How Kickstarter facilitates financial investments
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.