
Kickstarter is Debt - proee
https://blog.bolt.io/kickstarter-is-debt-e3b6a70ce180
======
bhouston
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...](https://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem)

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

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

Honestly? That statement seems a tad simplistic to me. Especially in the
context of startups.

~~~
hguant
What makes a start up different than any other business?

~~~
joshmn
The urge to aggressively, rapidly grow.

~~~
jjaredsimpson
This is a distinction without difference. You could've also said, "Startups
have fewer employees" for instance.

How does the urge to grow separate a startup from a business in the desire to
obtain low cost debt?

------
karmacondon
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.

~~~
bhouston
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.

~~~
nathancahill
Of course it's the best source of debt _for a company_ because it's completely
one-sided. See also: scamming, ponzi schemes and ransomware, all great sources
of free money.

~~~
simonh
Anyone who thinks they can renege on KS commitments needs to take care though.
The FTC has pretty clear ideas about people's responsibility to meet their KS
commitments.

[http://www.npr.org/sections/thetwo-
way/2015/06/11/413676042/...](http://www.npr.org/sections/thetwo-
way/2015/06/11/413676042/in-its-first-crowdfunding-case-ftc-goes-after-
boardgame-kickstarter)

------
xsmasher
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.

~~~
xirdstl
This calls to mind the (ongoing) MST3K Kickstarter, and his explanation of how
much of the first couple million is going to fees + fulfillment of awards. At
the level I pledged, I would love to dismiss the physical awards and just have
the digital movie copies. But I can't.

------
FussyZeus
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.)

~~~
rplnt
> I think Kickstarter has great potential

I think it _had_ a great potential. But they ruined their brand with allowing
basically anything on it. I'd say it's similar to Ebay in a way. Of course
it's better for them ($$$)... but the "potential" is not there anymore.

~~~
FussyZeus
I would disagree, but again this depends greatly on the Kickstarter in
question and specifically the leaders of the campaign. I think KS would be
wise to implement a little more vetting, and maybe require a prototype or
something, but truth be told this is something the KS community also needs to
get right. On the campaigns I follow I still notice a large amount of people
complaining about the waiting which tells me they fundamentally don't
understand how this is different than say, Amazon.

------
ThrustVectoring
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)

~~~
phire
Oculus might end up being the most successful product/company to be
kickstarted. They probably are the most successful money wise, going from a
simple prototype on a forum to being acquired for 2billion cash/stock.

They were clever and sold (reasonably functional) devkits, not final products
for their kickstarter.

I won't regard them as fully successful until they release a final product
that meets expectations (as in, facebook doesn't write them off as a loss)

Product wise, Pebble is the most successful so far, it was past the
prototyping stage before for the first kickstarter (though adding extra
features probably set them back) Right now they are up to major version 4 of
their product. Long term, I don't think they will be more successful than
Oculus.

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

~~~
louprado
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...](https://www.youtube.com/watch?v=84VxN9K_PMM&list=PLNTXUUIxHyNwrlAh2ZkaMTSBrgk86wC-a)

------
orky56
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.

~~~
duhruh
So really, any form of financing a company would be considered debt.

~~~
jacquesm
No, raising capital will also finance a company and is not debt, you give the
people that give you capital a portion of the future revenues and value
created in return.

~~~
orky56
Not quite. Raising capital could just be seen as massing liquid assets so you
have the funds to finance your business, which could take the form of debt,
equity, or just a plain transfer of assets for nothing.

With equity financing, the company transfers partial ownership of the company
in the form of shares so that they can gain the capital. Having shares in a
company does not automatically give you future revenues. Unless you cash out
your shares in the secondary market (if it's still a private company), you are
not going to see those future revenues directly. If there's an exit
(IPO/acquisition) or a share buyout, that would be the only other time you
would see your shares turn into a liquid asset. The value of your shares will
not increase unless those events occur or if the value of the company has
objectively increased through a higher valuation which in the private market
is through another financing round.

~~~
jacquesm
> Unless you cash out your shares in the secondary market (if it's still a
> private company), you are not going to see those future revenues directly.

Dividends.

------
MarkvW
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.

------
ascorbic
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...](https://www.kickstarter.com/projects/vela/vela-one-the-worlds-first-
high-speed-led-flash)

------
ryporter
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.

------
analog31
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.

~~~
Animats
_" 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."_

Yes, and then the Federal Trade Commission dumps on you for violating the 30
Day Rule, which covers refunds and delays.[1]

In the early days of the Internet, many little companies ran into this. They
put up a web site and started taking orders on line. But in those days, the
online ordering system was usually disconnected from inventory control and
fulfillment. A successful product could suddenly generate far more paid orders
than the seller could fill. Instead of the seller refunding the money after
the 60 day limit like they're supposed to, they held onto it, hoping to catch
up later. (After 30 days, you have to notify the customer they can get their
money back, and refund them if they ask. After 60 days, you have to refund
even if the customer doesn't ask.)

Kickstarter is sort of a gimmick to get around the 30-Day Rule, by explicitly
dumping more risk on the buyer. That doesn't always work for the seller.[2]

[1] [https://www.ftc.gov/tips-advice/business-
center/guidance/bus...](https://www.ftc.gov/tips-advice/business-
center/guidance/business-guide-ftcs-mail-internet-or-telephone-order) [2]
[http://arstechnica.com/tech-policy/2015/06/feds-take-
first-a...](http://arstechnica.com/tech-policy/2015/06/feds-take-first-action-
against-a-failed-kickstarter-with-112k-judgment/)

------
Paul_S
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.

~~~
Splines
Personally I don't bother anymore. If the project that is on kickstarter will
succeed, then I'll be able to buy them when they do and not have to wait. If
they fail, I wouldn't have gotten anything, and I get to keep my money.

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

[http://backersmanual.com/2014/03/19/crowdfunding-
terminology...](http://backersmanual.com/2014/03/19/crowdfunding-terminology-
a-legal-minefield/)

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.

------
steve19
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.

~~~
Johnny555
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.

~~~
steve19
Debt is the state of owing money. This is the definition of debt. Kickstarters
do not owe anyone money.

~~~
Johnny555
Debt isn't necessarily paid in money, depending on the terms of the contract,
debt could be paid in cash, labor, gold, corn, oil, hogs, or pretty much any
commodity that can have a value set on it.

In this case, Kickstarter funders expect to be paid in product (or whatever
perk was promised to them).

------
adventured
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.

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

------
miseg
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.

------
samfisher83
Debt usually has highest preference during liquidation. I don't see how
kickstarter is like debt.

