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.
Kickstarter is Debt
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Re: Kickstarter is Debt
#12Just 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 ri…
Apple is doing it as regulatory arbitage which is distorting the normal signals.
I'm not saying you are wrong, more its a really bad example.
Re: Kickstarter is Debt
#13It'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.
Re: Kickstarter is Debt
#14This 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 se…
Yeah, Kickstarter seems like debt that has no interest, and can be forgiven (in the right circumstances), and it gives you free publicity and a form of market validation. By far the best source of debt I can imagine.
In terms of forgiveness: I think the major sin is not shipping anything at all or perhaps worse, fulfilling some of your orders but not all of them. Even if you mess up the enclosures, perhaps you can ship everyone a prototype circuit board? Because surely, surely something physical arrived on your doorstep if you burned millions of dollars.
The problem is usually about being honest where the money went. Backers are mostly not aware of just how much money it takes to build stuff at scale and when the headline is "Bolt-o-phone goes under, $5M raised, nothing shipped" it's natural to say "so what the hell did you do with my money then?".
That and making wildly optimistic optional extras if the funding gets high enough... keep it simple and it'll ship!
Re: Kickstarter is Debt
#15I'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.)
Re: Kickstarter is Debt
#16It'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.
The interest rate doesn't determine whether or not something is debt - I have a 0% interest car loan, yet it's still considered debt.
Kickstarter funds are a loan for a finite time that's paid back in product. And if the product costs more to produce than estimated, that cost overrun is the cost of the debt - i.e. interest.
Re: Kickstarter is Debt
#17Just 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 ri…
Right, but MM's "optimal capital structure" isn't taking into account if your company can't raise debt on the public markets while maintaining cash flow.
Debt is essentially selling a put option on your assets, but early stage companies don't have substantial assets. That's why convertible debt exist and why early stage financers demand equity.
Re: Kickstarter is Debt
#18This should be required reading for anybody doing a hardware startup, not just those using kickstarter.
Agreed. As for required watching, Scott Miller of the Bolt team produced an excellent 18 part YouTube series on Design for Manufacturing https://www.youtube.com/watch?v=84VxN9K_PMM&list=PLNTXUUIxHy...
Re: Kickstarter is Debt
#19This 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.
Re: Kickstarter is Debt
#20In 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…
So really, any form of financing a company would be considered debt.