{"id":20498,"date":"2016-11-18T17:57:12","date_gmt":"2016-11-18T22:57:12","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/kickstarting-new-ideas\/"},"modified":"2016-11-18T17:57:12","modified_gmt":"2016-11-18T22:57:12","slug":"kickstarting-new-ideas-how-online-crowdfunding-is-disrupting-project-finance","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/kickstarting-new-ideas-how-online-crowdfunding-is-disrupting-project-finance\/","title":{"rendered":"Kickstarting New Ideas: How Online Crowdfunding is Disrupting Project Finance"},"content":{"rendered":"

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In 2009, Kickstarter launched an online platform for innovators to post their creative projects for financing. It essentially built a new global market for investors (\u201cbackers\u201d) and innovators (\u201ccreators\u201d) to connect. Kickstarter, a website which leverages a rewards-based crowdfunding model and provides rewards to investors rather than equity, has become one of the largest and most well-known online crowdfunding platforms creating immense value for entrepreneurs and artists. This model works especially well for the creative projects Kickstarter promotes by enabling creators to assess customer demand and build a community of early adopters without giving up equity in the business.<\/p>\n

Kickstarter is disrupting and circumventing the traditional investment market by democratizing the investing experience. Unlike traditional equity investing, Kickstarter and backers claim no ownership over the creator\u2019s projects and the work they produce. With an accessible, online platform, anyone with access to the internet can invest in an idea. To date, Kickstarter has received more than $2.7 billion in pledges from 12 million backers to successfully fund 115,387 creative projects.[1]<\/a> Projects range from music, film, technology, art, design, food and publishing.<\/p>\n

The Model<\/strong><\/p>\n

First, project creators choose a minimum funding goal and deadline. Then creators post their ideas online and amplify their campaigns via social media platforms like Facebook and YouTube. Backers then review and commit to a project. In this contract, creators are solely responsible for fulfilling their customer promise to backers, not Kickstarter.<\/p>\n

Kickstarter selectively accepts only certain types of projects on its website. First, the project must have a clear goal and something must be produced by it. Second, the project must be \u2018creative\u2019, think music album, art project, or novel. For example, Kickstarter does not allow projects to fundraise for charity or offer financial incentives.<\/p>\n

To incentivize creators and backers to use the platform, Kickstarter only charges backers once creators have reached their fundraising goal. The company also helps resolve any backers\u2019 payment disputes, but does not guarantee that all payments committed by backers will be collected (i.e. there may be fraud or outdated credit card information provided).<\/p>\n

Kickstarter actively defines the scope of their customer promise, as developing a marketplace for financing ideas, not<\/strong> ensuring quality or punctuality of project completion. Kickstarter\u2019s pricing model charges creators a flat 5% fee on the total amount of the funds raised before putting funds into the creator\u2019s accounts. Given most successful projects raise between $1,000 and $9,999, Kickstarter nets $50-$499.95 revenue per project. In addition to Kickstarter, payments processors apply a 3\u20135% fee.[2]<\/a> If funding isn\u2019t successful, there are no fees instituted. Further if the creator\u2019s project funding goal is not met by the deadline, no funds are collected as a kind of assurance contract. Roughly 9% of funded projects have failed in the past.[3]<\/a><\/p>\n

This business and operating model is successful due to its ability to easily and quickly connect backers and creators. Further, the site has a good reputation of securing trust throughout the contract. According to Kickstarter\u2019s terms of use, \u201cwhen a project is successfully funded, the creator must complete the project and fulfill each reward. Once a creator has done so, they\u2019ve satisfied their obligation to their backers.\u201d[4]<\/a> This clear contract obligation is communicated throughout the online platform. To ensure honest communication and strong, diligent efforts by creators, Kickstarter strongly encourages creators to post regular updates on the project, how funds have been deployed, and potential barriers moving forward in a timely manner. While the good faith between backers and creators keeps the system alive and has built a positive reputation for the platform, it continues to be a large reputational and business risk.<\/p>\n

Looking Forward<\/strong><\/p>\n

Crowdfunding has dramatically changed the face of investing by democratizing project finance. Kickstarter has leveraged crowdfunding to build a strong, successful online platform to connect creators with backers. While, the company has instituted several best practices, such as defining its customer promise and economically incentivizing creators and backers to opt-in by reducing barriers to entry, it is still faces great risk in a changing economic environment.<\/p>\n

To mitigate risk, Kickstarter should focus on two\u00a0key actions:<\/p>\n

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  1. Place more direct quality control requirements to reduce the number of funded projects failed from 9% to 0%.\n