," Wilson warns.
Whether you use funding to buy equipment and hire workers for small-scale, local production as Wear the Shift did or set up a Chinese factory for mass production as in Minimal's case, it's important to budget carefully to make sure you can fulfill all your rewards with the money you raise. Otherwise, Kickstarter fundraising success could end up killing your venture, as unhappy donors spread the word that you took their money and didn't deliver the promised products.
Business reporter Carol Tice contributes to several national and regional business publications.