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How Kickstarter Works

        Money | Business Profiles

The Kickstarter Model

The idea for Kickstarter was first conceived back in 2002, as co-founder Perry Chen tried to figure out how to raise money for a concert he wanted to produce in New Orleans. He knew the Internet was the key to soliciting small donations, but he and his partners Yancey Strickler and Charles Adler couldn't figure out how exactly how the site would work -- namely, how to get the most people to donate to random creative causes [source: Walker].

In the meantime, other crowdfunding sites threw their hats into the ring. A site called let teachers and educators post projects for their schools and solicit funding from supportive strangers. turned ordinary citizens into microlenders for third-world businesses. And sites like Sellaband and IndieGoGo draw crowdfunding for music and film projects respectively [source: Walker].

When Kickstarter finally launched in 2009, it did so with some effective new twists on the crowdfunding model. First, Kickstarter would be exclusively for creative projects. No charities, no "pay my rent" or "pay my tuition" solicitations, no startup funding for vague business plans, nothing that didn't have to do with the funding of a clearly defined creative project with a tangible final product.

But the second twist has proven to be the most powerful. On other sites like IndieGoGo (which now solicits funding for all sorts of projects), participants set a funding goal, but even if that goal isn't reached, they still get to keep the money they raised (minus a 9 percent commission). Kickstarter imposes a strict all-or-nothing policy: Backers of your project pledge a certain amount of money, but you only get that money if the total amount of pledges reaches or exceeds your funding goal. You either get 100 percent funding for your project or nothing at all. Likewise, Kickstarter only collects its 5 percent commission if you reach your funding goal.

According to Kickstarter, the all-or-nothing policy has several advantages for both creators and backers. For creators, it allows them to pitch an idea for a project without risk. If they don't get full funding, they move on to the next idea. If they do get full funding, they have all the money they need to complete the project. The danger of partial funding is that you only have enough to create an inferior product, which alienates investors. For backers, you know that your money will only be spent if the project gets a green light. You're not tossing money into a tip jar; you're investing in a tangible product with tangible returns.

Which brings us to the next important twist of Kickstarter: Creators are required to offer rewards to backers. There are different rewards for differing funding levels. A typical $25 reward is a copy of the product itself, such as a CD of the new album or a DVD of the documentary. Larger donations might win you a mention in the liner notes or even a producer credit on the film. Big-time donations can lead to a dinner with the author or a personal tour of Tokyo's art galleries.

In this way, the rewards system acts like a pre-order mechanism. Pay $25 now and you'll get this product that will eventually retail for $40. But on an emotional level, the Kickstarter system connects people with the artistic process. Backers can become early supporters of an artist and a project that they believe in, and that alone can be thrilling enough to fork over $25 [source: The Economist].

Now let's take a closer look at what qualifies as a Kickstarter project, as well as a look at some of the most successful projects to date.