The success of Kickstarter – or more exactly, the success of the companies that raise money on Kickstarter – is surprising to many of us in the industry.
I have represented companies trying to raise money for many years. I have given many lectures about raising money. One of my central messages: it is hard to raise money.
The founder of MCI, the former long-distance company, said that MCI was really in three different businesses at three different stages of its life. First it was in the business of fighting for access to AT&T’s phone lines. All the focus and energy of the company was devoted to that litigation because without access to the lines, the long-distance service would never have been born. Next came the business of raising money, an extremely difficult task that consumed all of the attention of management for a long time. Only after those two businesses had been successful could MCI be in the business of providing long-distance phone service.
Having represented many companies raising money, his story rings true for me. A typical entrepreneur creates a business plan, jumps through all the hoops of the securities laws, attends a hundred seminars and networking events, offers investors a good chunk of the company, and only then, if he or she is lucky, is able to raise money.
In contrast, the companies raising money on Kickstarter offer donors no stock or other financial return on their investment, because they are not allowed to legally. And yet many Kickstarter companies are successful, which leaves many of us veterans scratching our heads.
Why do people give money to Kickstarter companies? And will they continue to?
Like Facebook and many other social websites, Kickstarter gives users the feeling of participating in a community. And many of the companies on Kickstarter – though not all – are for good causes. Does participating in a community and doing good stuff attract people?
Does Kickstarter attract donors because it is new and cool? Will that wear off? Is the Kickstarter business model sustainable?
I wonder what, if anything, the Kickstarter model tells us about “real” Crowdfunding under the JOBS Act, where investors buy stock hoping to turn a profit. I expect that Crowdfunding will get off to a quick start also. I suspect that the most successful Crowdfunding companies, and the most successful portals, will be those that match the community and excitement of Kickstarter. Conversely, companies and portals that ignore the “newness” of the medium and use the old, boring model of the existing investment world might have less success, at least in the short term.
It’s an interesting puzzle. If you have any ideas I would be very happy to hear from you.
Questions? Let me know.