A look at Kickstarter: Why Not IPO?
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  • Jack Lau

A look at Kickstarter: Why Not IPO?


Good afternoon, everyone.

We have always said that the toughest challenges an entrepreneur faces is the marketing and sales of their initial products. In the past, not only does an startup have to manage their initial funding and product design, it has to find the first batch of customers. And, this is usually very hard. The classic way to do things, for hardware, would be to take a sample of the product to the buyers of the big box retailers. The buyers would tell you what they like or don't like about the products. But, even if the buyers like the ideas, they would be hesitant to put the products on their shelves. For small startups, how can they figure out all the logistics of warranties, returns, and shipping?

So, instead, startups would end up licensing the ideas to the brand names who then in turn sell to the retailers. With few exceptions, the margin retained for the startups would be small, and it becomes very difficult generate enough profit to develop the next phases of fantastic products.

How time has changed?

These days, a great number of startups opt for promoting their ideas through crowdfunding. Kickstarter would be one of the primary platforms. The idea with crowdfunding is quite straight forward. You have an idea; you make a pitch on Kickstarter, usually through videos and text. End consumers like the novelty, and they pitch in different levels of funding to support the startup. It can be a $1 just to say, "I like it". Or it can be a discount of a real product. End consumers pay first, and when the products become available, the end consumers get one of the earliest versions at usually a discount.

And, typically, the startups would set a target amount to be raised. Only if they reach that target would they go into production.

Kickstarter would take in 5% as commission if the target is reached.

Well, we want to talk a bit more about Kickstarter and why we love this platform.

The storyline could have been very straightforward. It makes money. Over the years, it has helped startups raised US$2.74 billion. It has raised only US$10M since its inception in 2011.

In fact, early on, articles have been written about how Kickstarter could easily been turned into a Billion Dollar IPO. And, it helps that the investors of Kickstarter are the likes of Jack Doresy who founded both Twitter and Square, and other big names.

(After taking in the 5% commission, Kickstarter does have an operating cost of paying the like of Amazon for payment processing.)

And, this particular article can shed some light on how an investor may look at a growth company. It was written in 2013. ( https://www.quora.com/What-is-Kickstarters-business-model-Could-it-ever-be-a-billion-dollar-business)

In 2013, Kickstarter was successfully helping startups raising about $290M a year in funding. The article went on to assume that at 5% commission, Kickstarter would be bringing in about $14.5M a year in revenue. And, if the growth is about 10X in a few years, they can command a price to revenue ratio of about 10 times. So, once they hit a revenue of about US$100M, they should be worth more than US$1 billion.

Now, just to have the benefit of hindsight, here are some numbers:

And, if we assume a constant 5% commission ratio, then currently, the revenue of Kickstarter would roughly be $34.14 M, not quite at a revenue of US$100M, but the growth is still very nice. Plus, always remember that it has only raised US$10M. For most companies, that amount is roughly the amount for an angel round or Series A at best.

Now, at this point, we will like to point out something that you may be curious about.

Questions: If Kickstarter is a private company, where do you get these detailed statistics, understanding that this is not like the numbers are obtained through a SEC filing?

Answer: Kickstarter publishes these data. In fact, they publish it real time.

https://www.kickstarter.com/help/stats Anyone can find out how much they have helped raised, and the detailed breakdown of the kind of projects. (No, you don't need to write a software script to crawl the data.)

Then, question: Why would Kickstarter want to publish the data?

Now, this is where we think is interesting and that is why we admire them.

It turns out Kickstarter's founder has never wanted to go IPO. (Please note that they can easily get rich themselves.) Kickstarter could easily find other business models to increase the revenue I am sure, but they remain focused and committed to be an impartial platform for startups to get support.

In fact, they are so committed that they have registered themselves as a Public Benefit Corporation. http://www.nytimes.com/2015/09/21/technology/kickstarters-altruistic-vision-profits-as-the-means-not-the-mission.html?_r=0

Kickstarter is based in New York. Just to get some ideas. In New York, the other examples of Public Benefit Corporations are the Metropolitan Transportation Authority and Port Authority of New York. By registering as Public Benefit Corporation, Kickstarter is essentially saying that they care more about the public benefit than shareholders return through profit.

Kickstarter also donates 5% of after-tax profits to support arts and combat inequality.

The founders of Kickstarter went one step even further. They chose to become a B Corp as well. By being a B Corp, Kickstarter reports its social and environmental performance every year. The founders believe in transparency.

And, from out contacts with some entrepreneurs who had experiences with Kickstarter, they all rave how "clean" Kickstarter is. We have heard more than once that some startups thought that they could easily hide their identities and become "backers" of their own projects. Please don't try. Once you are found out, you get immediately kicked out of the Kickstarter campaign.

And, we particularly like one of the quotes that the Kickstarter founders, Terry Chen, said in a New York Times article:

"As younger companies come up and think about how they operate and how they want to be structured, maybe they won’t be so easily swept up by all the usual choices,” …“Maybe they’ll be thinking long term, thinking about how to look after the things they care about.”

And, finally, in closing, we are happy to report that Kickstarter has just announced that they now started a new mechanism making it possible for startups from Hong Kong and Singapore to directly participate in the crowdfunding. (In the past, most have to go through a US partner for a few logistics reasons such as bank deposit). https://www.kickstarter.com/blog/were-now-open-to-creators-in-hong-kong-and-singapore

Have a good day! And, good luck to those who are doing their new ventures.


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