The Kickstarter Economy

“As many of you know, the entertainment industry is filled with incredible scripts written by incredible talent that have not or will never get made. Or worse, they’ll get changed into something that is nowhere close to what the original creator envisioned.”

The speaker is a suave, bearded gent in a striped bow tie and burgundy cable-knit sweater. He’s seeking financing for Anomalisa, a film written by Charlie Kaufman, the author of the screenplays for Being John Malkovich, Adaptation and Eternal Sunshine of the Spotless Mind. He gives a sales talk that’s convincing–inspiring, even.

He also happens to be an animated puppet. That’s less peculiar than it sounds. Anomalisa is a project on Kickstarter, the highest-profile website engaged in the crowdfunding of new ideas, including everything from board games to offbeat tech gadgets to movies. An engaging sales video, like the one hosted by the puppet pitchman, is critical to a project’s success.

This one did the job: the stop-motion animated featurette breezed by its $200,000 funding goal, raising more than $400,000 from 5,770 backers in a month. These patrons won’t receive an ownership stake. All they’ll get in return is a warm, fuzzy feeling and a thank-you gift scaled to the size of their pledge, starting with a thank-you on the movie’s Facebook page and a downloadable video clip offered to anyone who donated at least $5.

The extraordinary thing about Anomalisa’s crowdfunding story is that it isn’t extraordinary. In 2010 the creators of TikTok and LunaTik–watchbands that let you strap an iPod Nano to your wrist–made headlines when they used Kickstarter to raise $942,578. This year’s biggest winners are larger by an order of magnitude: Pebble, a smart watch that uses electronic-ink technology, raised $10.3 million, and Ouya, a pint-size gaming console that runs Google’s Android software, received $8.6 million.

And it’s not just Kickstarter. Over at Indiegogo, the other big-time crowdfunding site, online cartoonist Matthew Inman set out to raise $850,000 to help turn the Long Island lab of electrical pioneer Nikola Tesla (1856–1943) into a Tesla museum. Halfway into his monthlong campaign, he had already raised $1,251,144 from more than 30,000 individuals, some of whom put up as little as $3.

“This notion that people will pay prospectively for something they want to exist is fundamentally new,” says publisher and technologist Tim O’Reilly. But it’s a logical development on the Web, the most efficient tool ever devised for pooling the interests and resources of large numbers of disparate people.

Wikipedia proved that the crowd can collect the world’s knowledge with a level of ambition–if not always accuracy–that rendered the dead-tree Encyclopaedia Britannica obsolete. Twitter has repeatedly shown that the crowd can often report breaking stories faster than traditional news-gathering operations do. Millions of Facebook members clicking Like buttons efficiently puts articles, videos and other items in front of other people who might enjoy them.

The crowd also turns out to be pretty talented at identifying and bootstrapping promising creative endeavors. Two Kickstarter-funded documentaries have been nominated for Academy Awards. Cards Against Humanity, a game whose versions dominate the top slots on Amazon.com’s list of best-selling playthings, was originally financed through Kickstarter. In July, Publishers Weekly theorized that the site may have effectively become the second largest U.S. publisher of graphic novels.

So could Kickstarter and its crowdfunding competitors and imitators end up competing with venture capitalists, angel investors and other sources of funding for start-ups of all sorts? Entrepreneurs could use the help. In 2011, total U.S. venture-capital investments were off by more than 70% from their peak in 2000 right before the dotcom bubble burst. Good ideas are surely dying on the vine for lack of money.

Among the people who hope crowdfunding will come to the rescue is President Obama. In April he signed the JOBS (Jumpstart Our Business Startups) Act, which relaxes securities regulations in the interest of encouraging crowdfunded investment in companies of all sorts. Sometime next year, after the Securities and Exchange Commission has done due diligence, it should be possible for a site like Kickstarter to engage in a democratized form of venture capital, finding backers who will invest in start-ups in return for an equity stake.

Except it’s not that simple. For one thing, Kickstarter itself has no interest in becoming a start-up factory. What its founders care about is helping creative people pay for one-off projects with a well-defined beginning and end–whether or not they have the potential to be profitmaking enterprises.

That passion originated with a question that Perry Chen, a musician and native New Yorker living in New Orleans, asked himself back in 2001, when he wanted to throw a late-night music bash to coincide with that city’s jazz festival. “What if the audience could help fund this event?” he remembers wondering at the time. “If we could raise the funds necessary, great. If not, it just doesn’t happen at all.”

Chen didn’t solicit money, and his event never happened. Still, the notion stayed lodged in the back of his brain. Years later, back in New York, he began working on the idea with music journalist Yancey Strickler and designer Charles Adler, who became Kickstarter’s co-founders. The site debuted in April 2009 with Chen as CEO.

Today, despite the outsize impact it’s having on multiple industries, Kickstarter remains a lean operation; it only recently hired its 42nd employee. Other numbers associated with the company are also smaller than you might guess. As I write, 3,508 projects are seeking funding on the site–a dinky, dinky number on a Web on which 350 million eBay listings are active at any given time.

By definition, the Kickstarter enterprises that get the most ink, such as Pebble and Ouya, are outliers. “The typical project raises five grand and is supported by 85 people,” says Strickler. “So you can learn the first names of the people who got you started.”

Strickler and his partners have never stopped being excited about these itty-bitty efforts. Their enthusiasm for their invention is infectious–Strickler has personally sponsored over 700 projects–and when I chat with them at the company’s offices in a ramshackle walk-up building on New York City’s Lower East Side, the projects they bring up are mostly small and deeply personal: music albums, a board game, artisanal jam.

Whether they involve film, fashion or food, the Kickstarter projects that flourish tend to have a lot in common. Their developers set realistic goals. They produce slick show-and-tell videos. They update their community of backers regularly with progress reports.

They also realize that their supporters’ advice can be just as valuable as their cash. When Julie Uhrman, Ouya’s CEO, put the console on Kickstarter, she already had a prototype. But it evolved further. Backers pointed out, for instance, that some of the buttons on its controller might be tough for color-blind users to distinguish. “It’s really fascinating to design a product with your audience,” she says.

None of this is a cakewalk. “It’s a nice job, but it’s a job,” says Roman Mars, who was able to rustle up $170,477 to produce a season of 99% Invisible, his San Francisco public-radio program about design. “Luckily, in my case it was a job where people threw money at me.”

Mars lavished attention on the gifts he offered to backers, from a $15 notebook to a $10,000 bundle that included underwriter messages on his show and an in-person presentation anywhere in the world. Worldly goods and other tangible incentives, however, are only so important. “Most people are happy to help you on your way. That’s probably 99% of it,” says Alison Klayman, who used Kickstarter to help finance Ai Weiwei: Never Sorry, her award-winning documentary about the Chinese dissident.

In one way or another, many Kickstarter hits feel as if they serve a higher purpose. “The trick–and this is the trick to a lot of marketing–is that you don’t want to sell people a product,” says Jake Bronstein, a Brooklyn-based entrepreneur who set out to raise $30,000 on Kickstarter and wound up with nearly 10 times that amount. “You want to sell them a dream.”

Bronstein’s dream involved underwear–premium men’s underwear made in a 100-year-old Pennsylvania factory using California cotton and Florida elastic. He aimed to make pledging as little as $5 a stirring patriotic statement in an era in which nearly all undergarments are manufactured in far-off countries.

Anyone who pledged at least $15, which Bronstein says was his break-even price, was entitled to receive underwear. Once he found that he’d sold more than 18,000 items this way, “it meant a seismic shift in my thinking,” he says. “When I put the video up, I planned on managing this myself. It took me five weeks to realize I was in over my head.”

Bronstein, who had told backers to expect their underwear in June, was forced to pause his project while he hired folks with experience in the apparel industry. As of press time, he was planning to ship the first packages by the end of September.

Overambition is a common snag with Kickstarter campaigns, particularly when products need to be designed, manufactured and distributed. Ethan Mollick, an assistant professor at the University of Pennsylvania’s Wharton School, analyzed 471 projects in the design and technology categories and concluded that 75% of the ones that promised to send backers physical goods in return for their pledges didn’t meet their own deadlines.

In a worst-case scenario, backers could end up wasting their money on an impossible dream–or at least one that is impossible to fulfill on anything resembling the original timetable. In July 2011, a company called ZionEyez raised $343,415 from more than 2,000 individuals, most of whom pledged $150 or more in exchange for the promise of receiving a pair of eyeglasses with a built-in HD video camera. It planned to ship the first glasses that winter.

Then its plans slipped. And slipped. And then ZionEyez (which changed its name to Zeyez) stopped posting Kickstarter updates altogether. In September 2012, the company resurfaced and said it was seeking a million-dollar investment from traditional sources to proceed. It apologized to its backers for its crummy communications. It did not, however, offer refunds.

Kickstarter fiascoes are rare: only 3.6% of the creators in Mollick’s study were forced to issue refunds or went incommunicado. But projects carry no guarantees. And when they go awry, Kickstarter won’t help. The site, which receives a 5% commission on funds raised by successful projects, doesn’t vet creators for their ability to accomplish their goals and doesn’t mediate when they fail to meet them.

If Kickstarter sounds as if it’s not ideally suited to dealing with the challenges of garden-variety start-ups, that’s because it isn’t. In fact, there are whole categories of projects the site prohibits, including some that would put it in more direct competition with venture capitalists, such as social networks and e-commerce sites. If there’s a next Facebook or a next Amazon–or, for that matter, a next Kickstarter–it likely won’t be funded via Kickstarter. As Chi-Hua Chien, a partner at the legendary Silicon Valley venture-capital firm Kleiner Perkins Caufield & Byers, reminded me, venture capitalists generally see gadgets of the sort that do well on Kickstarter as risky investments with limited upside. But he went on to say that “it’s highly likely that Kickstarter-like funding will eventually be involved in funding a meaningful percentage of companies.”

Other sites, of course, will be happy to go where Kickstarter won’t–including Indiegogo, which already allows small businesses of all sorts to raise money. According to Funding Launchpad, there were 138 crowdfunding sites in the U.S. as of February; among the start-up-centric ones are CircleUp, Fundable and PeerBackers.

But the more crowdfunding starts to look like old-fashioned venture capital, the less relevant its success stories are. People who invest money in conventional start-ups expect a return on their investment but run a meaningful risk of losing it all. The prospect of opening the option up to the teeming masses is decidedly controversial.

“Crowdfunding does have a role in the investment field,” says O’Reilly. “Like if your favorite pizza place wants to open a second location–it’s a known business with known cash flow. But to be the equivalent of venture capital, that’s just nuts.”

Nuts or not, the JOBS Act guarantees that the experiment will happen. “It’s going to take a few years to shape and mold this thing into what works well, but you’re not putting this cat back in the bag,” says David Marlett, founder of a new trade organization called the National Crowdfunding Association.

The fact that Kickstarter intends to sit out any theoretical boom in general-purpose crowdfunding doesn’t mean that the site is maxed out. It’s certainly easy to envision its participants supporting projects of yet unreached magnitude. Maybe even ones that could make lots of money.

Just ask Dan Harmon, the creator of NBC’s Community and an executive producer of Anomalisa. I did, and he began fantasizing about Vince Gilligan, creator of AMC’s Breaking Bad.

“If he were to get on Kickstarter and say that he wanted to make a $6 million feature, that he knew the crew and the locations and it was going to star [Breaking Bad lead] Bryan Cranston–of course that $6 million would be generated in 60 days. It only takes people with that kind of street cred, people who have proven themselves not to be snake-oil salesmen, who can give people what they want.”

Whatever happens, Kickstarter’s founders seem to be comfortable with the tension between their rather specific vision and other possible manifestations of the revolution it’s helping unleash. “Maybe Kickstarter looks the same in five years,” muses Strickler, “but the rest of the world looks more like Kickstarter.” More and more, it already does.