First of all I did not even consider using Kickstarter to fund a company until a friend of mine pointed out that he was involved with a group of individuals that are doing just that.
They are starting their company and raising their seed capital with Kickstarter.
How is it possible to raise seed funding through Kickstarter?
If you think about what you are trying to accomplish, the end goal, and then determine the various ways of achieving that goal you often can come to conclusions that may not fit your preconceived notions. This is definitely an exercise of thinking out of the box. Let us break down what the goal of raising money and how to achieve it, along with pros and cons.
The End Goal
The end goal in this case is to raise money for a new company. Typically the first round of money is referred to as seed funding or angel capital.
What are the usual sources of raising capital:
(1) Raise money from friends and family.
Pros: can be quick
Cons: if things do not go well you may damage some relationships
(2) Raise money from angel investors.
Pros: can be quicker than typical venture capital firms
Cons: difficult to find angel investors
(3) Raise money from venture capitalists.
Pros: not only do you raise capital but you often obtain expertise and connections
Cons: can be a long process, often months of presentations
Traditional avenues to raise capital and what is given up:
(1) Friends and family : this is fairly straightforward as you usually just meet with them and explain what you are doing. If you are giving them part of the company you may do it informally or provide the legal documentation.
(2) Angel Investors : once you locate a group of angel investors, or an individual, you need to present to them. If they decided to invest you will need to have the legal documentation provided and they will obtain ownership in your company.
(3) Venture Capitalists : once you are lucky enough to obtain a meeting you then present to them. If they decided to invest you will need to have the legal documentation provided and they will obtain ownership in your company.
More recent advances in raising capital:
Angel List : an online site that facilitates investors and entrepreneurs finding each other, you list your company information and Angels have access to it.
With all of the above you are typically giving up ownership in your company, you will usually provide stock or options in exchange for the capital. In some cases, such as family, it may just be a loan but typically ownership is provided.
Now Enter Kickstarter
Here is an example of a company raising their seed funding with Kickstarter. When you look at the pros and cons above realize that raising money through Kickstarter has the benefit of being a fast method of raising funds and you do not give up any equity.
Here is the big difference between Kickstarter and all other forms of raising Capital. You do not give up stock or any ownership, you do not have a loan to be paid back. You do however have the seed funding you need.
Here is an example of a game that is being created and the creators are starting a new company. The game is Empires of Tahn and their kickstarter campaign is here so you can see how they are using Kickstarter.
Why would someone just give money to you?
That is the question. Clearly this is a for-profit company. You are giving them money and they are not giving you stock or options in return. So they are raising funds and you have decided to give them funds but you do not receive stock, so why in the world would you do it?
Instead of giving you stock in the company they are giving you something for your money. When it comes to games online there are subscription models, in game spending, and a combination of both. In this case they are giving you in game perks and in game currency. So when the game does indeed launch you will be able to play and already have in game currency as well as in game items.
I assume you will either be getting a discount from the future cost or possibly obtaining items that are not going to be available to the general public. So while you are not getting stock you are getting something for your money. In this case for those that love these types of games it may be a great deal.
Learn from Their Example
Now if you are considering this method of raising funds be sure to look at the Empires of Tahn kickstarter page and learn from their approach. They have extensive information about the game, from descriptions to images to videos. They also have multiple funding levels, you can give anywhere from $1 to $10,000 and there are 19 different options to purchase.
It appears that to raise money you need to have a very compelling offer. Essentially you are raising money from future customers as they are pre-paying. You need to be sure if you are going to take their money that you can deliver on what you promised.
The amount of money that can be raised through kickstarter will vary due to many factors, however do not discount it as it may be a very viable option.