Entrepreneurs have tons of ideas for the next great product. And until recently, if an entrepreneur wanted even a modest sum of $10k, she needed to convince her friends and family to chip in. If she wanted $100k, she needed an angel investor. And if she isn’t connected to the right people, finding an angel investor is about as hard as finding an actual angel, as they are bombarded with a constant flow of “brilliant” product ideas. Moreover, even if she found one that liked the idea – this angel investor tended to demand things like “equity”, “liquidation preference” and more. She’s frustrated because she knows there are so many people out there who would believe in her product, if only she had 2 minutes of their time to explain.
Kickstarter allows entrepreneurs to raise money from everyday people. Submit the proper forms online, upload your campaign’s video, and voila – you’re raising money. And the best thing? the money pledged comes with practically no strings attached – your contributors get no equity (moreover, it’s in fact unclear whether you even owe them the service/product you offered in exchange for their contribution). With the alternative being and endless search for an investor, that’s a lot of value created.
Kickstarter also creates value to consumers/contributors. With a 5% fee taken for every successful campaign, you can bet Kickstarter will do their best to find the projects you’ll find most appealing (read: you’ll contribute the most to, in expectation). So rather than sifting through the thousands of campaigns happening simultaneously at any given moment, Kickstarter will do it’s best to help you explore only the ones most relevant to you, sparing you the ones for products like “Little Eatz – treats that both you and your dog can eat”. With so much data about the campaign (popularity, category etc.), and about you (e.g., campaigns you’ve contributed to before, and if you’re willing, data pulled from your Facebook account), they’re very likely to do a good job.
This brings us to every investor’s must-have these days – Network Effects. Contributors bring Campaigns and vice versa. It’s easiest to see how contributors bring campaigners – the more dollars there are on a platform, the better your chances are to succeed, and therefore to upload your campaign to begin with. But also, as mentioned, campaigns bring contributors. With plenty of campaigns to choose from, Kickstarter can keep the contributors entertained for hours browsing the site, and more importantly, to always have a supply of interesting campaigns. Campaigners also help drive more contributors by taking charge of the marketing efforts, blasting their friends’ social media feeds with links to their campaigns. And to top all of this off, with a growing crowd of both campaigns and contributors seeking a match, Kickstarter gets better and better at playing matchmaker.
And as mentioned, Kickstarter doesn’t shy away from capturing some of the value it creates – charging 5% of the money raised in fees. With about half of the fees likely going to cover credit card companies’ fees, Kickstarter is left with a hefty sum given its near-zero marginal cost. With $500M in money pledged (generating $25M in fees) this still doesn’t give it “Unicorn Status”, but relative to the amount of capital invested ($10M), it’s not too bad. And with new geographies constantly added, it is likely to grow even larger.
I think it’s clear that Kickstarter is a winner. However, it’s not too clear who is the loser. Two come to mind: angel investors, and all the companies producing products that compete with the products featured in the campaigns. Ryan Grepper, the creator of “Coolest Cooler” might have had to give up equity to raise the $50k he asked for his venture. Instead, he created a Kickstarter campaign, and raised $13M. Good chance some angel investor never got the chance to tag along for the ride. Maybe one day Coleman, a company that makes outdoor recreation products, will one day discover that Ryan Grepper is eating their lunch. Time will tell.