Kickstarter, the Crowdfunding Pioneer, Is Now a Public Benefit Corporation. What Has It Changed in Six Years?

So tell us: which crowdfunding projects have you backed? Did they all ship?

On Tuesday, the UN Refugee Agency's campaign on Kickstarter came to an end, having raised US$1.777 million in seven days.

"The UN Refugee Agency is working to remedy a global crisis. You can lend a helping hand." Kickstarter and the UN Refugee Agency launched the campaign together to raise money for Syrian refugees. It was the first charitable project since Kickstarter announced last month that it was becoming a public benefit corporation.

Besides the campaign banner on the homepage, other project pages also carried a large blue bar, taking up a tenth of the page, reminding visitors to help the refugees.

The Kickstarter page for the Syria campaign

Since its founding in April 2009, Kickstarter has built the model of internet crowdfunding from scratch. Crowdfunding means a creator posts an idea online, in any form, and persuades the public to chip in money in one way or another.

According to Kickstarter's latest figures, 9.6 million people worldwide have backed projects on what is now the world's largest crowdfunding platform, pledging more than US$2 billion in total. Pledges now exceed US$1,000 a minute, and at least 40 projects reach their funding goals every day.

In the news, Kickstarter usually turns up next to smart hardware, and its Chinese imitators, Demohour and JD.com Crowdfunding, look almost like online stores for smart gadgets. Yet in the six-plus years since Kickstarter was founded, hardware and tech products have never been its mainstream.

Besides hardware, what else is on Kickstarter?

Our picture of Kickstarter usually stops at tech hardware, but public data show that music, art and film are its largest categories, accounting for more than half of successfully funded projects, while games have long had the most campaigns.

Amanda Palmer, once an obscure musician, gave a TED talk called "The Art of Asking" about crowdfunding her new album on Kickstarter and ending up with US$1.2 million in support. After the campaign succeeded, she thanked her backers by throwing house parties for fans, and fulfilled her dream of going on tour.

Amanda Palmer's crowdfunding page

Others have crowdfunded personalized T-shirts, books, paintings, documentaries and more. The journalist Anderson used Kickstarter to finish shooting the independent film Wish I Was Here, which went on to open in cinemas; Xue Xiaolan, a mother, turned her experience of teaching her child Chinese into a book that won Wallpaper magazine's annual Life Innovation Award...

Yet among the 20 most-funded projects on Kickstarter, the top three are all tech hardware: the Pebble Time from 2015, the original Pebble from 2012, and the Coolest Cooler.

Tech projects have a success rate of only 20%, the lowest of any category. They also split sharply: a few popular projects that win heavy media coverage gather most of the money, while most of the rest fail. That is why we so often hear about Kickstarter's tech hardware.

How do these projects reach you?

Kickstarter could be founded and grow because the internet made information open and easy to spread.

In 2002, Perry Chen, one of the founders, planned to put on a DJ show with friends. But he could not be sure of selling enough tickets, nor could he raise the US$15,000 needed upfront.

The show fell through, but it set Perry thinking. Anything new carries risk; how could creative people get money to try things out first while keeping the risk low? If the show didn't happen, everyone would simply get their ticket money back.

In theory, the market holds many unmet niche demands, such as a personalized T-shirt or a CD with only the songs you like. In the past, no one knew how to find the people who wanted these things. Only with the internet did it become possible to bring like-minded people together.

Kickstarter's founders: Perry Chen on the left, Yancey Strickler on the right

In 2009, Perry met Yancey Strickler in a New York café. The two hit it off over the idea, and soon the Kickstarter website was born, with the mission of helping creative ideas become reality.

Suppose you have a great idea and want to crowdfund it on Kickstarter. What steps do you usually go through?

First, make sure your project fits one of Kickstarter's categories, since the site generally accepts only creative projects. If your project involves hardware, you also need a working prototype and a manufacturing plan.

Next, you submit a complete project plan to Kickstarter. For a phone case that charges from solar power, for example, you would submit its detailed specifications, manufacturing plan, screenshots, prototype and reward plan, ideally with a compelling video. Once Kickstarter approves it, you set the minimum funding amount and the deadline.

Finally comes promotion, and waiting. On Kickstarter, if a project fails, all the money goes back to backers and the creator gets nothing. If it succeeds, Kickstarter takes a 5% fee and transfers the rest to the creator.

What has Kickstarter changed in the world in six and a half years?

Kickstarter was originally set up to give a platform to music and film projects that the big record labels and Hollywood would not look at, as well as to art, theater, comics and fashion. So it encourages projects that would never sit on a supermarket shelf, made outside the factory assembly line.

It provides a place to show ideas and raise money, and takes no part in any stage of a project. Anyone can log on and present their ideas. Each project or product is its creator's responsibility, and the patent belongs to the creator too.

Under Kickstarter's "all or nothing" rule, a failed product may simply mean that too few people want it, which makes the campaign a form of market research. A successful one gives the creator early funding to take the first step toward realizing the idea.

Backers, as a product's first users, also get a sense of taking part in and creating something, and the pride that comes with it. They can give the creator suggestions in the community and spread the word to the people around them.

The Pebble smartwatch, which twice broke Kickstarter's funding record, is perhaps the best-known example. In April 2012, founder Eric Migicovsky and his team could not get venture capital for their hardware startup, Pebble, so they tried putting the product on Kickstarter.

To their surprise, they raised US$100,000 within two hours and passed US$1 million within a day. In the end they raised US$10.26 million.

Three years ago, Silicon Valley venture capitalists were wary of smartwatches, seeing them as an unproven market. Although Pebble had graduated from Y Combinator, the world's most influential startup accelerator, it still could not raise money. With nowhere else to turn, Pebble raised the money on Kickstarter and launched two generations of products. Whether smartwatches have a future is still unknown, but hundreds of thousands of Pebble users could buy the watch they wanted only because crowdfunding exists.

Not everything one person wants will suit hundreds of millions of others, and Kickstarter gives these niche dreams a chance to come true.

What other crowdfunding models has Kickstarter inspired?

After Kickstarter came product crowdfunding, equity crowdfunding, debt crowdfunding and charity crowdfunding.

Indiegogo is another crowdfunding site people often mention. It was founded a year before Kickstarter, and it places no restrictions on who can launch a project or what kind of project it is.

Indiegogo creators can also choose between an "all or nothing" model and a "flexible funding" model. Under the latter, the project owner keeps the pledges whether or not the goal is reached. Indiegogo then charges a commission of between 4% and 9%, depending on its rules.

In China, where the business environment is different, Demohour is basically an e-commerce pre-sale site for smart hardware. It focuses on launches and pre-sales of Chinese hardware, drawing in users with lower pre-order prices.

JD.com's crowdfunding platform has funded smart hardware and a Haomeimei band concert at the Workers' Stadium. In March this year it also launched a private equity crowdfunding platform that lets ordinary people invest in startups' equity. JD.com uses a "lead investor plus follow-on investors" model, in which the lead investor is usually a venture capital firm or a well-known angel investor.

Overseas equity crowdfunding platforms include FoundersClub, Crowdcube, Seedrs, Angels Den, Crowdfunder, Funding Tree and Investing Zone.

Take FoundersClub. It owes its existence to the US JOBS Act (Jumpstart Our Business Startups Act), which lets small investors into the market for startup equity, bringing in money beyond angels and venture capital firms.

The company works with the Y Combinator accelerator and 500 Startups. It picks strong projects that the accelerators have already screened, looking for startups with "high customer growth, promising profits, investor enthusiasm and other growth signals," and offers them to qualified investors.

Kickstarter has also spawned all kinds of niche crowdfunding sites: Experiment, which funds only scientific research; Pozible, which funds only creative producers; Crowdfunder, which scouts startups...

Did Kickstarter become a public benefit corporation because it can't make money?

No. Unlike tech startups that begin free or even pay users to come, Kickstarter takes a 5% fee from every successful project.

So far 93,925 Kickstarter projects have reached their funding goals, raising more than US$2 billion in total, which means the company has taken in about US$100 million in revenue over six years.

According to what the founders told The New York Times, Kickstarter has netted an average of US$5-10 million a year over the past three years.

Kickstarter has raised only one round of funding, US$11 million in 2011, from investors including Jack Dorsey, Twitter's new CEO, and the well-known startup investor Chris Dixon. Foursquare, another hot New York startup founded in 2009, has raised six rounds, about one a year, totaling US$160 million, and has yet to turn a profit.

Kickstarter has not sought more money. Although it inspired many other crowdfunding models, it has not tried to enter those markets, and it has no plans to expand or go public.

After Kickstarter converted to a public benefit corporation, one of its investors said the company has been profitable since its second year, that it has already given its founders, investors and employees ample returns, and that making money is not Kickstarter's goal.

But Kickstarter has little room to grow much bigger

Kickstarter takes its name from "kick start," the pedal that starts a motorcycle, and it has indeed helped tens of thousands of projects get going.

The problem is that once they are going, the vast majority of companies no longer need Kickstarter to raise more money.

A few of the teams that proved themselves on Kickstarter have grown, and some have even been acquired. But Kickstarter's funding takes no equity, so unlike venture capital, it cannot profit as these companies grow.

Oculus Rift, the virtual reality project that got its first money on Kickstarter, may be an even more telling example.

In 2012, Oculus Rift raised US$2.5 million on Kickstarter and used it to build its first development prototype.

With that money, the Oculus team grew until Facebook bought it for US$2 billion. Had its early backers taken a 7% stake, as the Y Combinator accelerator typically does, they would have collected US$140 million in the acquisition.

But neither Kickstarter nor those early backers got a cent from the Facebook deal.

Most Kickstarter projects raise between US$1,000 and US$9,000. Only 127 projects on Kickstarter have raised more than US$1 million, just 0.01% of all successful projects.

For established companies, Kickstarter matters more as a way to test ideas and get publicity. So although Kickstarter's projects, backers and money raised grow every year, its revenue will not explode.

What does it mean for Kickstarter to become a public benefit corporation?

A public benefit corporation (PBC) is not a charity. Kickstarter is still a for-profit company, but when it makes decisions it will weigh their social impact more, rather than simply doing what shareholders want.

A traditional company exists solely to maximize returns for its shareholders; a public benefit corporation is a compromise. Under its new charter, Kickstarter will give 5% of its after-tax profits to the arts and to fighting inequality, and it promises to stay transparent, reporting on its social and environmental performance every year.

The Syrian refugee fundraiser is Kickstarter's first charitable campaign. It breaks the rule that a project must have a product to go live, and perhaps one day Kickstarter will open a dedicated charity category.

In every other way, Kickstarter is not much different from an ordinary company, which means it will keep growing and keep making money.

It will not be another money-making miracle like Apple or Google. But Kickstarter, and the crowdfunding models it set off, have turned ideas that only a few people care about into reality. That's pretty good, isn't it?

Cover image from warholian