The hidden Kickstarter industry

By Chris Nicholson, Guest Contributor , written on December 25, 2013

From The News Desk

The crowdfunding industry is largely hidden from the public eye. To the uninitiated, a crowdfunding project looks like one person’s lonely slog through sleepless nights and white-knuckle days. The truth is that, while it may be sleepless and white-knuckled, it is rarely lonely.

Kickstarter alone has helped projects raise $789 million since it was founded in 2009. Together with Indiegogo, Crowdtilt, and numerous other platforms, crowdfunding could raise almost that much again just in 2013, according to Deloitte. Except for a few startups’ thin margins, all of that money will go to the marketing, manufacture and delivery of the products that crowdfunding backers support. If you are a marketer, manufacturer or shipper, that’s good news.

These service providers are the hidden Kickstarter industry. They are the makeup artists preparing dancers to go on stage, the carpenters fixing the set, the spotlight operators high on the catwalk: no one in the audience can see them, but they make sure the show goes on.

Every crowdfunding campaign is essentially an act of marketing, with all the connotations of media blitz, customer acquisition and market validation that implies. And that's why marketing makes up much of the Kickstarter industry’s infrastructure. There are at least three marketing and PR firms — CommandPartners, Agency 2.0 and Shmedia — that focus on crowdfunding, and countless filmmakers who make the famous Kickstarter videos at the top of every project page. The Steven Spielberg of startup filmmaking, Adam Lisagor, did the Coin crowdfunding video that hit no. 1 on YouTube.

One reason Kickstarter companies require a new industry of service providers is because crowdfunding has turned e-commerce on its head. Everything that Amazon figured out in the late 1990s assumed you were starting with a product and searching for customers to close a sale. With crowdfunding, you start with hundreds of sales and go in search of a product. It's a sophisticated form of market testing.

It's difficult to imagine a book ordered on Amazon taking six months to arrive, but this is baked into crowdfunding, since projects need that time to manufacture something. In the interim, many use pre-order software to keep making sales, and rely on a customer management service like BackerKit to keep track of their many, impatient fans.

For those of you experiencing deja vu, yes, we’ve seen this before. Every historically new platform -- books, newspapers, radio, TV -- brings forth its own support industry, and Kickstarter is no exception. eBay, founded in 1995, went on to spawn an ecosystem of service providers and auxiliary businesses (Remember “The 40-Year-Old Virgin,” where Catherine Keener's character owns and runs a store that sells people's stuff on eBay for them?). Today eBay has a market cap of $68 billion. Its certified collaborators help eBay vendors advertise, merchandise, list goods, auction them off, monitor sales, research markets, ship goods and provide customer support. They’ll even sell you a pair of knee-high, sequined boots, if you wait long enough.

While eBay has reserved those companies a place on its website, and systematized the ecosystem it supports, the crowdfunding platforms haven’t yet. It’s too soon. They live in a market without established players, as multiple suppliers jostle for the top spot, and none dominate.

Three other characteristics of crowdfunding projects require a new kind of service provider. Generally, projects are small, most are doing this for the first time, and therefore many are risky. Being small means you don’t have access to the tier-one factories that work with Apple. Instead, you have to work with a lot of very small suppliers you’ve never heard of (which makes them hard to find). It also means you have a lot to learn about converting money into objects, and a short time to do it in, so your partners have to be mini-accelerators (similar to Y Combinator) in their own right, helping you to solve problems quickly.

Young companies are more likely than old ones to partner with their peers, so when crowdfunding alumni choose a payment processor, it’s usually Stripe or Affirm rather than PayPal. Startups understand other startups, and they're probably hungrier for opportunities too small to be noticed by legacy players, so in the Bay Area you see a network of new companies emerging to serve needs that simply didn't exist a few years ago.

The new pools of capital that crowdfunding channels to inventors have triggered a boom in hardware innovation, and a lot of companies that predate crowdfunding now rely on it. The fulfillment house Rush Order, for example, was founded in 1989, but sees a significant share of new clients coming from crowdfunding alumni.

While crowdfunding made raising money a lot easier, making stuff is just as hard. Berkeley Sourcing Group, a company that helps makers with prototyping, tooling and production, says about 70 percent of its customers are crowdsourcing alumni of Kickstarter and its rivals. Dragon Innovation, while performing similar services, is actually a crowdfunding platform in itself. Various hardware accelerators, including Bolt, HAXLR8R, Highway One and Lemnos Labs, have sprung up to guide project creators through the design and manufacturing process.

Crowdtilt’s $23 million in financing, announced Dec. 16, is just one indication of how large the industry looms in investors' minds. Crowdfunding appeals to venture capitalists at least in part because VCs and crowdfunding platforms do the same thing: they sell money to early-stage, potentially high-growth startups. Both take a cut of the funds sold, and being close to the money is usually a pretty good business model.

Whose money are they selling? A newly available group of investors that we think of as “venture consumers.” Rather than just buying products, venture consumers are shopping for ideas and eventual bragging rights. On the spectrum of risk capital, they’re one rung lower than angel.

There are a lot of risks in allowing retail consumers to buy a piece of the future. The main one is that the future might never show up. Those shoppers know what to expect on eBay: that’s where you buy used things online. Amazon is where you buy new things. But Kickstarter is where you buy the new new thing --so new it hasn’t been made yet.

Now, of course, there’s a new new industry to go with it.

[Image via Youtube]