Kickstarter relaxed its regulations this week, in an effort to increase the number of projects eligible to receive funding through the site. After five years of enforcing higher barriers to entry than its competition, the company hopes the move will cement its place as the most successful crowdfunding platform, and not dilute the quality of the site’s offerings.
The company has made two major changes to its application process. The platform will offer a Launch Now option designed to bypass the site’s Community Managers, actual employees who previously stood as gatekeepers, approving or rejecting proposals. If a project passes the standards set by a new algorithm, it can immediately begin to raise money. Users can, however, still choose to receive feedback from the Community Managers.
Second, Kickstarter has distilled its project description requirements from 1000 words down to 300. There are now only three guiding principles; that projects create something to share with others, are honestly and clearly presented, and do not fundraise for charity, other financial incentives, or involve prohibited items (defined as illegal, regulated, or dangerous items.) As a result of these changes, previously banned products, such as sunglasses, bath and beauty products, and certain types of software can now receive funding.
Kickstarter’s move from a curated marketplace into a more open environment is evocative of the strategy Facebook used to navigate the emergent social media landscape. In 2004, the year it was founded, Facebook required users to have a Harvard email address. It then opened itself up to Boston-area schools before allowing any student with a college email address to join its network.
The Facebook system imposed quality control, providing users with the confidence that the community was regulated. Before long, Mark Zuckerberg’s company had supplanted the more open, incumbent social networks such as MySpace and Friendster. Two years after its founding as a closed network, Facebook became available to anyone over thirteen with an email address. It then reaped the benefits of an open network, because it had established its reputation as a closed one.
Like Facebook, Kickstarter was not the first company to develop the concept that it would become synonymous with. The first to develop that concept, rewards-based crowdfunding, was Indiegogo. Founded in January of 2008, Indiegogo is like Kickstarter in that a gift, and not equity, is given by the project creators to their backers in exchange for their financial support. Indiegogo, however, is network neutral. Unlike Kickstarter, it gives any project looking for funding the opportunity to raise cash. Indiegogo also practices flexible funding, allowing fundraisers to keep any money that is donated to their cause. Kickstarter project creators, meanwhile, must meet their predetermined fundraising goals in order to see any of the money.
It is undeniable that Indiegogo’s formula has proven to be a popular strategy. The company reports that it has helped users in nearly 200 countries launch 200,000 campaigns, and in January, the company raised $40 million in Series B funding from a group of investors that included Kleiner Perkins.
Due to the stricter regulations, visitors to the Kickstarter website have come to expect a higher caliber and more focused range of projects. This approach has allowed the company to stand atop the crowdfunding market. According to a Google Trends report, the word Kickstarter is searched for eight timesmore than “Indiegogo” and “crowdfunding.” Reflecting this popularity, Kickstarter has raised over $1 billion for projects, all of which were approved by the site’s managers and met the fundraising goals necessary for the project’s completion.
However, with its most recent changes, it remains to be seen whether Kickstarter has struck the right balance between competing with Indiegogo for users and preserving its competitive advantage. Now that the barriers to entry have been lowered, will the creators of the next Oculus Rift, the Kickstarter-funded virtual reality headset acquired by Facebook for $2 billion, continue to view it as the preeminent crowdfunding site? Or will they opt for another, more selective option in an increasingly competitive crowdfunding space?
There are now over 1,000 crowdfunding platforms, with a new one being developed and added every week, according to OZY. In addition to rewards-based platforms like Indiegogo and Kickstarter, there are three other categories for crowdfunding: peer-to-peer lending, pioneered by the Google-backed Lending Club, donation-based crowdfunding, practiced by microfinance services like Kiva, and equity-based crowdfunding. The latter could grow dramatically at the expense of rewards-based platforms, if rulings related to the 2012 JOBS Act allow unaccredited investors to gain equity in early stage ventures. The verdict will be announced later this year, and will have far more impact on Kickstarter’s fate than any of the changes that were announced this week.
That being said, there is certainly a niche for rewards-based crowdfunding, even if equity-based crowdfunding is opened up to unaccredited investors. For products like the Oculus Rift, impressive technology that could find traditional venture funding, the advantage of rewards-based crowdfunding is that it allows for immediate feedback from developers and industry experts who, unlike venture capitalists, are uninterested in taking ownership of the project.
In this market, Indiegogo and Kickstarter indisputably enjoy a comfortable lead. And there is a good chance that, with an established reputation for protecting consumers, Kickstarter will be able to capitalize on a more open-door policy going forward. But the market is growing rapidly and, with possible changes in funding laws on the horizon, every company in the sector runs the risk of becoming just another face in the crowd.