This is a pretty straightforward value proposition. Kickstarter can be thought of as an intermediary, a virtual place for people who are interested in cool projects to meet with people who have cool projects and need money. There are all sorts of interesting facets to this site but I want to focus on what we can learn about deal design -- and not just for people on Kickstarter itself.
A key part of a Kickstarter deal is that the project owner specifies a minimum amount they need to raise and all pledges are conditional on that target being met. If it's going to cost you $10,000 to do your project you can set that as your target. If your combined sponsor pledges are $10,000 or less then the sponsors are charged and your project goes ahead. If the pledges are less than $10,000 then the project doesn't go ahead. (Of course, you're not required to set your target at the cost of doing the project. More on that later.)
This simple facet offers some substantial benefits. Most obviously, it reduces risk. Instead of investing money up front and hoping to recoup that investment, the seller can pre-sell her project. Risk is reduced for the buyer, too -- if he sees a project he likes he can make a pledge and then continue to learn about it, potentially increasing (or retracting) his pledge.
A more subtle benefit is the interaction it enables between seller and buyers. Because a project's sponsorship period lasts for a period of weeks, the seller gets an excellent opportunity to connect with buyers and to customize her offering to their wants. A conventional product launch requires much more time before feedback from early adopters can be incorporated. A Kickstarter deal is more like a software project with beta testers providing immediate feedback before the "real" launch.
Third, a Kickstarter approach enables potential customers to see other potential customers. This can offer psychological benefits for the seller (it's well-documented that people are more apt to buy something that they believe is popular) but in some cases the visibility of other customers creates tangible value in and of itself.
Let's take a step back from the website to see how this approach can be applied elsewhere. Sadly the deal I'm going to discuss was not successful, but a "Kickstarter" approach increased my chances of success from zero to something reasonable and kept my personal risk very low.
Some years ago I thought it could be very interesting to help young job seekers understand potential career paths. My concept was to do in-depth video interviews with people at different points along a particular path, exploring the measures of success, the rewards and challenges and how they changed as someone advanced within the company or field.
After consulting with a number of people in the recruiting field I concluded that charging users was a non-starter and that hoping for sufficient ad revenues was dubious and highly risky -- but that companies that recruited a lot of people out of school might pay to be part of the service. These firms spend millions on recruiting and getting the right people is very important for them.
I refined my pitch and got a meeting with senior recruiting partners at McKinsey and Boston Consulting Group. I didn't ask them to sign up but rather to explore the concept with me. They connected me with the right people at Bain Consulting. Having those three firms interested in the project made it easy to have the right conversations with other leading consulting firms.
During those discussions I got very useful feedback on what each firm wanted. Each agreed that they wanted a service that included only the best firms their peers. A small boutique firm could be acceptable if it had an excellent reputation but they didn't want to be alongside second-tier firms. (This would extend to other fields as well.) Other wants were varied. One firm really valued the ability to connect with top students at smaller colleges or graduate programs; another had a laser focus on a very small number of schools and only wanted to increase their presence at those schools. The service morphed considerably from what I'd first envisioned, becoming potentially more valuable to my clients.
In the end, the project didn't go ahead. The legal and marketing departments of the firms each wanted a level of control over content that I thought would undermine the project (the recruiters agreed with me) and one of the key firms decided not to go forward. This was a disappointment, obviously but the approach had made success possible...and all I lost was my time.
In thinking about whether and how to apply a Kickstarter structure to negotiations, consider the following questions:
1. How useful will it be to get indications of interest from potential counterparties? Are people more likely to be interested if they see that their peers (or rivals) are interested?
2. How valuable do you think feedback will be and how can you set things up to get the most useful feedback?
3. How do you close the deal?
The last question is important, because it's very easy for a Kickstarter-style conversation to keep moving forward but never cross the finish line. Kickstarter deals with this in the most obvious way; it has a deadline. Unsurprisingly, projects tend to get most of their pledges shortly after launch and right as the project closes. Think about how you can convert interest into closure.
Kickstarter within a Kickstarter?
I'm going to end with an anecdote that I think illustrates not only the power of the Kickstarter approach but more generally how useful it can be to think openly about deal design and negotiation.
I was working with a client on raising equity investment for a start-up business. He had a good team and an exciting initial product that had the potential to be a home run success but also entailed considerable risk. He had found a group of angel investors that were ready to put up the seed money, but only at a valuation he couldn't accept. He needed a way to increase the perceived value of the deal.
We discussed Kickstarter and unsurprisingly he was already planning to use it in his launch. The snag was that Kickstarter alone was unlikely to meet his full funding needs, creating a risk that even a successful Kickstarter launch (say, one that raised a third of what he needed) would create fundraising problems because he would need to raise the rest of the money quickly enough to continue product development aggressively.
My suggestion was to pitch an investment agreement that would be contingent on the Kickstarter launch hitting an ambitious target. That is, the investors would agree to a more favorable valuation (i.e. get a smaller piece of the company) but their investment commitment would be contingent on a Kickstarter result that would merit that higher valuation. (Contingent agreements like this are often a good solution to different expectations about the future, e.g. how successful a product or company will be.)
Again, this approach does not have to involve Kickstarter itself. Imagine a start-up that has received interest from a VC firm and from a few potential big clients. The VCs are reluctant to invest until the firm has at least one large client but the clients don't want to commit to a service from an unfunded startup. A contingent agreement might be a natural solution; if the clients know that the VC is in if they are, the deal is much more attractive. (In practice, of course, VCs will often take the initiative in making this happen.)