Kickstarter is Debt

Just to be clear though debt is actually a preferred type of financing because it is one of the cheapest forms.

A venture investor is expecting a 10x return on their investment. That means they are expected a much greater realized interest rate than debt - money that effective comes out of the pockets of the business owners.

If you can get debt, if is often preferred if you can figure out how to manage the default risk.

You do not give up equity (which could be worth a massive amount), rather you only have to pay back the debt at some future time with some much minor interest.

Also interest is often tax deductable, thus debt has further tax advantages.

One Nobel winning economic theory leads to an optimal capital structure of 100% debt: https://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theo...

Example: Apple is buying back shares (the opposite of equity funding), while issuing massive amounts of debt.

This article, and it seems the whole blog, is an amazing resource for anyone considering a hardware startup. Very clear and very helpful.

The funny thing is that kickstarter's official policy is that they are not a pre-sale platform. But if they were serious about this, they wouldn't let campaigns offer the product being developed as a "reward" in exchange for money. It's like amazon saying that they aren't a book seller, but they will give you a $30 book as a "reward" for donating $30.

I'm not sure if I fully understand the title of this post, though. The author points out that Kickstarter funds are to be used only for production related costs and therefore should be considered debt (they must be repaid, unlike equity). But, in reality I don't think that there are any legal or even ethical stipulations placed on money raised from Kickstarter. The money is being donated, and unlike business debt can be used in whatever manner without having to be repaid. Wasting Kickstarter money may or may not affect someone's reputation for awhile, but it doesn't show up on a credit score.

For this reason, it's always seemed to me that crowdfunding is the best way to raise money for anything. If you can do a crowdfunding campaign, do it. Most certainly for hardware. Then get a line of credit if you can, and raise money from VCs as a last resort [1].

[1] Other than Bolt of course, because their blog is so awesome that I'm thinking about pitching them right now.

Compared to three years ago, there are fewer game Kickstarters that offer physical rewards, and that's a good thing.

A lot of early campaigns wound up with a bunch of orders for physical goods (deluxe editions, t-shirts, figurines) that have a high marginal cost. Later (smarter) campaigns are offering digital art books and soundtracks instead, which have almost no marginal cost.

In short, don't get into the T-shirt / CD business TOO, in addition to your main product, if you can avoid it.

I've kickstarted a few things, but only with tiny amounts ($24 and $12) and only for things that I couldn't find in the open market. I think Kickstarter has great potential and has brought about numerous things, but just like any tool it's got people who know how to use it and do well, and people who don't and blow their foot off.

This goes both ways: A lot of the large kickstarters that make the news usually have gotten gobs more money than they ever thought possible from way more backers than they thought they would get. Then they're buying offices, cars, some fancy headquarters and all this other bullshit they didn't need.

Were I to do that, not one sodding penny is going anywhere that isn't directly related to getting my backers what they paid for. I get that kickstarter isn't a store (people love to say that) and it's a risk, but just because the risk isn't yours doesn't mean you shouldn't mitigate it. You're spending other people's money for Christ's sake.

By the same token, there were a lot of people who got burned on obviously fake/impossible projects but quite frankly, that falls into the category of stupid tax for me. A fool and his money are soon parted, etc. etc.

I do wish there were more legal routes for burned backers though, in the current system the backers are taking all the risk and if someone's kickstarter goes tits up they just walk away, usually hardly affected (and potentially Internet famous). I understand that's the risk involved, but it effectively puts the people in charge of decisions in charge of managing the risk taken by people they have no legal obligations too, which never goes well. (See the Banking collapse.)

This relates to why Kickstarter campaigns can be very lucrative to run - you raise funds without relinquishing any of your equity, which can later be sold for massive amounts of money (see: Oculus getting sold to Facebook)

This should be required reading for anybody doing a hardware startup, not just those using kickstarter.

In summary:

1) Kickstarter is debt financed by consumers directly (B2C) motivated by early access to product.

2) Factory financing is debt financed by production motivated by early fulfillment.

3) Purchase order financing is debt financed by consumers indirectly through retailers (typically) (B2B2C) motivated by early access to consumers.

4) Venture debt is debt financed by investors motivated by continued confidence in company.

Kickstarter is UNSECURED debt. Almost certainly unsecured debt, positioned well below undersecured secured creditors with liens on everything.

Kickstarter is tiny unsecured debt. Debt that is not economically worth any collection effort.

Kickstarter is all about faith and trust. Good luck with that.

Just over a year ago I ran a Kickstarter campaign[1] that raised just over £45k (about $70k). Because I was applying for R&D tax credits, I filed a tax return before I shipped the products. This caused a bit of a puzzle for my accountants. In the end they decided that they'd just not book the Kickstarter money as income at all until I shipped each reward.

It's good that the author mentions factory financing. It's not something I'd thought of before, but it ended up being a crucial part of my project's success. My CM initially gave me the standard 50% upfront/50% ex works. As the time to ship drew closer, it became clear that cashflow would be very tight. Luckily my CM was very flexible, and agreed to extended terms for the final 25%, which gave me time to sell a few more flashes and cover the last payment. Choose your CM wisely! I'm going to be placing an order for a second batch soon and will be angling for better terms still.

[1] https://www.kickstarter.com/projects/vela/vela-one-the-world...

Another possible source of purchase order financing is existing investors. For example, I am a major investor in (and a board observer of) a young startup that is just ramping up production. I've indicated to them that, should the need arise, I would be willing to provide some financing to help bridge a gap in their cash flow. Obviously, I would have to be very careful not to massively concentrate my financial risks (or to throw good money after bad, if a loan is needed because the company is struggling). However, no bank is going to know them as well as I do, and, if it really is just a cash flow issue, then I am highly incentivized help them out. Any interest I would collect on such a loan would pale in comparison to the increase in the valuation of my stake in the company.

Granted, not taking enough risk is probably one of the reasons why I'm not rich. (Another reason is that I haven't had any great ideas). But in my risk-averse world, I have always thought that the idea of taking pre-orders is more to secure customer commitment, rather than to fund production.

I have a hobby business in a niche where I've seen a few small entrepreneurs take pre-orders (often 50% down payments), spend the money, go broke, and face a bunch of angry customers. They can't deliver product, and they can't refund the money. It's possible that those were cases where something like a family emergency pulled them under.

But watching those failures taught me the lesson -- similar to what the OP suggests -- that down payments are a loan from the customer. In my own case, I decided that it was preferable to risk my own money than somebody else's, and I kinda crawled out of the starting gates by doing all of my own production using small runs of parts. Thus my margins were lower, but my risk was commensurately lower too.

As it turns out, my business easily saturated its own world market quickly enough that I still sell a few units a week but am glad that I didn't try to scale up too soon. My only regret is that I have so far missed the chance to learn how to scale up a hardware business.

This is pretty much spot on but not necessarily for long. I'm really saddened by how badly kickstarter is being abused. There was a time when they could've put in vetting into the process but it's really late now. I fear people have grown wise to the fact that from their perspective this is essentially a costly way to pre-order in the best case scenario and a costly mistake in the more common case.

Depends on the project. If you are promised a physical product , then it is a sale :

http://backersmanual.com/2014/03/19/crowdfunding-terminology...

I think that link provide an accurate description of what some transactions on KS are legally.

The problem is that KS TOS are vague on purpose, entertaining the confusion as backers have no legal status (hence the endless debate about what "backing" is), which is illegal in a lot of European countries. One day however even US justice will have to decide what is the legal status of backers once and for all.

It's not debt, there is no interest. It's just a liability. No different to Amazon taking a pre-order on an upcoming book.

Judging how many largish kickstarters end in disaster, I am not surprised the people running them don't use accountants.

This is plainly wrong. Kickstarter isn't debt, it's sales.

Both are obligations, but that is where the similarities end. Not all obligations are debt, unless you want to back the meaning all the way out such that it's no longer relevant to the kind of debt one would discuss around a business.

Sales and debt serve two different roles within a normal business and come with important, different legal requirements and nuance.

Easy proof: Kickstarter doesn't have the same legal protections that typical debt contracts do, not even remotely close. Kickstarter has legal protections a lot closer to what a sale comes with.

I thought the author might be making a pun with "Kickstarter is dead". It this something native English speakers hear too?

This may not be relevant on a "start ups" site of HN, but some people argue that debt is inevitable to grow any business, which I would argue against.

Debt usually has highest preference during liquidation. I don't see how kickstarter is like debt.