How Kickstarter facilitates financial investments

By Felix Salmon
May 31, 2012
Remember Flint and Tinder, the Kickstarter underwear project I wrote about last month?  

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Remember Flint and Tinder, the Kickstarter underwear project I wrote about last month? Well, it ended up raising $291,493 in all — almost ten times its initial $30,000 goal. In that sense, it’s like a mini-Pebble, the watch which raised $10,266,845 on Kickstarter and exceeded its goal by a factor of 102. Pebble was quite open about the fact that they were going to Kickstarter after having been rejected by more conventional sources of funding: a lot of VCs turned them down before the Kickstarter campaign went viral. And now, with $10 million in the bank, it’s not clear whether Pebble wants or needs any VC money at all.

Flint and Tinder, by contrast, does want more money, despite raising much more than it asked for. I got an email from Jake Bronstein, the man behind it, today: “I am currently trying to raise money from investors for this project,” he wrote, “to finance CapX improvements to the factory to make our product truly competitive”.

Actually, I should be a bit more accurate: I was copied on an email from Jake Bronstein, which was actually addressed to Reuters’s editor-in-chief, Steve Adler. The subject line? “I think one of your reporters is harassing me / can someone have a look”.

Bronstein’s request was that I remove a link to a YouTube video which I included in an update to my post. It seems that now he’s asking real investors for money, rather than just people who think it’s a good idea to buy underwear on Kickstarter, those investors will want to do things like check out Flint and Tinder’s website. After all, the Kickstarter page says that the main way the company can be competitive is by selling directly from its website. But if you try to find Flint and Tinder’s website, by Googling it, you’ll find that no such site exists. Instead, my post is the top search result.

Bronstein doesn’t want potential investors following that particular link, for much the same reason as he has now taken down his highly NSFW website, jakebronstein.com. That URL now redirects to his about.me page; that, in turn, links to his Wikipedia entry, which features an incomplete list of his publicity stunts, and describes his occupation as “Ex-Road Ruler, current-prankster and blogger Zoomdoggle”. But Bronstein has erased Zoomdoggle, too, from the internet.

Kickstarter is quite clear that it doesn’t vet projects, or their founders. And no one expects Flint and Tinder’s 5,578 funders to have done some kind of due diligence on the company. But this project is very far from Kickstarter’s core mission of providing funding for one-off creative projects. Kickstarter’s very first rule is unambiguous on this front:

1. Funding for projects only.
A project has a clear goal, like making an album, a book, or a work of art. A project will eventually be completed, and something will be produced by it. A project is not open-ended. Starting a business, for example, does not qualify as a project.

Flouting this restriction, Bronstein talks on his Kickstarter page about how “for every 1000 pair we sell per month, 1 full-time job has to be added back to the assembly line”. That seems pretty open-ended to me. And if he’s now looking for investors, that sounds like he’s starting a business, too. Not to mention the fact that in a follow-up email today, Bronstein said that my ego was getting in the way of his “earnest attempts at job creation”.

In a comment he left on my original post, Bronstein accused me of not being diligent in researching his background on the internet — which is kinda funny, given that he seems to be trying as hard as possible for people to do just that, both by taking down his own websites and by asking sites like Reuters to remove content about him.

Still, Flint and Tinder is clearly more than just another instance of Kickstarter looking like the Home Shopping Network. It’s also something rarer: an instance of Kickstarter being used as a way of making a company much more attractive to potential investors.

This happens in two ways. One is that a successful Kickstarter project acts as proof-of-demand: potential investors in Flint and Tinder, for instance, now know that there are thousands of people out there who, quite literally, buy into its project. And on top of that, Kickstarter funds constitute a source of unbelievably cheap unsecured debt, with a zero interest rate and no set maturity date; in the case of Flint and Tinder, moreover, that financing is repayable entirely in underwear.

Once a company has the best part of $300,000 in interest-free financing repayable at a time of its choosing in underwear, the famous underpants gnome business model starts looking actually rather attractive. I’m not entirely sure where or how Kickstarter funds would feature in an investment banker’s model of a company’s capital structure. They’re basically equity, without any kind of ownership or voting rights, which is offset against a set of future deliverables. In any case, Kickstarter funds will nearly always make any company’s balance sheet look a good deal healthier.

And so Kickstarter becomes more than just a way of funding projects, and more than just a way of demonstrating demand for as-yet-nonexistent products. It can also be a way of making your company a lot more attractive to potential investors. Kickstarter has made the decision that it’s not getting into the crowdfunding business as envsiaged in the JOBS Act. But in a way, it’s being dragged into investment markets whether it likes it or not. Unless, of course, it starts cracking down on the likes of Flint and Tinder.

Comments
26 comments so far

Felix,

Again, what do you have against asking a question before pushing publish? Especially as we’ve been in contact now. ..

Please don’t be confused – or confuse people – I don’t need money to fill the Kickstarter orders. Or the orders after them. What I’m trying to do is raise enough to put the kind of equipment back into a US factory to make it competitive with other countries who don’t pay workers fair wages.

I’m still unclear on why you have a vendetta here. But I guess you’ve won again (as my questioning the last time you did this seems to have upset you). Here’s hoping my earnest attempts at job creation doesn’t some day get in the way of your ego… or vice versa as was clearly the case today.

Posted by JakeBronstein | Report as abusive

Jake,

I think his point is that in this instance Kickstarter is being used to fund a start-up business, which is not what Kickstarter was intented to be used for.

Posted by mfw13 | Report as abusive

mfw13,

I guess. But if someone to collect money from a group of people to create a product (as happens every day on Kickstarter) and it turns out that lots of people want it… In addition to sending those people the product they helped fund, wouldn’t you expect that whoever was behind the campaign would try to start a business around it?

In my case, and in the case of many others I suspect, making a single batch of stuff to send to people (so you can get some of the stuff yourself)… and building a viable business around it are not exactly the same. Kickstarter, for example, helped buy the underwear I sold through it, but to sell more I need a distribution center, a customer service center, a website (as Felix noticed mine is not up yet) and, if you’re tying to be competitive beyond that, there might be even more things you want money for (marketing for example).

For the record: I like that you were able to engage me directly. Anyone else is free to do the same. The company I’m trying to build is fairly transparent, I don’t see why the discussion around it should be any different.

Posted by JakeBronstein | Report as abusive

“I’m not entirely sure where or how Kickstarter funds would feature in an investment banker’s model of a company’s capital structure.”

From an accounting standpoint, these funds would be classified as customer prepayments or deferred revenue, which like these funds are also usually unsecured liabilities. Based on the details of Kickstarter, there are probably lots of legal differences, beginning with the fact that a customer isn’t going to prepay a supplier without a firm, binding purchase order that represents a legally enforceable requirement for the supplier to deliver the product within a certain time frame. That said, on a practical level, someone thinking about investing in Flint and Tinder as a business is going to proceed on the basis that the Kickstarter funders will get their products.

Posted by realist50 | Report as abusive

Exactly. The way I think about it is this: The Kickstarter people bought a pre-bought a product. Nothing is changing that.

Often times when a business wants to grow – as mine does, beyond just filling those orders – it takes funding. Which is what I’m going after.

The other way to do it (potentially) would be that I get the next people, say Macy’s, to pre-order as well. They’re not going to pay me up front though. In fact, they’re not going to pay me until long after they’ve received the product (Net30 is standard). But, instead of raising money, I could take that order to a lender to “factor it” (meaning, lend money against it for a fee).

One way or another though, there does come a point in the growth cycle of most every business where capitol is required. It doesn’t mean anything’s gone off the tracks though.

PS: Realist50, I didn’t write that for you, as it sounds like you’re clearly an expert and have a fairly good idea of what’s going on here. But others might find it interesting.

Posted by JakeBronstein | Report as abusive

Exactly. The way I think about it is this: The Kickstarter people bought a pre-bought a product. Nothing is changing that.

Often times when a business wants to grow – as mine does, beyond just filling those orders – it takes funding. Which is what I’m going after.

The other way to do it (potentially) would be that I get the next people, say Macy’s, to pre-order as well. They’re not going to pay me up front though. In fact, they’re not going to pay me until long after they’ve received the product (Net30 is standard). But, instead of raising money, I could take that order to a lender to “factor it” (meaning, lend money against it for a fee).

One way or another though, there does come a point in the growth cycle of most every business where capitol is required. It doesn’t mean anything’s gone off the tracks though.

PS: Realist50, I didn’t write that for you, as it sounds like you’re clearly an expert and have a fairly good idea of what’s going on here. But others might find it interesting.

Posted by JakeBronstein | Report as abusive

Customer financing. cheap, but not necessarily free financing, if the customer gets a discount, which they should.

In accounting terms it’s a cash asset – Prepayments $291,493 and a liability – Customer prepayments $291,493

Then you draw down the prepayments account to pay vendors and inventory goes up. Then you ship product, and customer prepayments goes down and inventory goes down. And hopefully retained earnings goes up since cost of inventory is less than the prepaid amount.

In this case, it seems like it’s $12 per pair of boxers so that should leave room for some earnings.

I’m more of a briefs guy, and don’t have a moral objection to foreign-made stuff if they do it cheaper/better, so it seems like a guerrilla marketing/cheap capital raising from dumb money, but to each his own. Can’t blame a guy for trying, and he shouldn’t blame people for ridiculing it…no such thing as bad publicity.

Posted by streeteye | Report as abusive

Streeteye,

I’m with you 100%.

It leave some money, but not much. I think when we finally pull the sheet back on this thing – assuming we get there – it’ll be clear why I’m trying to accelerate the process. Rome wasn’t built in a day, but I’d rather not wait the 30 years it took Ralph Lauren to become a major force either.

PS: Fun fact – You’re not alone, boxers seem to outsell briefs almost six times over.
Even funner fact -Filling the Kickstarter order alone is making jobs http://abcnews.go.com/blogs/business/201 2/05/made-in-america-finding-inspiration -in-underwear/ … I’d be lying if I said this wasn’t one of the parts that excites me most!

Posted by JakeBronstein | Report as abusive

Er, correction to comment above for spelling and grammar. What I meant to say was that after filling the Kickstater order, is does leave some money, but not much…

Sometimes my fingers get ahead of my mind.

Posted by JakeBronstein | Report as abusive

“Can’t blame a guy for trying, and he shouldn’t blame people for ridiculing it…no such thing as bad publicity.” (StreetEye)

We have JPM and FB and Greece and Spain and, OBTW – Armageddon staring us in the face. So why are we dwelling on some online huckster and his underwear?

Posted by MrRFox | Report as abusive

I meant for the following comment to be posted here and not on the previous article written by the author relating to this subject … I hope Mr. Salmon doesn’t diss me as much as he does to Mr. Bronstein for this indiscretion …

I stumbled upon this article while reading some other Forbes pieces and it piqued my interest. I wanted to learn more about the debate so I spent some time and did the research necessary (unlike the author who admitted he did not do his homework in his first article) in order for me to form an opinion and then make a comment. My observations are thus:

1. The author in his original piece did try and make a go at analysing a potential pitfall or two with the Kickstarter model and nearly succeeded, such questioning should be encouraged as this model is still very new and hazards to it are definitely out there.

2. In view of 1. , the author then decided for some reason to veer drastically off track and for unknown reasons make it a direct hit piece on Mr. Brosnstein.

3. The author appears to be a frustrated legal eagle with his accusation that “Flouting this restriction, …”. Sounds more like a personal opinion of Flint and Timber with the author acting as judge and jury with nothing in the way of supporting evidence or any commentary from Kickstarter.

4. The author goes on to further state “In a comment he left on my original post, Bronstein accused me of not being diligent in researching his background on the internet — which is kinda funny, given that he seems to be trying as hard as possible for people to do just that, both by taking down his own websites and by asking sites like Reuters to remove content about him.”

Wow, talk about a master stroke of spin and not having the BuckyBALLS to admit one was wrong (yes, he did admit his oversight but was wishy-washy at best but the usual way of a journalist trying to get around their mistake).

5. The author states “His mention of Buckyballs, however, did remind me of this video, where Bronstein left an extremely aggressive and intimidating nastygram message for Zen Magnets, a smaller competitor.”

Watch the video, I did, and it really is quite good for two reasons:

1) Mr. Bronstein does comes off as complete jerk and probably if he has any “unmagnetized kahonas” left in his Flint and Timbers he would come out and admit this on this site since he obviously likes to be part of the live discussion here, and,

2). The response by the guy from Zen Magnets to Mr. Bronstein is not only hilarious but he really does make a good argument for his products – kudos to him for facing down someone who obviously likes to use the legal system as a form of business terrorism/legalised extortion which is all too prevalent in American business now.

6. However, the authors point of “… did remind me of this video” makes no sense in the context of why he should remember anything about Mr. Bornstein unless he spent some additional time in trying to dig up any dirt or other nefarious scraps of information that could be thrown at Mr. Bronstein with the single minded intent of trying disparage his reputation – yellow journalism at its best/worst. Too bad the author did not do his research on Mr. Bronstein’s previous retailing/manufacturing background which on the surface appears to be fairly successful (hey, my kids have Buckyballs… and I have to admit they are kind of addictive).

7. I do agree with some of the other commenters here that trying to scruff up a measly $30k for a manufacturing venture in the US makes little sense from a guy who started a $20+ million dollar business a few short years before. Surely it was throwing off some cash, and if not, why not? Perhaps Mr. Bronstein can chime in and explain as this really does leave an unpleasant taste in one’s mouth.

8. At the end of the day Mr. Bronstein’s venture is, all things considered, a positive step forward for American based industries and its potential to create jobs and I applaud him for his efforts and tenacity.

9. The editors at Reuters have done a disservice to its readers by allowing the author to take such a personal approach to Mr. Bronstein in view of that there is zero evidence in support of anything illegal or misappropriated by Mr. Bronstein – having an unknown personal grudge against Mr. Bronstein articulated in this way serves no one and is nothing short of a petulant rant.

I have probably rambled on a little further than I should have but it is interesting to see what should have been a more in depth investigative piece on Kickstarter and its potential long-term problems segue into a personal battle aired in real time. However, at the end of the day I see this in a very simple light … Mr. Bronstein wishes to create and build while the author wishes to use his podium to take him down.

Sorry, Mr. Salmon, you are way off-base here and I have to side with Mr. Bronstein.

Posted by exocet | Report as abusive

Exocet,

Great points all.

And yes, I totally know that I came off as a jerk in the video Felix linked to for no apparent reason. In fact, I even once posted a picture of myself with an award proclaiming something similar for Engadget or Gizmodo or some other blog of note.

Point of fact: I WAS trying to bully a competitor who had antagonized me in the past in that video. Cudos to him (the competitor) for calling me out in the way that he did. All in a day’s work.

On a personal note, the true shame of it all was that beyond learning not to bully people (as I did), I should have learned a greater lesson: “haters gonna hate” meaning, when someone has raised their hand as already having decided to be against you, no amount of bullying (in that case), or warm logic (in this one) all you’re really doing is giving them more ammunition. They’re going to see what they want, even in the face of the facts, or lack there of (fun fact: twice I’ve invited Felix to visit the factor and/or ask me anything he likes prior to posting these stories, I guess it’s not in his job description though).

About your interest in Kickstarter, I’ve had a very interesting experience with the system. And as one of the top earners no less (I’m guessing my project lands in the top 5-10% but don’t quote me there). I would gladly share these insights with any reporters interested in writing about the thing. Until yesterday, this included even Felix. If/when someone takes me up on the offer, I’ll be sure to let you know.

Posted by JakeBronstein | Report as abusive

EDIT: … no amount of bullying (in that case), or warm logic (in this one) is going to change their stance, all you’re really doing is giving them more ammunition.

Sorry, my internet is out at the moment and I’m writing these responses on my cell phone. I’m all thumbs and no brain at the moment.

Posted by JakeBronstein | Report as abusive

@Exocet – Well, we’re in complete agreement about this part –

“I have probably rambled on a little further than I should have….”

Posted by MrRFox | Report as abusive

Exocet,

Sorry, I missed out on one of your direct questions to me. Seeing it now.

How come someone with with a successful business would need money from others to get something else going? The answer is fairly simple: All of the profit made in business one has, and likely will be for some time, been reinvested in business one to finance the growth it’s seen (meaning, at the start, we only need X number of units and got paid for them fairly quickly from buyers, now we need 1000X number of units, and our buyers – chains at this point, not individuals, expect us to extend credit to them in the form of deferred payment for the product we send them)… reinvesting that profit in the business is what keeps us from having to raise money for that business.

Instead, when I wanted to make underwear in America, knowing that there was a minimum order from the factory but also that I didn’t personally want thousands of pairs of underwear, I put it on Kickstarter to see if I couldn’t get people to buy all but the 20 or pairs I wanted personally. And also, to see if anyone besides me would want underwear like that at all before plowing my life savings into the venture.

Now I want the thing to grow much larger than that, or even the website I’d planned on launching after the Kickstarter and few stores I lined up to put it in. I think this product should maybe be in even high-end store carrying underwear. Again though, this takes the kind of money that took business A years to generate through reinvestment. Instead, I’ve invested about 1/3 of my total life savings in it, but then went out to other investors (accredited investors, not Kickstarter backers) and gave them the opportunity to invest in it. In return for taking some of the risk off my shoulders, they will own a part of the company and will take an equal portion of the reward if and when we it gets there.

Does that make sense?

Posted by JakeBronstein | Report as abusive

Typos typos typos… I’m going to hold off on answering any more questions until I get to my computer at work. Feel free to continue asking, it just might take me a bit longer to respond.

Posted by JakeBronstein | Report as abusive

Jake, do you have a professional PR advisor?

If you do, then you should probably ask him why it is that he told you that “scrambling around to clean up your web presence is going to make you look better to VCs”, or that “a good way to get a better press is to pick a high profile journalist and complain about him to his boss”. You might have got a dud.

If you don’t, then I think it might be money well spent to get one, they can often really help.

I also have a question about this anecdote:

“Instead, when I wanted to make underwear in America, knowing that there was a minimum order from the factory but also that I didn’t personally want thousands of pairs of underwear, I put it on Kickstarter to see if I couldn’t get people to buy all but the 20 or pairs I wanted personally. And also, to see if anyone besides me would want underwear like that at all before plowing my life savings into the venture.”

This seems to imply that your original idea was just to get the product made, and that the idea of a venture capital backed company was secondary; you only really went to Kickstarter because the factory had a minimum order size. (Of course, this is the version of history that would be consistent with the Kickstarter terms & conditions).

But the actual name “Flint and Tinder”, according to the Kickstarter writeup, comes from a conversation with a VC, who apparently turned down the idea to fund an underwear manufacturing startup. This would imply that what you have is a company that failed to get funding then turned to Kickstarter to get working capital and create buzz. Which would of course not be consistent with the T&C.

Which one is true, or is there some other explanation consistent with them both (like maybe you were trying to persuade the VC to buy 1980 pairs of underpants? Or possibly that the VC story is really more of a bit of branding flimflam? Or something?)

Posted by dsquared | Report as abusive

@dsquared I think it is fairly obvious that Jake does has a PR advisor – and judging by the length of Exocet’s post he is paying by the word

Posted by Suncoke | Report as abusive

does have*

Posted by Suncoke | Report as abusive

Dsquared / Suncoke,

No PR advisor (ideally, yes, there would be someone Felix could call to confirm the “facts” he basing his opinions on). Also no scramble to fix anything.

I guess though, we’re kind of off base.

Again, while I don’t like Felix’s opinions, he’s more than entitled to them.

The problem is what he presents as being the facts on which he bases his opinions aren’t actually facts. He seems to do no more research into them or fact-checking of them than the opinions he follows with.

In my case, the results aren’t disastrous. But what if he did the same thing from the Rueters platform about something that really does matter, maybe a human rights issue, or an issue facing a local school board. What if you based your world-view of the subject on Felix’s facts (separate from the opinions he follows with) because he works for a news organization. And what if you were to vote on the issue one day.

Isn’t it fair to expect more from a professional, especially in his answer to a story in which he was called out for missing the facts?

Posted by JakeBronstein | Report as abusive

Jake,
I wish you all the best in your venture, don’t blame you for being creative in your launch/funding strategy, and don’t think you are in any way a fraud. However, you do come off as a bully and a huckster. Felix’s original post is a bit snarky. But it’s an opinion piece not a hard hitting, fully researched expose on your company. He says repeatedly that he’s using you as an example of a problem with Kickstarter.

Your claim that the Kickstarter campaign was some sort of a one off venture that you are “now” trying to grow into a viable business is pretty obvious BS. Your KS campaign violates their T&C’s. Not a big deal, but it is true. I think Felix’s main point was that at some point KS campaigns like yours are going to burn a lot of KS investors and they don’t seem to be doing much to police or deal with that eventuality.

I don’t blame you for bending the rules to get a venture off the ground. Good for you. But a little advice on the PR front. When you get called out for something, say “yeah, I’m doing what I’ve got to do to get this project off the ground.” Getting lost in the weeds of claiming a post about you is “error riddled” for pretty minor stuff while bitching to his boss just isn’t going to get you anywhere beyond back and forths like this in comment sections. I think investors are more interested in founders with clear purpose and vision, not ones who get sucked into tiny personal sleights that they try to blow up into a scandal that could hurt a “human rights issue” or “local school board”. (Think of the children!) Just makes you sound like a self obsessed a*s.

Posted by MaxUtil | Report as abusive

Kick starter is like a million lawsuits waiting to happen. I think the lawyers must be salivating.

Just yesterday I saw a project that had 75% of its funding 99.9% of the way through its window, and then magically just barely made it over. Cause you know there is no incentive for the kickstarter to put n that extra 25% just to keep the 50% that would be profit.

Between that sort of thing, the above fraud, and all the and all the project which clearly cannot possibly deliver what they promise with the funds donated you have to wonder how it will be around in a year.

Posted by QCIC | Report as abusive

QCIC,

Yup, the system has problems.

I think if you read the comments above though, you’d find that “the above fraud” is anything but. Check out this local news story about how the factory we’re working with is fairing thanks to the efforts of Flint and Tinder on Kickstarter http://wnep.com/2012/05/22/clothing-indu stry-making-comback/ Not bad, right?

Posted by JakeBronstein | Report as abusive

Perhaps everyone should take a look at the Kickstarter terms of use for clarification. Pretty sure they’re in good shape. http://www.kickstarter.com/terms-of-use

Posted by johnnyjr | Report as abusive

Jake, you must be savvy enough to have heard of the Streisand Effect, so I can only assume this is trolling. This story by Felix wouldn’t exist if you hadn’t tried to get him in trouble with an editor over the previous one. I can’t figure out what the Youtube video you’re upset about is, though – the only one Felix posted is this, which has been online for nearly two years: http://www.youtube.com/watch?v=S7Tka4NUm Uo

Posted by gwaitersesq | Report as abusive

“Once a company has the best part of $300,000 in interest-free financing repayable at a time of its choosing in underwear, the famous underpants gnome business model starts looking actually rather attractive.”
Haha, that’s awesome…

Posted by MattyD | Report as abusive
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