Kickstarter: How It Works

26 Aug

What is Kickstarter?

Kickstarter is the most widely known crowd-funding source currently available. Scientists, inventors, writers, artists, musicians, film-makers, and others can all ask for money to finance their projects without going to a bank. Instead of asking for a loan or applying for a grant from an organization, people with ideas can go to individuals for money.

The Project Makers and Why They’re Asking You for Money

All projects have to produce a product of some kind, and it behooves project creators to present a business plan to possible investors, just as they would with a bank. These people have great ideas, great products, that may not get traditional investing or wouldn’t be of enough benefit financially for a bank or grant but could be beneficial to the creator and those the product is for without high return to the creator. By not going in for a traditional loan from a bank, creator’s do not have to worry about debt or interest rates on a possible loan to finance the project.

The Money

The money pledged needs to feed directly or indirectly into the creation of the project, either by financing supplies and parts for the project or financing labor on the project. Those who pledge their money never experience nor are entitled to a financial return of their money, with the exception of projects that fail after the funding period is over (i.e. the product was never completed).

The Funding

Project creators choose how long they have to reach a certain funding goal (ex: 30 days to reach $1000). People pledge money of certain amounts. If the funding goal is met within the funding period, Kickstarter collects (over two weeks) the money from those that pledged. If the funding goal is not met within the funding period, no money is collected.

The Payment

Successful projects are paid to the creator through Amazon Payments. Setting up this account is hard to do, especially for creators who use a pen name as one of Amazon’s processes for setting up a Payments account is identity verification. Even though Kickstarter has this as the last step of project creation, creators should set up this account before they do anything else, such as create their timeline and video, as it could push back their deadlines if problems occur.

The Video

All projects should have a video. Without one, projects can seem as though the creator has not thought the project through or haven’t given it much effort. Even just a quick, but professional, webcam video with the project creator can lend a project more credibility.

The Rewards

Rewards are what project backers get for pledging money. They have to be directly related to the project product. The indirect reward to backers is the hand they had in creating something that otherwise would not have happened.

The Product

It could be anything creative, from a new invention to a book to a music album. It cannot be charity. This is the main rule on acceptable projects.

The Campaign

Creators need to promote their projects both before and during the campaign launch. Without doing so, projects will not be successfully funded. Media organizations need to be contacted. A Facebook page should be created. An email chain needs to be started. People, companies, and organizations within the product’s industry need to be informed. This is the most intense part of project creation, and it helps to have multiple people on the project to help with the promotion. One person reaches less contacts than two or three people. Getting volunteers to help in this way before project launch is a good idea.

Fees and Taxes

Both Kickstarter and Amazon Payments take fees out of a project’s funding, so it is a good idea to account for this when deciding how much to ask for. A good formula is this: x=y-(zy+ay) with x being the amount the creator asks for, y being the amount the creator asks for, z being the Kickstarter fee (usually under 5%), and a being the Amazon Payments fee (also usually under 5%). There are online algebra calculators that can help a creator solve for x and know the exact amount to ask for. Taxes are a little trickier. It all depends on the state and what the funding is considered: is it a one time negligible gift or is it income? This is something all creators must consider before tax time and may wish to consult an expert in their state before filing their taxes to know if it should be claimed and how it should be claimed. Don’t let this great opportunity ruin you when you file.

Good Sources to Know More

The Kickstarter website is very detailed in it’s explanation of how to create projects, but I would suggest The Kickstarter Handbook: Real-Life Crowdfunding Success Stories. This book gives very detailed and practical advice.

My Opinion on Crowdfunding and Kickstarter

I believe crowdfunding is the beginning of a new kind of economic growth. Products that would never get made are being made because of crowdfunding and that is wonderful. People who would never be able to make their dreams come true based on more traditional forms of investment are seeing their dreams become reality. Crowdfunding is a new way to upward mobility, when banks are not helping on that front. This is great news.

Kickstarter is a big step in helping a lot of people and products get off the ground, but I don’t think it is versatile enough. I believe it could do more to help its project creators, such as have flexible funding. Fixed funding (all or nothing funding like Kickstarter) works best for STEM based projects; however, more arty projects need more flexible funding as they will almost always have supporters but will be less likely to have the widely based supporters (a bunch of supporters with a little bit of money but who want to someday buy the project) or supporters with a lot of money that STEM based projects do. The supporters of arty projects tend to know the project creator or feel the project appeals to them aesthetically. The wide types of supports of STEM based projects do not all have the same ideas aesthetically, meaning the same number of people would not all support an arty project, but instead would split their support among many different arty projects based solely on their aesthetic leanings. This means arty projects are less likely to be successfully funded but will have some people willing to give money that will be let down that the project creator will not be getting that money, but this is not to say that arty projects are never successfully funded on fixed funding, just that in comparison to STEM based projects they are less likely to be successfully funded. This is why I’m going to try the flexible funding available to IndieGoGo projects; after which, I will be posting on the differences between Kickstarter and IndieGoGo and how effective flexible funding is.

Have you tried a Kickstarter project? How did it go? Is it currently in its funding period? Have anything to add? Have you tried IndieGoGo? How’s it working out? Please let me know.

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Posted by on August 26, 2014 in Business of Writing


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