Kickstarter

• The Bottom Line: Kickstarter is a crowdfunding platform for creative projects, representing a form of high-risk, venture-style speculation, not a traditional value investment.
• Key Takeaways:
• What it is: A platform where you contribute money (“back”) to a new project in exchange for a non-financial reward (like the product itself), not for an ownership stake in a company.
• Why it matters: It is a popular way to support innovation, but it fundamentally differs from investing. Understanding this distinction is critical for preserving your capital.
• How to use it: View it as a form of patronage or a pre-purchase, not as a path to financial returns. It's about supporting an idea you love, with the full knowledge that you risk receiving nothing in return.

Imagine your favorite local artisan—a brilliant woodworker who crafts beautiful, handmade furniture. She has a groundbreaking idea for a new type of ergonomic desk, but she needs $50,000 for specialized tools and a large batch of premium maple wood to get started. A bank loan is out of the question for such an unproven concept, and she certainly doesn't want to sell off a piece of her small workshop to outside investors. Instead, she turns to her community. She goes to the modern-day town square, which is a platform like Kickstarter, and makes a proposal: “If 250 of you believe in this project and contribute $200 each, I'll have the $50,000 I need. In return for your faith in me, each of you will be the first to receive one of these new desks, engraved with a 'First Edition' mark, at a price that's 50% less than what it will eventually cost in stores.” In this scenario, you are not an investor. You are a backer. You are not buying a share of her workshop; you won't get a cut of her future profits if the desk becomes a bestseller. You are, in essence, pre-ordering a product and providing the seed capital that makes its creation possible. You are a patron of her craft. This is the essence of Kickstarter. It's a powerful tool that allows creators—from filmmakers and game designers to tech gadget inventors—to fund their projects directly from the people who are most excited about them. Most campaigns operate on an “all-or-nothing” model. If the creator's funding goal isn't met by the deadline, no one's credit card is charged, and the project doesn't move forward. It’s a built-in market test. If the idea resonates, it gets funded; if not, no one is out any money.

“The difference between investing and speculating is a night-and-day difference… The speculator, by his very nature, is attracted to the exciting and the dramatic.” - Benjamin Graham

Kickstarter is, by its very nature, exciting and dramatic. It's filled with compelling stories and revolutionary ideas. But as a value investor, it's our job to look past the story and analyze the underlying substance.

For a disciplined value investor, understanding Kickstarter is less about finding opportunities on the platform and more about recognizing what it is not. It serves as a perfect case study to reinforce the core principles of value investing by showing what happens when those principles are absent.

• Ownership vs. A Promise: When you buy a share of a company like Coca-Cola or Microsoft, you are purchasing a fractional ownership stake in a tangible business. You own a piece of its factories, its patents, its brand, and, most importantly, its future stream of earnings. You can analyze its financial health and calculate its intrinsic_value. When you back a Kickstarter project, you own nothing but a promise. The “asset” you receive is the hope that a product will one day be delivered. There is no claim on future profits or underlying assets.
• The Total Absence of a Margin of Safety: The cornerstone of value investing, as taught by Benjamin Graham, is the margin of safety—buying an asset for significantly less than your conservative estimate of its intrinsic value. This discount is your protection against bad luck, errors in judgment, or unforeseen events. Kickstarter is the polar opposite. You are not buying an asset at a discount; you are paying the full price for an idea that has a statistically high probability of failure, delay, or under-delivery. Your risk of a 100% capital loss is substantial, with no safety net whatsoever.
• Pure Speculation vs. Prudent Investing: An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. Backing a Kickstarter project is the textbook definition of speculation. You are betting on the successful execution of an unproven plan by a team that may have no track record in manufacturing or logistics. The outcome is entirely dependent on future events, not on the current, established value of an operating business.
• Emotional Decision-Making vs. Rational Analysis: Kickstarter campaigns are masterclasses in marketing. They use slick videos, compelling personal stories, and the “fear of missing out” (FOMO) on early-bird pricing to drive emotional decisions. A value investor, guided by the wisdom of Warren Buffett, strives to be rational when others are emotional. Our decisions are based on financial statements, competitive advantages, and valuation metrics—not on how inspiring a creator's video is. Kickstarter is a playground for Mr. Market, appealing to optimism and excitement, the very emotions a value investor seeks to control.

In short, while Kickstarter can be a wonderful engine for creativity and innovation, it exists in a different universe from the world of value investing. Acknowledging this distinction is crucial for proper capital_allocation.

A true value investor wouldn't “invest” in a Kickstarter project seeking financial returns. However, they might choose to participate as a consumer or a patron. If you decide to back a project, you can still apply a value investor's mindset of due_diligence and risk_management to the decision. This isn't about finding a great investment; it's about making a less-risky purchase. Here is a step-by-step method for thinking through a Kickstarter pledge like a value investor.

• Step 1: Honestly Define Your Goal - Are You an Investor or a Patron?
  • This is the most critical step. Acknowledge that you are not investing. You are either pre-ordering a product you want, or you are acting as a patron to support a person or idea you believe in. The money you pledge should come from your “entertainment” or “discretionary spending” budget, never from your investment portfolio or retirement savings. Mentally write the money off the moment you pledge it. If you get a great product in the end, consider it a bonus.
• Step 2: Scrutinize the “Management Team” (The Project Creators)
  • Just as you would investigate the CEO and board of a public company, you must research the people behind the project. Do they have a public track record? Check their professional history on platforms like LinkedIn. Have they run successful Kickstarter campaigns before? If so, read the comments sections of those past campaigns. Were backers happy? Were products delivered on time? A history of successful execution is the single best indicator of future success. Be extremely wary of first-time creators with no relevant industry experience.
• Step 3: Analyze the “Business Plan” (The Campaign Page & Beyond)
  • Read the campaign page with a critical eye, as you would a company's annual report.
  • Realistic Goal: Is the funding goal credible? A goal of $20,000 to manufacture a complex electronic device is a massive red flag.
  • Detailed Plan: Do they provide a clear timeline for design, prototyping, manufacturing, and shipping? Vague promises like “shipping next Fall” are less convincing than a detailed, month-by-month plan.
  • Prototype Evidence: Do they show a working prototype in their video and photos? Or are they just showing computer-generated renderings? Never back a hardware project that doesn't have a functional, real-world prototype.
  • Risks and Challenges: Every campaign has a mandatory “Risks and Challenges” section at the bottom. Read it carefully. Honest creators will be upfront about potential supply chain issues, manufacturing hurdles, or software bugs. Vague or dismissive risk sections suggest naivety or dishonesty.
• Step 4: Assume the “Risk of Ruin” is High
  • Unlike investing in a blue-chip stock where the risk of total loss is minuscule, the risk of getting nothing from a Kickstarter pledge is very real. Studies have shown that a significant percentage of successful projects fail to deliver a final product. Always assume the worst-case scenario: the creators take the money and fail, and you lose your entire pledge. If you are not financially and emotionally comfortable with that outcome, do not back the project.

To illustrate the chasm between value investing and backing a Kickstarter project, let's compare two fictional individuals, “Rational Rachel” and “Creative Chris,” as they decide where to allocate $1,000.

This comparison makes the distinction crystal clear. Rachel is investing in established value, while Chris is speculating on a potential future. Both can be valid uses of money, but they must never be confused.

While it's not a true investment vehicle, the Kickstarter model has its own set of strengths and weaknesses when viewed through a broad economic and risk-aware lens.

• Engine for Innovation: Kickstarter provides a vital alternative funding path for small businesses, artists, and inventors who fall outside the scope of traditional venture_capital or bank loans. It democratizes creation.
• Powerful Market Validation: A successful campaign is irrefutable proof of market demand. This allows creators to gauge interest and secure manufacturing orders with confidence, reducing the risk of producing a product that nobody wants to buy.
• Direct Creator-to-Community Link: The platform fosters a unique relationship between creators and their most enthusiastic supporters. This can lead to valuable feedback during the development process and a loyal community of brand ambassadors upon launch.

• No Equity, No Financial Upside: This is the most significant drawback from an investor's standpoint. You take on venture-capital-level risk (extremely high) for zero financial reward. If a project becomes a wild success (like the Oculus Rift, which started on Kickstarter before being sold to Facebook for $2 billion), the backers get the product they paid for, while the equity investors reap life-changing returns. You are providing high-risk capital for a consumer's reward.
• Immense Execution Risk: Most project creators are experts in their specific field (e.g., design, programming, art) but are complete novices in the brutal complexities of international supply chains, mass manufacturing, quality control, and global shipping. The journey from a working prototype to thousands of delivered units is fraught with peril, and this is where most well-intentioned projects fail.
• Lack of Regulation and Transparency: Publicly traded companies are bound by strict reporting requirements from regulatory bodies like the SEC. They must disclose their financial health and risks. A Kickstarter campaign, by contrast, is a marketing pitch. The information is not audited, and there is little mandatory transparency or accountability if things go wrong.
• The Long, Unpredictable Wait: Delays are not the exception; they are the norm. It is common for projects to deliver months or even years behind schedule. During this time, your money is tied up, and your only recourse is to wait patiently, hoping for positive updates.

• venture_capital: The professional investment class that provides high-risk funding to startups in exchange for equity, representing the financial upside that Kickstarter backers do not get.
• speculation: The act of putting capital at high risk in the hope of a significant gain, which accurately describes the financial nature of backing a project.
• margin_of_safety: The core value investing principle of buying assets for less than their intrinsic worth, a concept that is entirely absent in crowdfunding.
• risk_management: The process of identifying and mitigating risks. For a backer, this involves researching creators and accepting the high probability of loss.
• due_diligence: The investigation of a potential investment. A modified, lighter form of due diligence is essential before backing any significant project.
• capital_allocation: The decision-making process for where to put your money. Understanding the difference between Kickstarter and the stock market is key to intelligent allocation.
• intrinsic_value: The underlying, objective value of an asset. Public companies have it; Kickstarter projects, as pre-revenue ideas, do not.