I like the concept of crowdfunding. Websites like Kickstarter have been helpful to start-up businesses, sole individuals with an idea but without capital, and independent entertainers looking for support for their first project. It’s democratic capitalism; the best ideas receive necessary funding while the “investors” receive neither a financial return nor equity. It’s a great deal for those would-be creators who are successful in getting the word out about their projects.
Whether you’re starting a business, putting a new album together, or producing a movie, you start with a plan. To receive funding from investors, whether from the outside of your group or from support from a studio, you show people this plan. Investors want to see your financial viability. They need to understand how the investment will be used.
Crowdfunding avoids almost all accountability. When you blend classes of consumers, you’re asking for trouble. When companies can’t use the strength of their products to sell those products, they turn customers into salespeople, creating incentives to sell the products.
Multi-level marketing may be a legitimate form of selling products when it’s not used for a pyramid scheme, and it may be effective, but if you have to pay your customers to praise your products, it’s similar to bribery. The FTC has a spotted history of pursuing the worst of the pyramid schemes, but perhaps they should look at this new form of raising capital and determine whether it’s in the consumers’ best interests.
Like multi-level marketing’s ability to cross consumer categories, crowdfunding has the potential of doing the same. In this case, fans — the purest of all consumers — can become investors. Not real investors, because there is no potential of a financial return or partial ownership. In most cases, fans will receive something they might normally purchase later. Here are some examples.
In order to manufacture and sell a wireless microcontroller, the creators are asking for $5,000 through Kickstarter. Those who pledge $15 or more will receive the product once it is complete. Those who pledge $29 will receive the product plus one accessory. The highest pledge level is $399, and those who give at that level receive ten products and well as more accessories.
This wireless controller and its functional possibilities — like warning you via your mobile phone when your plant needs to be watered, controlling a robot, or changing color based on the device’s proximity to another object — have attracted enough fans to have collected almost $60,000 at the moment I’m writing this article — twelve times the original goal.
On the one hand, all this really does is shift what has traditionally been the process. Traditionally, creators follow these particular steps: Plan, raise capital, build, market, sell, profit, return profit to investors. Now, this process looks more like this: Plan (perhaps), market, raise capital by selling, profit, build, sell more if you haven’t already reached your full audience. For the creator, there are major benefits to this new model:
- You don’t necessarily have to have a good plan. Traditionally, potential investors will scrutinize your plan, suggest improvements, and in some cases tell you there is no chance for your product to survive. You don’t have to prove yourself to anyone.
- You don’t owe anyone anything. As long as you can fulfill your pledge premiums, you don’t have to return any of the money you collect, you don’t have to share ownership with investors, and you don’t have to answer to partners you never wanted in the first place.
- You’ve reduced your start-up risk. When you invest your own time and money on an untested project, you could lose it all if your plan doesn’t succeed. Now creators are risking other people’s money, which can be positive or negative. If a project doesn’t reach its goal, the consumers can receive their refund quickly; if a project reaches its goal but the creators aren’t able to produce what is expected, the creator has to come up with the money for refunds, and Kickstarter itself doesn’t guarantee anything.
- You have a good idea of the audience. If the world responds well to your Kickstarter campaign (or other crowdfunding attempts), then you have solid proof of your ability to reach a particular audience.
For these reasons, some very successful creators have turned to crowdfunding. I wrote about Amanda Palmer’s success a few months ago. She is a musician and performer with a very strong fan base. She used Kickstarter to raise $1.2 million (with an initial goal of just $100,000) to produce a new album, art book, and tour. Traditionally, funding projects like these have been the responsibility of record labels, who have in turn used investors’ money. The music industry has been changing, and many are less likely to fund tours for musicians who are not in the top ten in any particular popular genre.
By raising capital on their own, artists have more say in how their media is created. With less studio input into the form of the music, the output is much more authentic. While I was concerned at first that a popular artist like Amanda Palmer might be using her fans to take much more money than she needed for this project — a label would fund the bare minimum — I’d be more concerned if someone as mainstream as Taylor Swift, for example, were to attempt to use crowdfunding.
The CW television network ran a series called Veronica Mars, and the program generated a loyal community of fans. The show was canceled years ago, but the original producer saw that fans continued to be engaged in the show. The network permitted the show’s creator, Rob Thomas, to use crowdfunding to determine whether there was support for producing something new — a Veronica Mars movie.
The Veronica Mars campaign became the fastest Kickstarter project to reach $1 million in funding, only four hours and twenty-four minutes after it was announced, and then became the first project on the website to ever achieve $2 million in pledges. The project currently stands at $3.6 million with 25 days left in the campaign.
Fans who pledge $10 to the Veronica Mars campaign receive a PDF of the script; the one backer who pledged $10,000 or more will receive a speaking role in the Veronica Mars movie.
The $3.6 million should be sufficient for producing a Veronica Mars movie, but using just money from fans was not the original intention. Warner Brothers would likely have sought other investors to fund the movie’s production had it brought in only its goal of $2 million, taking the full funding as an indication the movie could find an audience and be profitable. But if funding continues at this pace, the Kickstarter campaign is likely all that will be needed.
While this is another example of a great use of crowdfunding by well-seasoned producers, but it seems to be the opposite of the core mission of Kickstarter. Veronica Mars is not a start-up, looking to sell an audience on its idea. These aren’t scrappy filmmakers scrounging to find just a little bit of funding to move forward with their creative process. Warner Brothers is a big entity, and while the film industry may not be thriving, there are certainly more opportunities for investors than turning to fans. With the public paying attention to these big campaigns, there’s a bigger chance of missing opportunities to fund smaller projects that have no other avenues for raising capital.
In the end, everyone gets what they want. Even if the Veronica Mars movie isn’t a hit, the funders receive their DVD copies or other memorabilia, the fans are satisfied with the movie as long as it’s good, and if producers finish the movie and send out the premiums without using all of the money from Kickstarter, the rest is profit, in addition to profit from any sales after the fact. Best of all, the producers get around their responsibility to more sophisticated investors, who want to review financial plans for quality, claim ownership or a percentage of the profits, and have some say in how the project is produced.
Fans don’t want that; they just want their DVDs.
Do Kickstarter campaigns (or similar crowdfunding attempts on other sites) take advantage of fans’ willingness to spend money? Or is crowdfunding just a more efficient way of creating products and getting them to consumers, without involving too many other parties?
Published or updated March 18, 2013.