How Does Kickstarter Make Money?

Sometimes I am intimidated by a Make Money topic. Not because it is huge but because they are so superficially simple. Kickstarter raises money from individuals for creative projects. It is deeply entwined with the beautiful idea of crowd sourcing. Kickstarter then takes 5%, or 5 cents on every dollar, of all the funds raised. In addition to this, their payments partner Square takes 3-5%, so almost as much as Kickstarter, for moving money from the funder to the project owner.

But this begs the question, what the hell are these two fintech start-ups doing to deserve this cut?

How does kickstarter make money?

Image: perhapstoopink

I am going to explain how Square is a straightforward solution to an industry failing. More interestingly I am going to argue that Kickstarter is something completely new – it has made paying in advance cool by selling you a feeling.

Why Finance Attracts Start-Ups

At a start-up event I attended, the speaker, a venture capital partner, said that he preferred it when those pitching him were LESS likely to succeed.

“Sure things” had little interest to him as they were unlikely to earn him much money. Those businesses were odds on – and unattractive. He preferred risky ventures attacking big markets.

This pointed him straight into fintech, because finance is one of the biggest markets there are.

Finance also has inherent scale. If it weren’t for regulation, it would make sense for there to only be one stock market in the world. It would make sense for there to be only one marketplace for everything.

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Lastly, no one likes the biggest players in finance, namely the banks. Some might say that at best they are long term greedy. At worse they have already put their grandmother into a pyramid scheme with stilts. Surely any start-up can do this better than them?



Money is Time

I do overcook the idea that Time is Money. But the time aspect in finance is often what is being paid for, whereas the money is simply the measure of before, after and price.

A job is a swap of your time for money.

Saving is the accumulation of your many years of blood, sweat and tears.

Banking is the rent of these years of hard work.

Stocks and the stock market are a claim to the future success of a business.

Insurance is for your car and your house and your loved ones. But it doesn’t protect anything except the policyholder. It is most definitely not a Star Trek deflector shield. At its heart it is trying to put a dollar number on your stuff and saying that number won’t be lower in a year’s time.

Kickstarter wheel shields making money

Image: Kickstarter Wheel Shields – Longboarding Technology

Most of finance revolves around time.

Kickstarter and Square are different because they are not about time at all. They transact in the ownership of money. They take quite a big cut for changing that ownership. And this is what makes them both such great businesses as well as an absolute pain.

How Does Square Make Money?

  1. Square makes accepting card payments easy. Quintessentially they enable card transactions with as little as a dongle attached to your iPhone.
  2. They do this by acting as “merchant of record” for their client when they sell something. This is the little twist that creates enough scale for anybody to receive a card payment.
  3. They charge the retailer (or person receiving money) 3% or 3 cents on the dollar.
  4. They pay one, two or even three cents to Visa / Amex / MasterCard and the various banks.
  5. Square keeps any difference for themselves.

How does square make money?

Image: shardayyy

Square solves a small business’s pain point. There are transactions where Square makes nothing, but there are plenty where it gets to keep all 3 cents on the dollar. I read a bunch about them here.

The unfortunate truth about why Square and Paypal get to charge 3%, is that Visa, Mastercard and American Express have built an industry that charges almost 3%. They form an oligopoly built on the most intensely used and secure technology in the world.

Disruptors like Paypal and Venmo have come in and chosen to maintain the pricing umbrella rather than pull it apart.

I’m not arguing that swipe fees should be lower. Merely that 3% reflects the industry’s strategic pricing power. Evidence so far is that when swipe fees are forced lower, merchants keep the difference, not consumers. About the only thing consumers get are less credit card reward points.

When Square charges a Kickstarter project 5%, they are throwing in a 2% foreign exchange transaction fee. You’ll have to wait till I write How Does Transferwise Make Money to find out more about that.

The Kickstarter Platform

Like all good capital raisers, Kickstarter built a platform that embodies a network. That network is of people with loves and passions and most importantly a desire to put their money into projects they love.

As an aside, investment banks typically charge 7% to raise money. Their network is of rich people and institutional investors. You are paying them for access to this network. Percentage wise this is lower than kickstarter as the dollar numbers are so much larger.

However Kickstarter has less in common with the investment banks than it does with charities and foundations.

When you list a project on Kickstarter you are broadcasting your passion and offering a feeling of involvement to project sponsors. Charities are partly about doing good and helping people. But Kickstarter have figured out a way to persuade people to pay for the warm fuzzy feelings associated with making the world a better place.

Superficially Kickstarter have created a new asset class. However, this asset class is worth about as much as the saliva you use to stick a stamp on an envelope.

Zano Becomes Pain-o

This is from the Zano drone project.

How does zano make money

Image: Zano, Toquing

They promised market leading specs in a tiny flying package for £139 ($210 dollars). Namely it would avoid objects like trees and buildings, while in flight, all by itself. In 2015, Engadget shortlisted Zano for Best of CES, one of 49 out of 20,000 new products. By the end of the Kickstarter campaign, 12,000 backers had pledged £2.3million ($3.5m dollars).

When Zano began delivering their drones it became apparent that they did not work. Flight was difficult and the video quality was abysmal. The original promise of a drone that could fly itself seemed laughable.

Eleven months after accepting the crowd’s money, Zano went bust.

If you’re wondering why Engadget shortlisted Zano, they shortlisted potential not reality. Social proof can be an ugly deceit. I have a friend who is mostly useless at all the jobs he has had, and systematically annoys his boss. However he gives some of the best interview answers you will ever hear. He’s doing alright for himself!

The majority of people who handed over money to Zano ended up with nothing.

In total 9% of funded Kickstarter projects do not deliver rewards.

A small number of investors in Zano did get a poorly functioning drone – but even that stopped working when Zano switched off their supercomputer.

This is in contrast to senior managers on the project who decided to buy themselves BMWs.

Equity, Bonds, and Kickstarter

Remember how stocks give you a claim on the future? That’s a claim on upside. You are buying in at a price that the market thinks reflect the value of that business’s future. If they go bust you get nothing, but get with the dream – this *$x^& is going to be huge!

Bonds are typically an exchange of somebody’s money and time for a daily fee. There is no cut of the upside, but if that business goes bust, bondholders have a claim on the firm’s assets. Think property, machines and inventory. Vulture Funds often buy bonds from bankrupt businesses as a way to take control of them.

Kickstarter investments are no upside exposure and no downside protection. But if people are buying in, can it just be “bonds minus”? Surely there must be something more to it than that?

Consumption Plus

This is from the Crabapple Cousins Plush Toys project.

How does crabapple make money

Image: Crabapple Cousins, Shelly Rodriguez

They have received almost $19,000 of pledges so far, which is around double its initial target. The project creator is a talented artist Shelly Rodriguez. With a background in fine arts and video game design, she is currently working at inki-Drop.

Her employer makes soft toys.

Yep you got it, they are just selling stuff.

Its $20 for an individual Crabapple toy. $40 for two, $55 for three, and up and up until $450 will get you four plush toys, a digital wallpaper, a postcard, a tote bag, a trading card and an A4 sized artist’s illustration watercolor.

Kickstarter funding isn’t equity minus, it isn’t debt minus, it is not any kind of investment at all. It is Consumption Plus. Its something cool plus a little on the side.

How Expectations Are Worth Something

Do you get excited the first week of December at the prospect of all the presents you are going to get at Christmas? Do you see a pair of heels or a new gadget and think Ohmigod I so want that?! Did you pre-order any of the Harry Potter books?

I remember a joke I heard after the iPhone came out. A comedian said that he wanted to say one thing to all the smug hipsters with their expensive smartphones: “You only bought it, you didn’t make it.”

There is a magic to expectation. There is a magic to being involved and being part of something and that is what Kickstarter are marketing. They are selling you a dream to be delivered in the future, where you get to say that you helped get it off the ground. In exchange a start-up is getting the risk capital it desperately needs, or more commonly a creative organization is receiving its initial batch of manufacturing cost.

Business model of expectation

Image: Niki Georgiev

Kickstarter bundles in with this a powerful amount of advertising, market development and social proof. A successful Kickstarter or Indiegogo campaign is a seal of approval.

These guys are one of my all-time favorite fintech companies because it is so innovative, powerfully enabling a plethora of new ideas. Think about it. They actually made paying in advance cool.

Born in the Eighties

It is somewhat unoriginal to say that Millennials, people born after 1981, prefer experiences over objects. Nearly everybody has got a car whereas almost nobody has trekked across Iran with some bad hair dye for company.

How does backpacking make money

Image: Me doing my thing in Iran

But when I ponder this, I do not believe that Millennials have evolved. Rather that there was an odd period where people were genuinely confused enough to think that a big car and a big house would make them happy.

The people around before this group pursued stuff because they needed food and shelter to survive.

When you buy something there is (1) the value of the product, but there is also (2) the transactional value of the bargain, and something that Kickstarter explores, (3) the value of intangible emotions. I suspect we are going to see more Kickstarter type business models that delineate the transacting of human emotions. Selling being part of something is only the beginning.

I am an affiliate partner with Blinkist, an app that summarizes fiction into really short and sweet reads. I heartily recommend going here and downloading it.

Yuen Lo


  1. So glad that you covered Kickstarter, the “promise to make you happy” company. When this company started, I was confused. I thought they were selling IPO’s. Then I realized that you get prototype IF the company could execute. What??? I can just go to the store/amazon and get a similar product from a trusted brand? But what if the Kickstarter project is novel and is otherwise unavailable. Or, which I never realized before, (YUEN you nailed it) using Kickstarter gives you the opportunity to purchase the perception of inclusivity and industriousness. Humans LOVE feeling like this. These are the same feelings that video games exploit. In the digital worlds you can be a part of something big and create armies, towns, weapons, achieving one level after another. Same with politics, that is, donate money to a candidate and you think you will change the world! This is also how non-profit or charity works, donors receive the perception of being included and making a difference in the world. Ok, how about a using a Kickstarter/Fintech company for social and community endeavors. Perhaps this already exists?? How about Let’s call it Hopestarter, begin it in a major city and mobilize (via social tech) people to contribute money to fix the problems/things that the government can’t afford or does not care about. Thus, giving people the perception of being included and that they are effecting change in their communities. This is largely the model that places of worship (churches, synagogues, mosques) already use. However, is anyone doing this in FINTECH? If this model became successful, it would be a disruption and threat to existing governmental agencies as people would seek out Hopestart to take care of them, not the government. Ok, I just solved all the world’s problems 🙂 Now if I could just fix that leaky faucet in the bathroom.

  2. Hey Ryan you make some great points. In fact I may have to go back and add a section all about the similarities with how charities are partly about feelings as well 🙂 Sounds like gofundme beat you to it though! Its a really interesting idea, I wonder if you could fund a new school or even a citizen’s income this way. I don’t know about where you are but there is a desperate need for community building and maybe your suggestion is one way to develop that

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