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The Pros and Cons of Raising Money on Kickstarter to Launch Your Business

By Serena Solomon | November 13, 2014 7:35am
 Some New York City businesses are using Kickstarter to raise funds.
Kickstarter and Small Businesses
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NEW YORK — This summer as Nolan Walsh and Connor Wilson crisscrossed South and Central America finding a factory for their new company Thursday Boot Co., they raised almost $300,000 for their first run of shoes through crowdfunding site Kickstarter.

"At the end of the day [Kickstarter] is a great platform for people to find your brand, especially if you are on a budget," said Walsh, 26, an MBA student who is based in Flatiron District.

Through Kickstarter, Thursday Boot Co. pre-sold its $199 boots to 1,203 backers ahead of production, solving the cash flow problem that lags between making and selling products. They were also able to build a community of customers early on and avoided bringing in big investors, which would have meant doling out controlling stakes in Thursday Boot Co.

Kickstarter provides a platform on which entrepreneurs and other creatives can get projects off the ground by offering those who support a campaign increasing levels of rewards to match the money pledged. Kickstarter takes a 5 percent cut of funds. While artists, filmmakers and musicians might offer token rewards such as a producer credit on a documentary, many startup businesses like Thursday Boot Co. use the site to presell the product they are about to make.  

While the New York City-based Kickstarter isn't the only crowdfunding website — other websites like Indiegogo offer a similar service — it is the most well known. In 2013, about $50 million was pledged to almost 3,500 New York City-based projects, according to company spokesman Justin Kazmark. Nationally, Kickstarter pledges grew from $320 million in 2012 to $480 million in 2013.

Here are the pros and cons of fundraising on Kickstarter from to five New York City businesses who have done it:

Pro: Get Cash Fast

In January 2014, New York City-based milliner Satya Twena needed money fast. The Midtown factory that created her hats for her 4-year-old company had suddenly shut its doors and she managed to scrape enough funds together to buy it. She needed additional cash to hire back its employees and get production rolling again.

"For me, going and getting investment would have taken too long," said Twena, 31. The process would have involved weeks or months of vetting investors to find the right fit, negotiating and legally finalizing any deals.

Within a few weeks through a Kickstarter campaign, Twena was able to raise more than $170,000 in exchange for fulfilling 1,300 hat orders from supporters.

Pro: Keep Control of Your Business

To match the $170,000 raised through crowdfunding, Twena would have had to hand over 50 percent of her business to get the same amount from investors, she said.

"We literally had no other way" besides crowdfunding, said Twena.

Demonstrated success on Kickstarter can also be a selling point to future investors when a young business is ready for another phase of growth. The success of Thursday Boot Co.'s Kickstarter campaign put the company in a strong position in this regard, according to Walsh. 

"We have shown that a lot of people agree with us that these shoes are something new and desired," he said. "Now we are able to get the right investors if we choose to do so."

Pro: Create a Community of Support for a Business

One supporter that pledged to the Kickstarter campaign for Snapshotr, a duel-chamber shot glass that separates the shot and chaser, not only sent money, but also sent Andrew Levin and Justin Altus some of his music so they could listen to it as they developed the business.

It's just one example of the community that developed around Snapshotr's campaign, according to Levin and Altus. The campaign has raised almost double its $12,000 goal and it still has three weeks left on the clock.

Other campaigns such as Twena's hat factory also experienced a level of support that went beyond the exchange of money and goods. She already had a dedicated customer base, but the cry-for-help in a Kickstarter campaign rallied more troops.

"They become our tribe. They love what we do. They believe in local manufacturing," Twena said.

Pro: A Chance to Sharpen Your Brand's Message

For Levin and Altus, the strength of their Kickstarter campaign was in the honesty of its story. Who has more authority on how to improve the shot glass than two college-age friends?

"We have a whole back story that is better than someone saying 'Buy this,'" said Altus. "It has a great history of student entrepreneurship."

As part of their campaign, Levin and Altus created a video to explain their device. They also took potential pledgers through their 18-month journey of creating Snapshotr, including photos of all their prototypes and a detailed diagram of how it works.

Designer Joanne Hong's Kickstarter campaign for the next line in her already-successful kids clothing brand has raised half its goal and ends on Sunday. Unlike Twena's factory, Hong can go ahead with her line if she is not successful on Kickstarter, but the publicity and social media buzz generated through the campaign has already made it valuable. 

"A big part of it is being able to publicize and show people what I am doing," she said.

Con: Not Everyone Understands Crowdfunding

The Kickstarter campaign for designer Dipali Patwa's kids activewear line has not been as popular as she hoped. Her company Masala Baby is already a successful kids clothing brand and activewear will be a new line, but that campaign that ends this Friday has only raised a fraction of its $15,000 goal. Kickstarter has an all-or-nothing policy in regards to fundraising: if you do not meet your goal, your backers do not pay the money they pledged for the campaign.

However, customers have gone to her website and pre-ordered the same clothes that were available through the Kickstarter campaign despite Patwa attempting to redirect customers from her website to the Kickstarter campaign.

"I just don't think moms are ready to shop on Kickstarter," she said.

Levin and Altus have also noticed in their Snapshotr campaign that many messages they received demonstrated that not everyone understands the crowdfunding concept.

"A lot of people don't even know what Kickstarter is," said Altus. "We spend a lot of time filling those knowledge gaps with potential customers."

Con: Be Ready for Lots of Emails

Not only do Levin and Altus spend time educating people on the concept of crowdfunding, they also have to respond to complicated questions such as what customs restrictions there are for Snapshotrs bought by German customers. On average they had to take at least a few hours to respond to the 50 or so emails they received daily, according to Altus.

"We wanted to respond to each email personally," he said.