Imagine you get an e-mail from someone you barely know, or don’t know at all, asking you for money. They want you to help them make a documentary or fund the research and development of a brilliant new product they’ve thought up. And for your investment, they’re offering you, well, nothing. Other than the satisfaction of, hopefully, seeing the film or the product made.
That may sound like a nonstarter, but in fact that’s the business model of Kickstarter, the most successful of an increasingly large number of websites devoted to finding backing for new creative or business projects through what’s called crowdfunding.
Kickstarter’s business plan is simple: people go to the site or receive e-mail solicitations about certain proposed projects, and if the pitch appeals to them and they want to see the idea — be it a film, a rock opera or a children’s toy — realized, then they toss their small donation into the digital hat. Unlike traditional investors, Kickstarter donors receive no return on their investment and have no legal stake in the product.
The crowdfunding movement began in the late 1990s and early 2000s when people working in the music and film industries started successfully asking fans for help in funding their work. This way of raising capital has now grown to the point where it’s no longer just aspiring indie bands seeking help: award-winning screenwriters like Charlie Kaufman and musicians like Amanda Palmer are successfully using Kickstarter to fund movies, albums and tours.
But Kickstarter’s organic success and huge growth has led to problems. Like some other crowdfunding sites, Kickstarter has faced criticism from users for its lack of accountability. It is, some say, too easy for someone with an apparently good idea to ask for and receive the generosity of strangers — and then disappear. Kickstarter, which takes a 5% cut of the funds raised by successful projects, offers no safety net for users who have been exploited in this way.
TIME’s tech editor-at-large Harry McCracken looked into the high-profile website and revealed why the risk in investing in unknown projects is part of its appeal and how it’s keen to be seen differently from other crowdfunding sites. TIME spoke with McCracken to get the story behind the story.
What drew you to doing a story on Kickstarter?
My editor and I started talking about it a few months ago, and TIME got excited about it, as it sits at that intersection between culture, technology and business, which I think makes it very interesting. Also, things are happening rather quickly in the area of crowdfunding, particularly with the JOBS [Jumpstart Our Business Startups] Act, the law relaxing security regulations for small businesses. The hope is that it could, by relaxing some of the red tape small businesses face, encourage economic growth. So one of the basic questions we wanted to ask is: Can crowdfunding of the Kickstarter type go beyond music and movies and help to prop up the economy? There is also the fact that it is creeping into common knowledge, and more and more people are aware of it, but no one really knows what it’s about. I started off knowing as much as maybe the average person does about it.
As you reported the story, what did you learn about the company that surprised you?
One of the things that became apparent very quickly was that the company has strong feelings about itself, what it wants to be and what it doesn’t want to be. As I talked to them, I found it interesting how they preferred to talk about music albums and board games rather than the projects that get a lot of attention like Pebble, the smart watch with an electronic-paper screen. Another lesson is that every tale is different. Perhaps five or six of its projects are well known, but they are the tip of the iceberg. And in many ways they are not representative of that whole iceberg. Actually, it’s a hugely diverse group of projects and creative individuals who are trying to realize very different things, be it a tour or creating artisanal jam.
How long did you spend with the founders?
I spent a day there and talked quite a bit with the people at the company. They are based in New York [City], which is quite interesting in itself. The office is on the Lower East Side, in this area where not many other tech start-ups are based. Their office has a lot of personality, though — the whole space feels sort of handcrafted. They have these tables that are made out of reclaimed wood from old barns. They also discovered that there was old graffiti on the walls in their building, and rather than remove it, they’ve kept it. It’s also interesting that some of the people who work there were actually creators of Kickstarter projects. It’s full of musicians, filmmakers and artists. You get a real sense that these are creative people who genuinely believe in the company they themselves have benefited from.
Did you sense some skepticism or suspicion of it on the part of venture capitalists?
Venture capitalists, like everyone else interested in it, see something in it. But a lot of them say that these are not the kinds of projects they would want to fund. They prefer to fund websites rather than consumer-hardware products like toys, where production problems can mean delays and so on.
Some people say Kickstarter sets well-meaning people up for a fall, that there’s no guarantee their money will be well spent.
It’s based on trust: you are depending on a person whom you back to do what they say they are going to do. The company doesn’t check out the project creators. You put up some money, and there’s a risk that you might not get anything out of it.