Kickstarter is the leading example of an exciting idea called crowdfunding. Crowdfunding is a twist on crowdsourcing, in which an organization uses the talents and time of hundreds, thousands or millions of people to create or improve a product or service [source: Dell]. Wikipedia is a prime example of crowdsourcing [source: The Economist]. Instead of hiring professional writers to research and write each encyclopedia entry, Wikipedia taps the collective knowledge of millions of users to create and edit the articles for free.
Similarly, Kickstarter uses crowdfunding to pay for creative projects by soliciting small donations from the "crowd," which are the anonymous patrons that visit the site. Kickstarter didn't invent crowdfunding: Different Web sites, blogs and charitable organizations have been perfecting the idea of so-called micropatronage since the mid-1990s. President Barack Obama funded 88 percent of his 2008 presidential campaign through individual donations, many of them small ($250 or less) and collected via the Internet.
But part of the reason Kickstarter has been so successful has to do with the subtle twists and restrictions it has imposed on the crowdfunding model.
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.
Disrupting Banking
As the U.S. jobs market continues its slow, not-very-impressive-but-nonetheless-forward march, one area of the economy still lags. Banks have only very recently begun to lend. Both individuals and small businesses have faced tight credit standards enforced by risk-averse banks; mortgages have been hard to obtain, and small business credit has been tighter yet. From 2008 to 2011, loans to small businesses fell 20 percent. The net effect has been to mute an already muted recovery.
These trends haven't been confined to the United States. Lending has been even tighter in Europe, particularly in stressed markets such as Spain. While there are some signs of a thaw, the days of easy credit spurring new and small entrepreneurs to create new and innovative companies seem increasingly of the past.
Or so the data points from the banking and credit industry tell us. What they don't tell us is that as traditional sources of credit and funding have withered, alternate sources have blossomed. We have been so focused on the negative shifts triggered by the financial crisis of 2008-09 that we may have neglected to notice some new and powerfully positive trends.
Take the case of Kickstarter. It may be no coincidence that the site launched in April 2009, just as the global credit crunch was reaching its apex (or nadir, depending on your perspective). With the almost complete evaporation of traditional forms of financing, especially for high-risk entrepreneurial projects with shoot-for-the-moon ambition, Kickstarter took an entirely different approach: It used the Web to connect people with ideas to people with money. In Kickstarter's case, however, the connection isn't to people with lots of money ‑ it's to anyone willing to put up a little bit for an idea that inspires, excites or intrigues.
Kickstarter is an exercise in what has been called "crowdfunding," and its numbers are startling. According to its own published numbers, since the site launched less than four years ago, 3 million people have pledged more than $400 million to 35,000 different successful projects. The majority of them have raised $1,000 to $10,000, but more than 400 projects have raised $100,000 to $1 million. The most successful projects have been clustered in the arts (especially film), but the largest project is a smartphone watch called the Pebble E-Paper Watch that is expected to launch sometime this year; its creators raised more than $10 million in pledges made by almost 70,000 people. The launch has had several delays, but that has little to do with funding.
There is every reason to suppose that this model is in its infancy. With the passage of the JOBS Act last year, many of the restrictions on raising money to finance private projects could be lifted as early as this year, making it that much easier to advertise. There are also numerous other crowdfunding sites focused on donations and non-profit ventures, but the surge in Kickstarter speaks to a fact that is all but lost in the focus on dwindling lending by traditional banks: We live in a world awash in capital, much of it inexpensive because of low interest rates. Rather than funding flowing in large chunks from a small numbers of banks, it can now flow in small chunks from a vast number of small investors looking to be a part of the next new thing.
This democratization of finance could in time have as revolutionary an effect on traditional lending and banking as digital music has had on the traditional recording industry. It is the ultimate disruptive model, simultaneously opening doors and threatening established gatekeepers. While Kickstarter doesn't yet challenge the mega-financing provided by investment banks to governments and multinational corporations, there are signs of cracks in that world as well, as large companies circumvent banks and market bonds directly to individual and institutional investors.
Take the recent example of Andrew Sullivan and his blog "The Daily Dish." At the beginning of the year, Sullivan decided that rather than hosting it at The Daily Beast, he would create a company called Dish Publishing with a unique twist. Rather than relying on subscriptions (the old magazine model) or pay-walls (the new model for digital publications), he would simply ask those who valued the site's content to pay $19.95 a year for total access in order to meet the company's overhead; those who don't subscribe can still access the site, but not all of it. In its first 24 hours, the site raised more than $300,000 from 11,000 people. When the site launched, Sullivan claimed it had raised half a million dollars.
For years the media have lamented that its revenues were eroding in the face of free content offered online. Print publications have been dying or shriveling, and online sites have been challenged to raise sufficient ad dollars to cover even a fraction of the overhead commanded by print. Content online may be easy to distribute relative to printed pages, but someone still has to generate it and publish it, and that requires money. Money has been in short-supply in the traditional media model, but Sullivan has shown with his elegantly simple experiment that when you stop banging your head against closed doors, you sometimes find that there's an open door just a few steps away.
The scale of all these new channels is tiny compared with what is disappearing or being disrupted. Then again, the numbers of people contributing money isn't small, and as broadband and computer literacy become even more widespread, the numbers could easily multiply.
These developments have occurred in a parallel and seemingly unconnected universe to that of traditional financing. Small business lending statistics take no account of Kickstarter and crowdfunding; Sullivan's experiment with The Dish has so startled traditional media that people are only beginning to understand how potent, powerful and perfect a model it might be - that is, when people pay something for content they value because they understand that everything costs something.
Dysfunctional banks and a sluggish recovery are known quantities. The potential efflorescence of democratized financing for tens of thousands of ventures wasn't much predicted, yet here it is. And if it gathers steam, it will undermine established channels, disrupt entrenched ways of doing businesses and unleash a wave of new businesses and new ideas that have only been lacking a kick start, and which the tired banks of the 20th century failed to see as a great untapped well of possibility.