Kickstarter vs Traditional Funding to Start a Company
As unknown undergrads on Kickstarter pitching an idea for an email client users would pay for, in January 2012, asking for $35,000 — our chances were… slim, at best. Somehow, after five weeks, we raised over $54k, received surprising praise in the New York Times, and walked away with a deeper understanding of crowdfunding and its role in spawning new ventures.
The big difference between all-or-nothing crowdfunding like Kickstarter compared to traditional funding is that the following three things happen or don’t happen, all together:
- Validate your idea and business model
- Grow a fanbase
- Get funding
Traditionally, those three things would not all happen at once. On Kickstarter, they all hit a tipping point together. If your idea is not validated, then you haven’t taken anyone’s money, and you’re not stuck with an obligation you’ve now learned you can’t fulfill.
On the other hand, if your idea is validated, and your project raises at least 100% of your goal — ideally at least what it’ll take to produce the project — you get the money, then, and only then, along with a crowd of fans. You’re only obligated as long as it makes enough to see the project through. What’s amazing about crowdfunding on Kickstarter is how low-risk it becomes.
This low risk allows you to test out crazy ideas, such as a conviction that the email market, dominated by a few free options, could have a newcomer with superior solutions to the the major problems plaguing users, and that people wouldn’t have a problem paying for that kind of innovation.
A few other pros:
4. Your best investors are your customers
5. Crowdfunding gives the market a voice
- Spreading an idea early opens the door to copy-cats. In our case, we did apply for a patent (though we decided early on to fight infringement with innovation, not litigation), and we did have our idea copied.
- Standing out. As crowdfunding has gotten more popular, and since the barrier of entry is low, the signal-to-noise ratio is tough. I do have a counter to this one though, and this may be selection bias as I only have the one experience from running a campaign, but I do believe that the campaigns that were well thought-out and received a lot of time investment on prep inherently stand out from those that people pop up in a few days to ‘see what happens’.