How Kickstarter Works

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 DonorsChoose.org let teachers and educators post projects for their schools and solicit funding from supportive strangers. Kiva.org 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.

Kickstarter calls itself a "funding platform for creative projects." That means that any project posted on the site must be creative in nature. According to Kickstarter project guidelines, "creative" means anything in the fields of art, comics, dance, design, fashion, film, food, games, music, photography, publishing, technology and theater. A Kickstarter project must also be a proposal for a project, not a sales pitch for an existing product or service. It isn't "Buy my DVD!" It's "Help fund my movie and I'll send you a DVD when it's done!"

Another interesting twist of the Kickstarter model is that you can't just pop onto the site, register and post your project. First you must submit a project proposal to the Kickstarter staff, which will review your idea and decide if it meets the Kickstarter project guidelines. According to co-founder Yancey Strickler, Kickstarter approves about half of the submissions it receives, filtering out charity solicitations and non-creative business ideas [source: The Economist].

The Kickstarter staff admits that some projects walk the line, and the approval criteria are constantly evolving. For example, the highest funded project yet on Kickstarter is for a sleek watchband that holds an iPod Nano. The project, launched by a small Chicago-based design firm, had a funding goal of $15,000, but eventually received almost $1 million in donations. In this case, a $25 donation got you a watchband that now sells for $39.95 at the Apple Store. So that million bucks was essentially a pre-order on a cool new product. Co-founder Yancey defends it as an artful design gone viral, but critics say it turns Kickstarter into an online retailer instead of a grassroots crowdfunding platform [source: Constant].

As of July 2011, Kickstarter had helped to successfully fund over 10,000 creative projects. Over 60 percent of successfully funded projects fall into the categories of music (3,110 projects) and film and video (3,048). But that doesn't stop folks from proposing some truly unique ideas, like the artist couple that wants to mail handwritten letters to every person on Earth (they've already successfully funded letter-writing campaigns to a village in Ireland and a neighborhood in Pittsburgh, Penn.). Or the guys designing retro lacrosse socks. Or the lady funding her 50-state trip to try every vegan restaurant in America. (They all got funded, by the way.)

Of course, not every project works out. In fact, more than 13,000 Kickstarter projects have failed to meet their funding goals. So what's the difference between a winning and losing Kickstarter pitch? More on the next page.

The difference between a successful and unsuccessful Kickstarter project starts with the idea. Catchy, unique, fun and inspiring ideas are always going to garner more attention. But even the best idea can fail if it isn't priced correctly and isn't "sold" well on the Kickstarter site and across other social media platforms.

If you project is approved, a Kickstarter rep will contact you and help you to figure out the right funding goal for your project and the best rewards to offer at different funding levels. It turns out that there's some math behind all of the creativity. For example, more than half of all successfully funded projects fall within the price range of $1,000 to $5,000, so if you want to increase your odds, choose a project with a budget in that price range [source: Kickstarter].

One successful Kickstarter suggests that you figure out the minimum scope of the project and calculate the minimum amount of money necessary to achieve it. Once you have that number, decide if it's a realistic amount to raise given your social network contacts and range of influence [source: Mod].

It turns out that the size of your social network is key to the success or failure of a Kickstarter project. Every successful project begins with an “anchor audience” of friends, family, fans and clients that are firmly within the creator’s social circle [source: The Economist]. If that circle includes the kind of people with spare cash to support creative endeavors, you have an advantage. The next step is to promote your project across popular social networking sites like Facebook and Twitter, providing project updates and easy ways for friends to spread the word.

Another key to a successful Kickstarter project is a good story. Kickstarter heartily encourages creators to make a video of their funding pitch. Kickstarter videos are a wonderful way to tell your personal story and make a humble plea for financial support. Most videos have a quirky sense of humor and a consciously low-budget aesthetic.

As for reward levels, Kickstarter has done the math on this one as well. The $25 level is the most popular donation, representing 18.41 percent of pledges. The $50 is the second most popular pledge at 13.57 percent of the total. Interestingly, donations of $100 have the biggest impact on total dollars raised, even though they make up less than 10 percent of pledges [source: Benenson]. What's the takeaway message? Stick with these contribution levels and you'll maximize your donations [source: The Economist]. And be creative with your rewards: Include higher pledge levels with really personalized prizes. You never know who you might hook. Interestingly, 94 percent of successfully funded projects exceed their funding goals [source: Kickstarter].

For lots more information about social networking and e-commerce sites, check out the links on the next page.