Posts from crowdfunding

All Or Nothing vs Keep What You Raise

We’ve been investing in the crowdfunding market for a long time. My initial exposure to it was via the non-profit DonorsChoose where I am on the board and where my partner Brad and I made an early contribution to the fundraise which allowed them to go nationwide. That was almost ten years ago now.

There are two prevalent funding models in the crowdfunding market, all or nothing and keep what you raise. I prefer the all or nothing model and I think most funders do. DonorsChoose uses the all or nothing model and that’s where I saw it first. Kickstarter also uses the all or nothing model.

In the all or nothing model, the project creator picks the size of the raise they want to do and then they have to hit that number to get the funds. In the keep what you raise model, the project creator picks a size of raise as well, but they don’t have to hit the number, they keep whatever they raise.

Many project creators think the keep what you raise model is preferable. They don’t like the idea that they will fail and not get anything. But they fail to realize a number of important points about crowdfunding:

1) Funders prefer all or nothing because they want to be sure the project creator will have the funds to complete the project

2) The need to hit the goal pushes everyone, including the project creator, to work hard to make the goal. It drives the whole raise.

3) Creators who choose all or nothing are more committed to the project, the raise, and the process. Keep what you raise often attracts dabblers.

4) All or nothing raises more money. The amount of money that is raised every year in crowdfunding via the all or nothing model dwarfs the amount of money that is raised in the keep what you raise model, except in the charitable giving category.

Crowdfunding on the global Internet may be new, but raising money is not. In the venture capital business, the keep what you raise model is almost non-existent. A founder can’t go out to raise $5mm and then say to the investors “well we only got $2mm of capital committed, but we are going to close on that next week.” That just doesn’t fly.

Keep what you raise is for people who are afraid to fail. It’s not funder friendly. And it is less effective too.

So if you are considering a crowdfunding project for anything other than charity and are being wooed by a platform that pitches its keep what you raise offering, you should see that for what it is. Lame.

Feature Friday: Crowdfunding Filters

Our portfolio company CircleUp, a crowdfunding market for equity investments in consumer products companies,  launched something this week that I think is a something we will see more and more in the crowdfunding world going forward.

They have added filters to the left side of their company discovery page. It looks like this:

circleup filters

I decided to filter for food companies in New York that have more than $500k of annual revenue. That got me three results:

food companies in NYC > $500k

Whether it is equity for consumer products (CircleUp), equity for tech startups (AngelList), consumer lending (LendingClub), small business lending (Funding Circle), philanthropy (CrowdRise), or creative projects (Kickstarter), all of these crowdfunding marketplaces have a tremendous amount of things to fund. Drilling down to find exactly what you want to fund is becoming harder and harder. Discovery tools are becoming critical to the user experience.

So I think CircleUp is showing one good way (another is social discovery which Kickstarter does a good job with) to help funders find the things they want to back. My bet is we will see more of these kinds of tools cropping in up in the marketplaces in the coming year(s).

The Kickstarter Film Festival

The fourth annual Kickstarter Film Festival is upon us. Tomorrow night in Fort Greene Park in the fine city of Brooklyn NY from 7-11pm, Kickstarter will be showing films, and featuring musicians and local food purveyors. The festival will be replayed in Los Angeles on Sept 12th, and also in London later this fall.

Here’s a short trailer for the festival:

Here’s the website for the festival. It lists all the films that will be featured. Attendance is free.

And here’s a blog post that talks about how they selected all the films that will be featured. 

It’s going to be a beautiful night in NYC tomorrow night. If you are considering your weekend plans, think hard about spending friday night in Fort Greene Park watching the amazing things that emerging filmmakers are doing right now.

Kickstarter’s Launch Now

Our portfolio company Kickstarter announced some important changes yesterday. They massively simplified their rules (from over 1000 words to under 300 words). And they introduced “Launch Now”:

launch now

At USV, we’ve always been a fan of fully open marketplaces over closed or curated marketplaces. I have written about that a bit here.

That said, you do benefit, particularly early on, by curating the market so that buyers are protected from crap and scams. Kickstarter turned five earlier this year and the company, service, and brand are well understood in the marketplace. I saw a chart on the Internet today that shows just how powerful the Kickstarter brand is right now:

When people think of funding a project on the Internet, they think of Kickstarter first and foremost. So the decision to curate and insure that backers on Kickstarter had a good experience was clearly the right one for Kickstarter.

But crowdfunding is a big business now. There is crowdfunding for seemingly everything now and users’ expectations and understanding has been well set. So it makes sense to be more open and creator friendly. Backers on Kickstarter and the vast number of other crowdfunding sites are now pretty clear about the risks and rewards of backing a project.

I am pleased with these moves. It makes life a lot easier for creators, it will lead to more crowdfunding by more people, it will lead to more projects that backers can back. There will be criticisms that Kickstarter is opening itself up to scammers and crappy projects. That’s always been a criticism of Kickstarter and other crowdfunding sites and will always be. But as this market has matured and gone mainstream, those criticisms need to be seen in the context of the overall success of crowdfunding and Kickstarter’s role as the creator and leader in the market. I think they will be fine.

CrowdRise

Yesterday the news broke about our most recent investment, CrowdRise. I wrote a bit about it yesterday on usv.com. I thought I’d add some thoughts here as well.

Many of our best investments came to us over time. We did not invest the first time we met them, or the second, or the third. CloudFlare was like that, SoundCloud was like that, Behance was like that. Zynga was like that. FeedBurner was like that. And CrowdRise was like that. I told the story of how I met them in 2010 and we did not invest until 2014 in the usv.com post yesterday. Many things, like wine, get better over time. And when you wait on them, these companies often turn out to be great investments.

Another thing about this investment that feels right is the domain. We have been early and consistent investors in crowdfunding at USV. We like everything about this category of company. We like the democratizing aspects of a true marketplace model. We like that it supports discovery, curation, and personal connections between funders and fundees. We like that we have become recognized domain experts and have been able to invest in some of the very best companies in this sector. It was our early expertise in this sector that led to our first meeting with CrowdRise back in 2010. If you go deep on a sector that you really like, it pays dividends, again and again.

But the thing that feels most right about CrowdRise is the impact that this company and their service has on the world. Yesterday, runners in the Boston Marathon raised over $25mm on CrowdRise. If you click on that link you can see the runners, the charities, and the teams that collectively made up that massive expression of generosity. These are not fatcats donating millions to their favorite cause (which is totally fine by me!). This is everybody giving 10s and 20s in a scale that adds up to $25mm+. This will happen again at the NYC Marathon, The Ironman Triathalon, and a many other events that will take place this year.

While events drive a lot of giving, they are not everything that happens on CrowdRise. As regular readers of AVC know, we have been raising money for CSNYC on CrowdRise. If you feel generous today and want to support expanding CS education in the NYC public schools, please head over to CrowdRise and support our cause.

Everyone on CrowdRise has a profile. Here is mine. It does not show individual gifts, but it does show the fundraisers I have run on CrowdRise. Over time, I hope and expect that these profiles will live up to Edward Norton’s vision that he shared with TechCrunch yesterday:

“‘Facebook’ is who I am as defined by my social life; ‘Linkedin,’ is who I am as defined by my [business] life; and ‘CrowdRise’ is who I am as defined by my activist life,” 

If you are active on CrowdRise, I would encourage you to fill out a profile for yourself and start doing online fundraisers for your favorite causes. It’s both efficient and fun. And that’s a powerful combination.

Video Of The Week: Yancey Strickler’s Commencement Speech At McNally Smith

I came across this short (<15min) video this morning as I was wandering around YouTube. It’s a commencement speech that Kickstarter’s CEO Yancey Strickler gave at the McNally Smith College Of Music in St Paul Minnesota.

I really like the way Yancey frames the opportunities and challenges facing young artists as they head out into their adult lives and careers. It’s optimistic and hopeful. You can’t beat that.

What I Have Learned From Kickstarter

Today, Perry Chen announced on the Kickstarter blog that he’s moving up to Chairman and that his co-founder Yancey Strickler will step into the CEO role at the start of next year. Like all things that involve Kickstarter, this is a classic Perry move. Perry and Kickstarter have always done things their way, and today's news is another example of that.

As I reflected on this change, I started thinking about all the things that Perry and Kickstarter have taught me. I believe that entrepreneurs teach VCs and Kickstarter has been full of important lessons for me.

Maybe the most important lesson I have taken from Kickstarter is that you have to build your company in your own mold. There is no one right way to do it, as much as the advice giving pundits (me included) would tell you otherwise.

When Perry came to see me in 2009, just after they had launched the site, he said he was wary of taking money from VCs. He said he had no intention of taking the company public and no intention of selling it. He wanted to build a long lasting sustainable business that would always put creators first and serve as a resource for the creative community to get funding for their work. He saw the race for the big payday as orthogonal to his goals for the company and wanted no part of it. I understood the argument but wasn’t sure Perry really meant it. We invested anyway, because we believed that a network/market based approach to funding creators made sense and that it would be a good business. It does make sense and it is a very good business. And, as it turned out, Perry did mean it.

Kickstarter has been profitable from shortly after we invested. It has never needed to take outside money and it has not done much to optimize its profitability. The profits have been spent investing in the team and more recently in a new headquarters in Greenpoint, Brooklyn that will open next month. Instead of agreeing to pay sky high rents and sign a long term lease that the Company would quickly grow out of, Perry chose to buy an empty old Pencil factory on the waterfront in Greenpoint, Brooklyn and spend the Company’s profits fixing it up and making it into a physical instantiation of Kickstarter’s role as a resource for creators. They will be their own landlord.

I suspect that Perry could have bootstrapped Kickstarter without VC and maybe he should have. But I am sure glad he did not, as we feel incredibly fortunate to be along for this ride. Networks and markets are slowly changing the global economy and the creative sector is at the forefront of these changes. Instead of going to Hollywood studios for the funds to make their next movie, directors are choosing to harness the network of their fans. Instead of going to the publishing industry for their book advance, authors are choosing to harness the network of their fans. Instead of signing a deal with a record label, musicians are harnessing the network of their fans. The same thing is happening with comic books, video games, theater productions, and many other creative endeavors. Kickstarter has changed the way creative projects come to life.

Four and a half years after launch, Kickstarter is a very important and sustainable business. It will continue to grow, it will continue to fund creativity, and it will continue to do things its own way. Kickstarter was built in Perry’s mold and the unique culture and mission of the Company are derived from him. I suspect his decision to step up to Chairman and allow the team to run the business day to day is Perry’s way of saying to the team that they have his confidence to lead Kickstarter into the future. Kickstarter will always be Perry’s work and we are very happy to be a part of it and be inspired by it every day.

The Fallacy Of Zero Sum Game Thinking

We invest in a lot of marketplaces. When they scale, we often hear complaints from early adopters, amplified by the media, that the early adopters are getting hurt by the "mainstreaming" of the marketplace. You hear that kind of argument with other kinds of networks as well. When Twitter went mainstream, a lot of the early adopters complained that it had lost its soul.

I think most of this thinking is emotional, but not rational. A rising tide lifts all boats, or at least most of them. Kickstarter has published some data on this issue. I like this part from that post:

Spike Lee brought three decades of fans to Kickstarter when he launched his project. He introduced many of them to this new way of funding creative works, and to the thousands of other projects that are funding on Kickstarter. Of Spike’s backers, 47% had never backed a Kickstarter project before.

The Veronica Mars and Zach Braff film projects were similarly criticized for hurting other projects, but in reality were a windfall for creators. Those projects brought thousands of new people to Kickstarter who have since pledged more than $1 million to 6,000 other projects (film projects have received most of those pledges).

In the past 90 days alone, more than $21 million has been pledged to filmmakers on Kickstarter not named Rob Thomas, Zach Braff, or Spike Lee. Even without counting these projects, it’s been the biggest three months for film ever on Kickstarter!

Almost five million people have backed a project on Kickstarter, and more than a million have backed two or more projects. These repeat backers are responsible for 59% of the total money pledged to Kickstarter projects — a whopping $444 million. On average, 2,130 people a dayhave become new repeat backers this year. This is huge! Future creators will benefit from more and more people using Kickstarter.

We have seen a similar effect at Etsy. When a wave of new sellers came to Etsy as it became a mainstream marketplace a few years ago, the early sellers were concerned about the competition these new sellers would create for them. But Etsy has grown its gross transactions at between 70-100% per year for the past five years, a rate that is roughly the same as the rate of new sellers joining the service. For every new seller that joins Etsy, it seems that there is  a new buyer waiting to consider buying from them.

The cool thing about these marketplaces is that the sellers (or project creators in Kickstarter's case) are the primary marketing engine. Sellers bring the first time buyers. And then many of them stick around and transact again and again, often with sellers other than the one that brought them in the first place. It is a commons where everyone (or most everyone) benefits from the expansion of the marketplace.

I felt like explaining this because I read this opinion piece in the NY Times today about Kickstarter. While the title of the piece is awful (nobody has their "hands out" on Kickstarter), I like how they ended it:

The gentrification of Kickstarter doesn’t seem to be hurting its original inhabitants. It may even be helping them.

The only quibble I have with that line is the use of the word "may". I am certain it is helping them.