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.
Kickstarter money represents both revenue and a liability for the company that is doing the project. There are many types of liabilities which are not exactly debt in the sense that we think about a bank loan (which is also a liability). The thing that all liabilities have in common is that they represent an obligation of the company which could require them to spend money or other assets to fulfill. This does not mean they have to satisfy the liability, it just means that there is a financial justification for any work they do relating to that.
I am sure the accounting profession is continually being tested with new business models and trying to capture the financial reality for people who are playing very different games in the world of capital.
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.
Though, the more and more I think about the grand-parents comment, the less I understand it:
With debt, you can go into default: so all your assets go to the creditor, instead of you paying. That's like buying a put option, not selling one.
Your parent post's statement is a reference one of the basic financial models in asset pricing literature, the "Merton model" (Merton RC. 1974. "On the pricing of corporate debt: the risk structure of interest rates." J. Finance 29:449–70)
Honestly? That statement seems a tad simplistic to me. Especially in the context of startups.
Lending to getScale is vastly different to lending to IBM.
Therefore the debt/equity argument and balance is vastly difference.
How does the urge to grow separate a startup from a business in the desire to obtain low cost debt?
I'm not saying you are wrong, more its a really bad example.
That is the central thesis of the linked article as well.
Too bad the theory is complete nonsense.
>> The basic theorem states that under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed.
In short, the theorem states that in conditions that will never exist in the real world, the value of a firm is unaffected by how it's financed.
>> the value of the company increases in proportion to the amount of debt used
First they say "the value of a firm is unaffected by how it's financed", but then: "the value of the company increases in proportion to the amount of debt used", so if "debt used" counts as "financing" then the theory contradicts itself, at least as described by Wikipedia.
This is where I rambled about some other related stuff, but decided to just leave it out because fuck everything about mainstream economics.
If only Modigliani and Miller weren't total idiots. Then they might have repeated their calculations with these assumptions relaxed.
If you bothered to read the article, you'd recognize that Modigliani-Miller actually did the exact calculation you previously criticized them for not doing. Similarly, if you read it, you'd recognize that the claims you think are contradictory actually apply to different circumstances (taxes vs no taxes).
What next, medicine is contradictory because "if you don't eat cyanide, you probably won't drop dead, but if you do eat cyanide you will"?
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 .
 Other than Bolt of course, because their blog is so awesome that I'm thinking about pitching them right now.
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!
Although they label things as "donations" and "rewards", it is a de-facto presale platform. If you're going to put a project on there and tell people you'll send them something for giving you money, you're making a promise beyond the words that Kickstarter is using. And while I know that there's a certain amount of risk with any project, you damn sure do have an ethical obligation to do everything in your power to make good on your promise to your early supporters.
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.
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.)
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.
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.
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.
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.
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.
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.
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.
Yes, and then the Federal Trade Commission dumps on you for violating the 30 Day Rule, which covers refunds and delays.
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.
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.
Judging how many largish kickstarters end in disaster, I am not surprised the people running them don't use accountants.
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.
In this case, Kickstarter funders expect to be paid in product (or whatever perk was promised to them).
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.