With its mission to help bring creative projects to life, Kickstarter helps finance creativity and innovation not just for art world elites but also for people that do not have a creative background, facilitating projects in various categories such as Art, Design, Journalism, Photography, and Theater.
Every Kickstarter project has a clear goal such as making an album or a book and the project creator keeps 100% ownership of their work. Since its launch in 2009, 18 million people have pledged over $4.9 billion to fund more than 180,000 Kickstarter projects.
But how exactly does Kickstarter work and make money?
Let’s find out, but before we do that, let’s have a look into its founding story.
How Kickstarter Started
The idea of Kickstarter came to Perry Chen after a failed concert due to monetary issues. At the time, he was living in New Orleans in late 2001 and was making a living as a musician.
He wanted to bring down the DJ duo Kruder & Dorfmeister to play a show during the 2002 Jazz Fest and had his plan all set up – he had found a great venue and even reached out to their management, except the concert never took place, because the cost was too much.
This inspired Chen to come up with the idea of a platform where fans could pledge money if they had enough interest in a particular project and would even get rewards for contributing. But Chen didn’t immediately start working on the idea because he was focussed on making music.
In 2005, Chen moved back home to New York City and met Yancey Strickler, who became his friend and joined him in brainstorming to come up with a rough design of the site. They then came across Charles Adler who joined them in their endeavour, and after months of collaboration, they ended up with wireframes and specifications for the site.
Subsequently came a few years when not much happened but their driving force, which was the thought, “This should exist,” eventually led the three founders to build their team in 2008, amid an economic crisis.
Finally, on April 28th, 2009, Kickstarter came to fruition when it was officially launched to the public. Projects instantly began to trickle in, and they were flooded with emails from people using or wanting to use Kickstarter.
Just within a few days of its launch, Darkpony’s ‘Drawing for Dollars’ became the first Kickstarter project to be successfully funded, and it raised $35 with the reward being one of his sketches.
Then in a few weeks, a young singer-songwriter launched a project to fund her album ‘Allison Weiss Was Right All Along’ and her video was captivating in a way that project videos hadn’t been up to that point, garnering funds all in one day. She used Kickstarter in a way that they had always dreamed of. In Chen’s words, “This was the moment Kickstarter was truly alive.”
Thereafter, Kickstarter’s awareness and usage skyrocketed, and they hit a milestone in 2012 after two of its projects – Elevation Dock for the iPhone and Tim Schafer’s Double Fine Adventure, reached $1 million in donations for the very first time.
In October, the same year, they expanded their operations to include the United Kingdom, following it with expansion into Canada, New Zealand, and Australia in 2013, and European countries like Ireland and Denmark as well as Spain in 2014.
Kickstarter does not currently have a dedicated partner program, but they have on occasion partnered with various organizations, cultural institutions, and other entities that are aligned with their creative interests.
In 2015, the New York Times partnered with Kickstarter to create Kickstarter-branded documentaries to be featured on its homepage as well as YouTube channel.
Today, Kickstarter projects have even won Grammys and Oscars, and Hank Willis Thomas and For Freedoms’ political billboard project across all 50 states became the largest creative collaboration in U.S. history.
Kickstarter’s Business Model
Kickstarter is so committed to their mission that became a Public Benefit Corporation in 2015. However, Kickstarter is still a for-profit business, and it operates on a multi-sided business model that has successfully combined the two business models of crowdfunding and online marketplace.
It comprises of two customer segments:
- Creators: The creators are individuals or groups with a clear goal that request funding for their project.
- Backers: The backers are the users who pledge money for the funding of the creators’ projects.
At any moment on Kickstarter, there are thousands of creative projects being funded and the creators which can be filmmakers, musicians, or artists, have complete control over their projects as well as the responsibility to complete them. They pre-plan their projects, shooting videos or brainstorming on what rewards to give to the backers, and then finally launch their project and share it with their community.
Kickstarter neither guarantees nor investigates a creator’s ability to complete their project. It’s up to the backers to decide which project is worth investing in. These backers either support the project voluntarily or pledge money to gain rewards, which can be in the form of free products, offers, event invites, etc.
In 2009, Kickstarter launched the all-or-nothing model to protect the creators and minimize risk, through which funds are released only after a project meets its funding goal so that the creators have enough money to complete their project and aren’t expected to do so without adequate funds. This strategy also ensures that the backers are investing in creative ideas that are guaranteed to be a success.
The project creators have complete control over all-or-nothing funding. They set their project’s funding goal and fundraising deadline, which is locked in once they launch their project. If the project succeeds in reaching its funding goal during the fixed duration, then the backers’ credit cards are charged when the time expires, and the pledged amount is transferred to the creator’s account.
Kickstarter applies a 5% fee on all the projects that have been successfully funded. In addition to this, they charge a separate payment processing fee that varies in amount from 3% to 5% and all the pledges are securely processed through its third-party payments partner, Stripe. If the project does not reach its funding goal, then they do not charge any fees.
For example, for a successfully funded project in the United States, the Kickstarter fee is 5% of the total funds raised, and the payment processing fee is 3% + $0.20 per pledge. The pledges that are below $10 have a discounted micropledge fee of 5% + $0.05 per pledge.
So suppose a project has raised $10,000 from 100 pledges, then the creators will get $9,000, Kickstarter will get $500, and the payment processing fee (3% + $0.20 per pledge) will be $500.
Kickstarter also has a solid execution track record. While 12% of projects ended without having received a single pledge, 78% of the projects that raised more than 20% of their funding goal were successfully funded. Most projects that have been successfully funded raise less than $10,000 but a growing number of projects have also reached six, seven, and even eight-digit figures.
Kickstarter’s initial backer was David Cross and so far, according to Peter Kafka of All Things D, Kickstarter has raised $10 million in funding from investors including Union Square Ventures and Betaworks as well as several other noteworthy business angels such as Zach Klein, Caterina Fake, and Jack Dorsey.
When it comes to the economic impact of Kickstarter, over 300,000 part-time and full-time jobs have been created by its projects. According to a study by the University of Pennsylvania, creators have reported professional growth, greater earnings, and career advancement due to their Kickstarter projects.
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