Kickstarter tries to clarify what it's about

As I have written before, I believe that Kickstarter is a novel and important way of allowing innovators and information creators to ensure against some of the risks associated with upfront investment by obtaining some pre-investment signals of demand. Strictly speaking, those signals were supposed to be financial support but ultimately ended up being, for many ventures, pre-sales. Consider Pebble and LiFX (that I discussed last week). From an economic theory perspective, pre-sales can work very well. Basically, a supplier posts an amount that would justify investment and if there are enough pre-sales, the investment is undertaken and the goods are delivered. The good aspects of Kickstarter are that you can see how close a supplier is getting to that goal and also that if the goal is not reached you do not have to pay.

But there are issues here. For starters, the economic theory is based on an assumption of truthfulness: when you report your target investment there is an incentive to inflate that number. Now thanks to the Internet there is some scrutiny but the incentive issue remains.

Second, it isn’t really a pre-selling mechanism. It is a funding mechanism and so we should expect the same failure rate for ventures as elsewhere. Some have whined about this but it is part of the game.

Third, on that score, there is no commitment really. The idea is that you back a venture but there is no contract or guarantee that the money will be spent and any promises delivered upon. Last week, in relation the LiFX, Felix Salmon did his job and scrutinised the hype. That didn’t stop LiFX from reaching its funding goal in quick time but ultimately what is true is that LiFX will only be able to counter Salmon’s claims by actually selling their intended products. Like many others we are still waiting and seeing. Pebble, for instance, that I backed is not going to make its September shipping date. I, for one, never expected it but I will be bitterly disappointed if no watches are delivered; they did at least present that they had a design that was operable.

In light of all of this, Kickstarter have responded with some new rules. First, projects now must be more explicit about the risks and challenges they face. This is a welcome move and consistent with the idea that backers are funding projects and need to understand the investment aspects even if they do not have equity per se.

Second, Kickstarter now say they are not a store. That means for hardware and project designs …

• Product simulations are prohibited. Projects cannot simulate events to demonstrate what a product might do in the future. Products can only be shown performing actions that they’re able to perform in their current state of development.
• Product renderings are prohibited. Product images must be photos of the prototype as it currently exists.

Products should be presented as they are. Over-promising leads to higher expectations for backers. The best rule of thumb: under-promise and over-deliver.

We’ve also added the following guideline for Hardware and Product Design projects:

• Offering multiple quantities of a reward is prohibited. Hardware and Product Design projects can only offer rewards in single quantities or a sensible set (some items only make sense as a pair or as a kit of several items, for instance). The development of new products can be especially complex for creators and offering multiple quantities feels premature, and can imply that products are shrink-wrapped and ready to ship.

These are very important changes. For starters, they rule out aspects of what Pebble and many others have done in essentially pre-selling. You can kind of still pre-sell but you are limited. Basically, Kickstarter are refocussing on what they originally started out to: help creative works get funded more so than products.

Focus is a noble goal but it is missing some crucial points. First, there are products that can be developed when they have pre-sales. Second, there are many people who would like to purchase pre-sold products. In other words, Kickstarter may not want to supply the platform for that but there is a market for it. That means that they are ceding that space to others. It strikes me that given Kickstarter’s brand and market presence, it is a mistake for them to so easily cede that. After all, it was a platform that enable users to use it as they saw fit. As it turned out, their uses differed from Kickstarter’s initial vision. My guess is that Kickstarter should have worked out how to go with it rather than to restrict it. But, of course, this may also signal a deeper problem — perhaps a legal one — that is not clear from all the enthusiasm and activity.