When Kickstarters Fail

[wraith808]

A great article (courtesy of MakeUseOf.com) about why Kickstarter's fail.  This isn't just about not getting funded, but also failure to deliver in a timely fashion, which is a problem of many successful kickstarters, especially the mega-successful ones, and other problems with estimation and expectations, which cause some kickstarters to under-deliver as they don't actually have the funds to deliver the entire product.

TL;DR summation from the article itself (and a great quote included before the conclusion)

These changes seem sensible, yet the title of the blog post (“Kickstarter is not a store”) misses the point. The real issue is not contributor expectations but instead the burden of success. Project creators are beginning to understand that realizing a dream is sometimes more frightening than failure, which may be why there’s been a noticeable upward trend in the funding projects are asking for. Kickstarter could solve this by implementing a funding cap that allowed creators to keep projects manageable, but that would cut in to the company’s profits.

Conclusion

In talking with Tyler, Dylan and Georgia it became clear that Kickstarter, though potentially an incredible platform, is no magic bullet. The effort required to put up a good project is substantial and many projects have no reasonable chance of success without weeks of work by the project’s creators.

Talking with these individuals has also given me a sense that Kickstarter is a force of both creation and destruction. An extremely successful project can be life-changing for its creator, but failure implies the world has found the project worthless. This chaos allows for incredible creativity and success but also can take a toll on the people involved.

As the flood of money into crowd-funding continues both contributors and creators are at risk of forgetting that this movement is about people, not products. The people we fund, the platforms we support and the rewards we demand will shape the future crowd-funding, and perhaps even our economy.

[40hz]

Excellent article and a must read for anybody thinking of seeking or contributing cash through a Kickstarter project.

I was a little surprised and disappointed when I read this in the article:

Kickstarter intentionally makes failure a hard thought to stumble on. Its website does not show failed projects unless they’re specifically asked for and the company directs search engine crawlers away from them. Estimating the number of failed projects is difficult because of these tactics, but most independent attempts to pinpoint the figure have landed at 50% or more.

That's a bit disingenuous on Kickstarter's part. And considering they may be considered in the business of publicizing and facilitating investment opportunities, they're skating on thin ice with state and federal laws and regulators.

So it goes.

[wraith808]

That's a bit disingenuous on Kickstarter's part. And considering they may be considered in the business of publicizing and facilitating investment opportunities, they're skating on thin ice with state and federal laws and regulators.

Is that true though?  It's a failure of the project in terms of a failure to get funding.  That's not a consideration for investors- but rather a consideration for those listing their KS there, right?

[40hz]

That's a bit disingenuous on Kickstarter's part. And considering they may be considered in the business of publicizing and facilitating investment opportunities, they're skating on thin ice with state and federal laws and regulators.

Is that true though?  It's a failure of the project in terms of a failure to get funding.  That's not a consideration for investors- but rather a consideration for those listing their KS there, right?

Um. No. Previous track record is important. Both for the individual and the venue soliciting investments or contributions - or whatever you want to call a Kickstarter "pledge." Angel investors and VCs are very interested in industry trends, failure rates, key ratios, and the personal track record of the individual soliciting startup funding. As are most non-amateur investors.

A business is a failure if you can't secure funding for it. If regular business startups can't secure sufficient seed capital or later round financing it's counted as a business failure. Many new businesses never even get off the ground. A bunch of cash goes into the startup and it never opens its doors before it runs out of money. It's a net loss to the investors who are usually friends and family. How is something like that (which has always been considered a "failure" in any business circle I've ever been in) different if Kickstarter was involved. Same thing to me unless I'm missing something. (Always a good possibility with me.)

[wraith808]

But Kickstarter isn't really involved, other than being a forum for submissions.  It's like if I posted something on DC regarding wanting funding for something- sure DC is place where I can put things, but how does the success or failure of that venture reflect on DC?  Or on any future posts?  That failure reflects on the business posting the proposition- not the forum where it's posted, other than this is a good or bad place to post my venture, right?

It's a little bit different with places like YCombinator that actually invest in the startups and groom them.  They are putting a certain amount of their own reputation and resources behind any that they accept.  But Kickstarter actively separates themselves from those that ask for funding.  The success or failure of any posting is a reflection on that business only, IMO.

[40hz]

I guess I'm more of the "in for a penny, in for a pound" school of thought when it comes to things like this. And from some of the noise I'm hearing, so is the SEC.

Of course it also begs the question of why Kickstarter makes finding failure stats so difficult for projects hosted on their site. I think the answer is fairly easy to figure out. Which is why I took care to characterize their behavior as "disingenuous" rather than "dishonest" earlier.

But there is proposed legislation that may soon have a significant bearing on crowdsourced funding projects. Here's one legal opinion on it.

It's long

<Link to original page here.>

Kickstarter, to date, has been operating based on the general belief that contributors are not purchasing securities (i.e. a profit interest in any of the companies in which they contribute funds) under the current methods used to raise funds on Kickstarter and similar funding sites. These fund sourcing sites do not purport to be an intermediary for a company's offer and sale of its securities, but instead companies only agree to provide contributors with something of value, in consideration for their contributions - in this case a Pebble wristwatch. Based on the assumption that such transactions do not constitute investments in securities, it does not appear to be regulated under U.S. securities laws.

Now that new crowdfunding laws are scheduled to go into effect sometime within the next 245 days, crowd sourcing sites like Kickstarter will need to be more aware of the methods used to raise funds on their sites to assure that they are not subject to regulation under the crowdfunding laws, or, if necessary, that the sites are properly registered and all transactions are conducted in compliance with applicable crowdfunding laws.

Interestingly, even though the article was written after the JOBS Act was signed into law by the President, there is no mention, in the article, of these new crowdfunding provisions. It is possible that the author of the article, as well as Kickstarter and similar crowd sourcing sites, are not yet convinced that crowdfunding, as provided under the provisions of the JOBS Act, will become a viable means of raising capital. For starters, it limits the total amount a company can raise during any 12-month period to $1 million, which is $6 million less than the amount of funds raised by the watch company through Kickstarter.

Also, if the digital watch company - Pebble - had been able to raise $1 million pursuant to the equity crowdfunding laws included in the JOBS Act, at the time these funds were raised, it would have been required to have audited financial statements and also be required to make certain disclosures to the SEC. Finally, Kickstarter, or any other funding portal through which the funds were raised, would be required to register with the SEC. It appears that those with an interest in providing services as funding portals under the new crowdfunding laws, including existing crowd sourcing sites like Kickstarter, are going to wait for a final determination of the registration requirements, before making any decisions on whether to register with the SEC as a funding portal.

I'm not crazy about regulations. And I think the government is more than a little behind the times when it comes to much in the modern global economy. But in this particular case, I can see why they are concerned. And there are governing laws for this sort of thing. You can't just put something together to do an end run around them and expect nothing to happen. You're bound by the law whether you agree with it or not. Much like Copyleft and Creative Commons. Those who originally put those together intended for them to be alternatives to a standard copyright. "Not so!" said Uncle Sam. You have a legal copyright whether you want one or not. If it amuses you to also do a CC on some creative work you've done, that's all well and good. But it supplements a standard copyright. It does not act as an "alternative" or "replacement" for one. You always have copyright protection. There is no provision in the law that allows you to waive it.

[wraith808]

But in this particular case, I can see why they are concerned. And there are governing laws for this sort of thing. You can't just put something together to do an end run around them and expect nothing to happen.

I'd have to disagree on this point.  And I think they're being disingenuous, truthfully.  They only reason that they're concerned is because of the volume.  The same sort of thing has been done before, it's just not been (as) successful, other than (arguably) in the case of charities.  And for the level of individual 'investment', and the fact that they are decidedly not dealing with a monetary concern, they should be more concerned for Wall Street than Kickstarter (and they're talking about repealing those if Romney gets into office as they are 'too constricting').

[40hz]

They only reason that they're concerned is because of the volume.

That's the only reason we're concerned about anything really. Below a certain "noise level" nothing is ever much of a big deal.

But hardly disingenuous. I think this is more an act of recognition than a desire to regulate. It's an acknowledgement that crowdfunding may indeed be the next big thing in business or project financing. So there's the potential for large amounts of money to change hands with a fair degree of regularity if it really takes off. And I think most of the legislation I'm seeing proposed is intended to be proactive. I don't see some big conspiracy with Wall Street and big banking looking for ways to torpedo something like Kickstarter. They would love to see informal off-book arrangements like this become the norm. Because they want to be out from under regulation more than the most rabid libertarian ever did. It's not about principle either. Regulation is costing financiers money as well as denying them the "flexibility" to run roughshod over good business practices.

If Kickstarter really takes off, the VC world willl just copy it - or buy it outright. There's nothing that's remotely proprietary in Kickstarter's non-business model, so there's no IP to get around.

No. I don't have a problem with some thought being given to oversight when it comes to crowdfunding. I know too much about how business gets done, and how aggressive business finance can be to ever trust it to self-regulate. Because even with regulations in place they constantly push the boundaries of the rules. And the current state of our domestic economy bears mute testimony (and some scars) to what the lack of enforceable financial regulation can result in.

I'm all for laissez-faire capitalism. But not to the point of where I'm willing to give businesses carte blanche to do whatever they want. We already tried doing that. It doesn't work.

[alexsan01]

I wonder why Kickstarter does not implement a way o rate the project team. People who has funded their project could rate the level of communication the team developing the product has with their funder, how often the update with new information. I don't know, just a why to tell other potential funders if is good or not to fund this project. I know there's always a risk of failure even with this information but funders have to understand that they need to keep people updated.

[SeraphimLabs]

You guys might know this actually:

I have a project that's been in R&D at my own expense for the past 4 years or so, that is drawing near to the point where it is ready to patent.

It is developing a mechanical device- an engine like no other, and already has a prototype that demonstrates a successful concept even going as far as filling the testing area with the blue haze of the lubricating oil burning in the chamber because the test type lacks oil control.

Would Kickstarter be a suitable way to secure the funding for said project? I really need to fix some glaring errors in the design and construct an improved prototype, but also lack the money required to secure a patent on the design let alone promote any viable products to come from it.

[40hz]

A lot probably depends on your future plans and what sort of investors youll be looking for down the line. I could see some cases where doing a kickstarter might interfere with subsequent financing rounds. Then there's the issue of maintaining the necessary secrecy during development  until a patent can be secured.

Either way, I really think you need competent legal and business advice rather than a layman's opinion on something like this. You might want to start with the Small Business Administration and their SCORE advisors. You may even be eligible for federal technology grant funding depending.

Start with the SBA and go from there.

[iphigenie]

Another problem is that the energy and content that is needed to make a project sexy and successful on Kickstarter isn't at all similar to the energy and planning needed to build and launch a successful product and delivery...

[40hz]

Another problem is that the energy and content that is needed to make a project sexy and successful on Kickstarter isn't at all similar to the energy and planning needed to build and launch a successful product and delivery...

Excellent point!

Kickstarter does seem to lend itself more to a project-oriented feasibility study (or a "one-off" creative effort) than it does to the product development and start-up phases of a traditional business plan. As iphiginie pointed out, building and delivering product on an ongoing basis requires a different mindset and finance model.

[wraith808]

Kickstarter does seem to lend itself more to a project-oriented feasibility study (or a "one-off" creative effort) than it does to the product development and start-up phases of a traditional business plan. As iphiginie pointed out, building and delivering product on an ongoing basis requires a different mindset and finance model.

To this point, I've actually seen many established companies use KS (and to a lesser extent IndieGoGo) for this very purpose- to suss out interest in the product in KS rather than risking the money upfront.  I think this is one of the advantages of KS that isn't really touted.