David Tisch and Others See Opportunities, Caveats with Kickstarter

The federal JOBS Act will make it easier for novice investors to use crowdfunding platforms to make actual equity investments in startups, rather than just donating money, as they can now through sites like Kickstarter. But with any crowdfunded project, there are some concerns to watch out for, according to David Tisch, managing director of TechStars NYC.

Speaking on a panel last Thursday at the Consumer Electronics Week (CE Week) conference in New York hosted by the Consumer Electronics Association, Tisch said inexperienced investors may not be aware of just how risky a startup investment can be. “People are going to lose a lot of money betting on early stage Internet companies because 90 percent of Internet companies fail,” he said. “People are going to lose 90 cents on the dollar on a regular basis. That risk probably applies to Kickstarter on some projects.”

Joining Tisch on the panel , which focused on the way Kickstarter has disrupted the way new ideas can get financed, were Josh Guyot, co-founder of Motrr; Sam Gordon, managing partner of Brydge; and moderator Brian Tong, editor with CNET. While the Kickstarter platform gives startups in need of funding the chance to attract backers from the public, the panelists pointed out some risks that come with the territory.

Kickstarter, based in New York, gives folks working on independent projects and products a way to raise money by letting the public pledge funds online. Projects funded through this platform include video games, software, novels, independent movies, and consumer electronics. Minimum pledges can be as low as $1 and larger pledges can top $10,000.

Most startups and project developers looking for funds through Kickstarter offer various incentives, such as early releases of the products, for different levels of pledges. Kickstarter earns money by taking nominal 5 percent cut of the pledges, but no money gets collected unless the funding goal is met within the allotted time. Total pledges raised by Kickstarter, which was founded in 2009 and is backed by Union Square Ventures, now exceed $250 million.

Even if a project meets its funding goals, though, there is no guarantee the finished product will be delivered as expected. Donors have to be ready for the possibility that the project they’re funding will fail, or that it will take a lot longer than projected. While 40 to 50 percent of Kickstarter projects are successfully funded, according to the company, there’s little hard data yet on the percentage of funded Kickstarter projects that actually deliver on their goals.

The risks aside, Kickstarter does offer a disruptive way for new ideas to get off the ground. According to Tisch, the site can help early stage companies gauge demand for the products and services they plan to offer. In consumer electronics, for example, device makers can essentially test public reception of gadgets before substantial money is invested to scale up production and build inventory. “It shows purchase intent for that product,” Tisch said. “For the first time ever there’s a way for consumer electronics or software [developers] to get customer feedback with money attached to it.” And If backers flock to a project posted on Kickstarter, similar demand may follow on the retail market.

But while crowdfunding can be a great, non-dilutive way to raise early money, putting together a company that can deliver the promised product may take additional funding, Tisch said. “You’re most likely not raising enough money [through Kickstarter] to have a significant amount of working capital to bring on other team members, build an office, and what ever it is you need to actually execute a company,” he said.

There are rare cases of companies bringing in large amounts of seed money through the platform. Palo Alto’s Pebble Technology raised more than $10.2 million through Kickstarter to develop its e-paper watch. Initially Pebble sought just $100,000 to back development of its smart watches, which link via Bluetooth to users’ iPhones and Android-based phones and alert users to incoming calls, new e-mails, texts, and other messages.

Other startups such as Brydge in San Francisco and Motrr in Santa Cruz have also exceeded their Kickstarter funding goals, though not at Pebble’s scale. Motrr created a swiveling mount called Galileo that lets users remotely control and manipulate their iPhones or iPod Touch through another iOS device’s touch screen. For example, a user can wirelessly link an iPad to control an iPhone mounted on the Galileo platform to shoot photos or video. The controlling iPad displays what the linked iPhone’s camera sees. Motrr has raised more than $700,000 in pledges through Kickstarter, after seeking just $100,000.

Meanwhile Brydge is developing a slim keyboard designed to be used with Apple’s iPad, giving the tablet controls like a laptop. The company sought to raise $90,000 through Kickstarter and then went on to raise nearly $800,000 in pledges.

In spite of his own company’s success using the platform, Gordon believes Kickstarter should be doing more to prepare for the day when a high-profile project falls apart. “The second that someone rises like Pebble but then fails to deliver, people are going to realize there is nothing to stop that from happening,” he said. So far no large-scale projects have failed, but Gordon sees the potential for calamity unless changes are made to abate such risk. “You’re placing a bet on a company and it’s unproven,” he said. “That concern hasn’t come forward yet.”

A healthy dose of doubt may be called for among backers who support crowdfunded projects. Tisch pointed out that unlike experienced investors, individuals from the general public may not be prepared to lose money when they back startups. But he expects more structure and guidance to emerge as this space evolves. “I think you will see more maturity in the Kickstarter platform,” he said.

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