Kickstarter, a New York City–based website originally founded to support creative projects, has become a force in financing technology startups. Entrepreneurs have used the site to raise hundreds of thousands of dollars at a time to develop and produce products, including a networked home sensing system and a kit that prints three-dimensional objects (see Hack).
This crowdfunding model offers an alternative to traditional means of raising startup funds for some types of businesses, such as Web or design firms. Startups keep their equity, maintain full control over strategy, and gain a committed community of early adopters to boot.
While most projects ask for relatively small amounts, several have exceeded the $1 million mark. Most notably, Double Fine Productions raised over $3 million to develop a video game. That’s well beyond the typical angel stake, which generally tops out at $600,000, and into the realm of the typical venture capital infusion.
Overall, Kickstarter users pledged nearly $99.3 million for projects last year—an amount roughly equivalent to 10 percent of all seed investment in the United States, which PricewaterhouseCoopers estimates at $920 million.
People seeking to raise money for a project set a funding target and solicit pledges. If a project fails to reach its target (as happened to about 54 percent of them in 2011), supporters pay nothing. For projects that do hit their target, donors receive a variety of rewards, including thank-you notes, products, or even elaborate packages that might include a visit to the creators’ place of work. Kickstarter, which was launched in 2009 by Yancey Strickler, Charles Adler, and Perry Chen, takes a 5 percent cut. Since the launch, the site has distributed over $150 million.
Kickstarter’s role could begin to shift with the end of the U.S. ban on private companies’ selling equity to small investors, which was lifted in April. Says Paul Kedrosky, a senior fellow at the Kauffman Foundation who focuses on risk capital: “If crowdfunding sites start offering equity shares, it will make a few dozen VC firms disappear.”