1. Provide a summary of the case

2. identify the problem

3. What makes Kickstarter entrepreneurial, and how is this strategy working for them?

4. What approach does Kickstarter appear to have regarding innovation, and how should this be managed?

5. propose alternative solutions

6. make recommendations

CASE 9 KICKSTARTER AND CROWDFUNDING 2019 * In 2019, sixteen Kickstarter-funded films were heading to the SXSW Film Festival. Kickstarter had a record-breaking year for games and witnessed some changes in its management. Co-founder Perry Chen stepped down from his role as CEO, having taken over from co-founder, Yancey Strickler, only two years earlier. In March 2019, Aziz Hasan, the head of Kickstarter's design and product teams was made interim CEO. While Chen had been at the helm, Kickstarter lost about 50 out of 120 Kickstarter employees. Among the departed were seven of the eight members of Strickler's executive team. - In interviews, employees said Chen strongly exerted his will on the company-making sudden changes to planned-out Kickstarter features, scrapping project timelines at the last minute, forcing out highly respected employees, and trying to shake up office culture in ways that struck the rank and file as simply bizarre.' Although Kickstarter is known to be Chen's brainchild, the future of the crowdfunding platform looks shaky with Chen's method of alienating and replacing the employees. As a result of advancements in technology and worldwide adoption of mediaplatforms, the concept of "crowdfunding" became a norm. According to Wharton School researcher Ethan Mollick, crowdfunding allowed "founders of for-profit, artistic, and cultural ventures to fund their efforts by drawing on relatively small contributions from a relatively large number of individuals using the Internet, without standard financial intermediaries." It was considered "a novel method for funding a variety of new ventures," but it was not without its problems. Although billions of dollars had been raised for projects ranging from something as small as an artist's video diary to large endeavors, such as the development of a new product for accessing e-mail or an award-winning film documentary, very little was known about the kinds of mechanisms that made funding efforts successful or whether "existing projects ultimately deliver the products they promise."> One example of this new phenomenon in entrepreneurship was the story of Kickstarter. As of March 2019, according to DigitalTrends.com, Kickstarter ranked first among the top 10 best crowdfunding sites, with over 159,246 successfully funded projects, over 15 million backers, and over $4 billion in pledged dollars; 340 projects had raised over $1 million each. Kickstarter also had a success rate of nearly 37 percent; however, 63 percent of the time the backers got nothing in return for their donations." What was this crowdfunding thing all about, and was Kickstarter truly a boon for entrepreneurs, or a bust for backers? Kickstarter = Dumb people giving money to anonymous people in hope of some goodies in an unspecified amount of time." So read a comment posted in response to a story about one nine-year-old girl's Kickstarter campaign. Mackenzie Wilson wanted to raise $829 so that she could go to computer camp and create her own video game.(She said her older brothers were making fun of her, and she wanted to prove that girls could do "tech stuff," too.) The trouble was that Kickstarter rules said someone had to be at least 18 years old in order to list a project, so Mackenzie's mom, Susan Wilson, created the information listing. Susan Wilson was a Harvard graduate, a known entrepreneur, and had allegedly promoted her daughter's Kickstarter campaign by tweeting celebrities like Lady Gaga and Ellen DeGeneres to elicit support. Within 24 hours of the project launch, it not only had reached its $829 goal but was on its way to getting 1,247 backers and $22,562 in pledges. Despite the success of a campaign that raised a lot of money, Wilson and her family received negative responses. The majority of the negative responses seemed to come from those who believed that Susan Wilson had misrepresented the nature of the project, that she had acted in bad faith-intending to profit from her daughter's story-and thereby had violated Kickstarter's project guidelines. It also received headlines because of the extreme public response-accusations of a scam and death threats against Wilson and her family. Kickstarter clearly stated that its crowdfunding service could not be used for "charity or cause funding" such as an awareness campaign or scholarship; nor could a project be used to "fund my life"-for example, going on vacation, buying a new camera, or paying for tuition. And a project had to have a clear goal: "like making an album, a book, or a work of art. . . . A project is not open-ended. Starting a business, for example, does not qualify as a project." " In addition, for Kickstarter to maintain its reputation as one of the top crowdfunding services, it had to make sure it kept control of how the projects were promoted: "Sharing your project with friends, fans, andfollowers is one thing, but invading inboxes and social networks is another." Kickstarter responded to comments on the Wilson project by affirming its support, saying, "Kickstarter is a funding platform for creative projects. The goal of this project is to create a video game, which backers are offered for a $10 pledge. On Kickstarter backers ultimately decide the validity and worthiness of a project by whether they decide to fund it." However, backers and Kickstarter fans were concerned, with one user commenting, "It's all of our jobs to be on the lookout for shady Kickstarters and personally I don't want to see it devolve into a make-a-wish foundation for already privileged kids to learn how to sidestep rules of a website to profit." And therein lies Kickstarter's dilemma-how to provide a service that allowed funding for obvious commercial ventures while also providing safeguards for backers. Kickstarter remained a service business, collecting 5 percent of successfully funded projects as a fee for this service, and had kept itself hands-off otherwise. However, in addition to receiving comments such as the ones in response to the Wilsons' project, Kickstarter came under fire for providing no guarantees that funded projects would actually produce promised items or deliver on the project's goals. Kickstarter's three founders had to create a specific blog post titled "Kickstarter Is Not a Store"to remind backers that the ventures were projects and, as such, would be subject to delays, sometimes long ones, while in development. Kickstarter made it clear that it was the project creators responsibility to complete projects and that it would pull projects from its web pages if project promises were obviously unrealistic or violated copyright or patent law, but otherwise it gave no other protection to backers. And even if aproject could not fully deliver, Kickstarter collected its fee. By keeping its business model as a fee-for-service commercial venture, was it in danger of losing its reputation and therefore its future business stream? More competitors were entering the crowdfunding, crowd investing, or peer-to-peer ending space, partly because of the Jumpstart Our Business Startups (JOBS) Act passed by Congress in April 2012. The JOBS Act was designed to encourage small business and start-up funding by easing federal regulations, allowing individuals to become investors; and crowdfunding by the likes of Kickstarter was a "major catalyst in shifting the way small businesses" operated and found start-up capital. 4 Crowdsourcing had already changed the way businesses interacted with consumers; crowdfunding needed to figure out " how to build a community of supporters before, during, and after" a business launched. But Kickstarter's founders seemed to believe 'a big part of the value backers enjoy throughout the Kickstarter experience" was to get a closer look at the creative process as the project comes to life. Kickstarter seemed to want to be a place where people could "participate in something," something they "held dear," and ultimately become a "cultural institution" that would outlive its founders. "Was that the vision of a commercial venture, or was it a wish to eventually become a not-for-profit legitimate cause-funding organization? What did Kickstarter want to be when it ultimately grew up? The Kickstarter Business Model By 2019, Kickstarter had become a popular middleman acting as a go-between, onnecting the entrepreneur and the canital needed to turn an idea into a reality TheKickstarter platform had launched on April 28, 2009, created by Perry Chen, Yance Strickler, and Charles Adler, and was one of the first to introduce the new concept crowdfunding: raising capital from the general public in small denominations. In a social media-filled world, an opportunity had been recognized-you could count on your peers to help you fund your big idea. Many creators, who were young, inexperienced, low on capital, or any combination of these, turned to websites such as Kickstarter for financial support for their projects. The site acted as a channel, enabling them to call on their friends, family, and other intrigued peers to help them raise money. When establishing a listing on Kickstarter, the creator could place his or her project offering in one of 15 different categories: art, comics, crafts, dance, design, fashion, film & video, food, journalism, games, music, photography, publishing, technology, and theater. The project "owner" filled out some basic information, and the listing was on its way. However, certain standards had to be met before the listing could go live. If the project met those requirements, it was approved by the Kickstarter team and listed. The guidelines were surprisingly basic and straightforward. First and foremost, the listing had to be for a project. As mentioned previously, it could not be for a charity or involve cause funding, nor could it be a "fund my life" kind of a project. The guidelines also disallowed prohibited content. Other than that, the project simply had to fit into one of the 15 designated categories. More recently, however, a few more cautious measures were added to ensure that only real and recognizable listings were created ( see the section on rules and regulations later in this case). The projectcreator now had to set a deadline for the fund-raising, as well as a monetary goal, stating how much money he or she hoped to raise for the project. If that goal was m the funds were then transferred to the project creator/owner. If the goal was not met, however, all donating parties were given refunds and the project was not funded. Additionally, the project owner could create rewards as incentives for different levels of donations, to be received by the donor if the project met its goal and was therefore funded. The more a donor pledged, the better the reward, which was usually related in some way to the project at hand, such as being the first backer to receive the finished product. If the project succeeded in reaching its goal, payment was collected through C 54 Amazon. The project creator had to have an active Amazon Payments account when setting up his or her project. If a project was funded successfully, the money was transferred from the backers' credit cards to the creator's Amazon Payments account. If the project was not funded successfully, Amazon released the funds back to the backers' credit cards and no charges were issued; Kickstarter never actually possessed the funds at all. Once a project was funded successfully, Kickstarter took 5 percent of the total funds raised, while Amazon took around 3 to 5 percent for its services. After both parties deducted their commissions, the project creator/owner could still expect a payout of about 90 percent of the total money that was raised. On January 6, 2015, Amazon decided to discontinue its payment service with Kickstarter. Kickstarter replaced Amazon with Stripe Payment, a service similar to PayPal. For project creators, Stripe made it easier to collect the funds as it did not require setting up a separate account like Amazon did, and backers could check out faster using Strine to naw directly via bank accounts credit cards It allowed Kickstarter to havea complete control on backers checkout experience and access to raise funds anywhere in the world. Kickstarter History As previously mentioned, the company was launched in April 2009 by its three co- founders: Perry Chen, Yancey Strickler, and Charles Adler. Originally based in New York City, Kickstarter initially raised $10 million from Union Square Ventures and angel investors, including Jack Dorsey of Twitter, Zach Klein of Vimeo, Scott Heiferman of Meetup, and Caterina Fake of Flickr. It all started with the hope of a musical success-a $20,000 late-night concert that Perry Chen was trying to organize at the 2002 New Orleans Jazz Fest. Chen had hopes of bringing a pair of DJs into town to perform. He had found a perfect venue for the concert and even gotten in touch with the DJs' management, yet the show never happened. The problem was the lack of capital, and, even if he had found willing backers, Chen had wondered what he would do if the show was unable to attract sufficient interest to pay back any investment. This dilemma brought Chen to the realization that the world needed a better way to fund the arts. He thought to himself, "What if people could go to a site and pledge to buy tickets for a show? And if enough money was pledged they would be charged and the show would happen. If not, it wouldn't." Although Chen loved this initial idea, he put it on the back burner, being more focused on making music and not on starting an Internet company. Three years later, in 2005, Chen moved back to New York and began to reconsider the potential for his business idea but he was unsure how to goabout building it. That fall, Chen met Yancey Strickler, the editor-in-chief of eMusic through a mutual friend and approached him with the idea of Kickstarter. Strickler was intrigued, and the two began brainstorming. Then, about a year later, Chen was introduced to Charles Adler. Adler was also interested and began working with Chen and Strickler. After months of work, the team had created specifications for an Internet site, yet one major problem remained-none of them knew HTML coding, so the project was put on hold. Adler moved to San Francisco to do some freelance work, and Strickler remained at his day job. Finally, in the summer of 2008, Chen was introduced to Andy Baio, who joined the team remotely as an adviser, since he was living in Portland, Oregon, at the time. Soon after, Baio and Adler contacted some developers, including Lance Ivy in Walla Walla, Washington, and the site started to take shape. Although the team was scattered throughout the country, they were well connected through Skype and e-mail and finally began building the web portal. By April 28, 2009, Kickstarter had been created and was launched to the public. The idea for creating a new channel for artistic entrepreneurs of all kinds to explore their creativity was finally realized.23 Crowdfunding Competition Although Kickstarter had become a well-known name in crowdfunding, many other companies had had the same idea. Not all of them had attracted as much media attention, but this meant that they had also avoided some of the negative press. Being a market follower rather than leader gave Kickstarter a prime opportunity to maintain a clean track record with the media because the company was able to avoid themistakes made by other similar businesses. One of the better-known Kickstarter competitors was Indiegogo, founded in January 2008 in San Francisco. Indiegogo was initially funded with $1.5 million from investors such as Zynga co-founder Steve Schoettler. By June 2012, the company had attracted over 100,000 projects from 196 countries. Aiming to "make an even bigger impact," in 2012 Indiegogo raised an additional $15 million in a "Series A" private equity stock offering.24 CEO Slava Rubin said that the money was needed mostly to hire, build out, and increase resources to take on other crowdsourcing competitors such as Kickstarter. However, while Kickstarter focused on individuals' creative projects, Indiegogo was much more business-oriented. Projects on Indiegogo were not regulated as they were on Kickstarter. Indiegogo used an algorithm that decided which projects to promote on the basis of activity and engagement metrics like funding velocity.25 Additionally, Indiegogo projects followed the "keep it all" model-all funds collected were handed over to the project creator, regardless of any goal achievement. If the project fund-raising goal was never met, or the project's objectives were never achieved, it was up to the project creator to refund collected funds to the contributors. Indiegogo was also available for use internationally, while Kickstarter required backers to have either a U.S. or UK bank account.26 Other online crowdfunding companies, which raised funds for either charitable C 55 or creative projects, included ArtistShare for musiciansand Fundly for charitable projects and political campaigns. Meg Whitman used Fundly to raise $20 million for her 2010 campaign for governor of California.Illustrating the degree of ad been i ce 2011ownership of the "methods and apparatuses for financing and marketing a creative work," with ArtistShare claiming Kickstarter infringement. Meanwhile, similar companies that created some buzz in the area of business investment were Crowdfunder and Grow VC. While only in start-up mode, Crowdfunder had made enough noise to grab some attention. This platform enabled funders to participate in three different ways: they could simply donate to a project, lend to a project and receive a return, or purchase equity. However, the third option-purchasing equity through crowdfunding-was still not allowed in the United States as of 2013.30 Grow VC, similar to Kickstarter, made funds accessible to the company or entrepreneur only when the goal had been reached. One important difference between the two was that Grow VC enabled companies to collect monthly installments from investors, allowing a growing business to collect a continuous influx of funds rather than just a one-time investment. The cap for funding was set at $1 million. Other recognizable competitors were Rockethub, EarlyShares, and Bolstr in the United States; CrowdCube in the United Kingdom; and Symbid, based in the Netherlands. These were only a few of the more publicized newcomers to the industry-there were at least 50 legitimate crowdfunding platforms operating worldwide. 32 Kickstarter Successes By March 2019, Kickstarter had launched 437,085 projects, raising $4.16 billion, of which $3.70 billion was successfully collected by project owners, $429 million was unsuccessful, and $39 million was currently in "live" donation status on the site. $ OnFebruary 8, 2012, the first project to ever get a million dollars funded from the site was a project in the design category, an iPod dock created by ElevationLab. Its goal was set at $75,000, and backers reached this goal almost instantly, raising a total of $1,464,706. However, as impressive as this feat was, its top-funding status was short- lived. Six hours later, in the game category, Double Fine beat that goal-receiving $3,336,371 to fund its new adventure game, far exceeding the initial request for $400,000.34 On March 27, 2015, a California-based smartwatch company, Pebble Time, ran a record-breaking Kickstarter campaign by raising a total of $20,338,986.35 The initial goal was to raise $500,000 yet Pebble Time was able to raise the first million dollars in less than an hour. Pebble Time was founded in 2012, and since then the company had been working to perfect its smartwatch that offered battery time of about 10 days and more than 6,500 applications via an open platform app store. However, one of the pioneers in the fitness tracker and smartwatch industry, Fitbit, acquired the intellectual property and hired key personnel from Pebble Technology Corp. in December 2016. Other notable projects with over $1 million in funding included the Tik Tok and LunaTik multitouch watch kits and the Coolest Cooler in the design category; the OUYA TV console and Project Eternity in the games category; the FORM1 3-D printer and the Oculus Rift virtual reality headset in the technology category; and a new Amanda Palmer record, art book, and tour in the music category. Gustin premium menswear and Ministry of Supply men's dress shirts, in the fashion category, were notably successful offerings with over $400,000 in pledges. In the movie category, in 2013, Inocente became the first Kickstarter crowdfunded film to win anOscar-for Best Documentary (Short Subject) and Kickstarter backers donated over $2 million in 12 hours to fund a movie based on the popular Veronica Mars franchise. Kickstarter was becoming a source of major support for independent films. According to the company, as of 2013 it had facilitated over $100 million in donations to various "indie" films and had funded 10 percent of all the films shown at the 2013 Sundance Film Festival. 39 These projects made contributions to Kickstarter's business model. Even with an office in New York City, large amounts of capital raised, and about 125 employees, Kickstarter had to have been profitable. Based on the 2018 statistics, Kickstarter took a 5 percent cut from the total money that was funded on the website. Kickstarter Failures However, as in all sectors of capital investment, some Kickstarter projects did not work out as planned. In the world of start-ups, many venture capitalists or angel investors made investments in projects that were inherently risky. Some were lucky and achieved their intended goals or did even better. Others fell short. There were many possible reasons for the failures, including lack of industry knowledge, unrealistic projections of cost, lack of managerial experience, manufacturing capabilities, or simply a lack of competence for the task at hand. These possibilities existed for Kickstarter projects as well, but in the Kickstarter model, investors/backers/donators did not "own" anything; project creators kept ownership of their work. As Kickstarter pointed out, "Backers are supporting projects to help them come to life not to profit financially"40This disclaimer did not stop backers or the media from highlighting Kickstarter's risks. Eyez was one of the better-known project failures on Kickstarter. More than 2,000 backers collectively contributed more than $300,000 to the entrepreneurs developing the high-tech glasses, meant for recording live video. Eyez's product creators promised delivery of the glasses ahead of the fall 2011 goal, yet by 2013 Eyez glasses still were not being produced and none of the individual backers had received a pair. Meanwhile, the entrepreneurs had stopped providing online updates on the project and would not answer questions from backers." Another prominent failed project was the Skarp campaign in 2015, which raised about $4 million. The project promised to develop and offer a razor that used a laser beam instead of a traditional blade. The Skarp campaign also showed a video demonstrating the procedure of laser razor to cut hair. However, in reality the prototype of the laser razor was far from a properly functioning product.* Others, such as the group behind MYTHIC, a nonexistent game from an imaginary team, continued to try to scam the crowdfunding scene.43 A major challenge to Kickstarter's business model was related to intellectual C 56 property rights. It was probable that anyone with a good idea trying to raise capital through Kickstarter would discover that his or her idea was already stolen by merchants in China. Yekutiel Sherman, an Israeli entrepreneur, spent years developing an innovative smartphone case that unfolded into a selfie stick. In December 2015, Sherman started a Kickstarter campaign, hoping to raise funds to capitalize on the new product. A week later, Sherman found that his designed selfie stick was already on sale by vendors across China. People around the world could buythe new selfie stick using online sites including eBay. Ongoing Issues-Backers' Concerns and Rules and Regulations Despite the success Kickstarter had achieved, the company was under fire for many things, particularly regarding false projects, the collection of funds with no end product, and the failure of backers to receive the stated rewards set by project creators. Kickstarter followed the "all or nothing" approach to funding-pledged dollars were collected only if the fund-raising goal was met. In the beginning, Kickstarter tried to explain that the company had no control over the donated funds once these funds were in the hands of the developer-there was no guarantee of product or project delivery." Additionally, if the fund-raising goal was met but the project never made it to fruition, Kickstarter had no ability to issue refunds. These explanations did not keep backers from complaining of "delays, deception, and broken promises." In 2012, the Kickstarter founders felt it was necessary to reiterate "Kickstarter Is Not a Store" and point out, yet again, that "in addition to rewards, a big part of the value backers enjoy throughout the Kickstarter experience is getting a closer look at the creative process as the project comes to life." > Kickstarter then implemented a new set of rules, designed to prevent creators from promising a product they could not deliver. The goal, Kickstarter said, was to help prevent entrepreneurs from overpromising and disappointing backers by not delivering. By forcing creators to be transparent about their progress, Kickstarter hoped to discourage unrealistic projectsand encourage the participation of more creative individuals who had the skills to spink products as promised. These new rules required Kickstarter's project creators to list all potential problems involved in seeing their projects through to completion; to submit proper supporting materials-no simulations or "renderings," just technical drawings or photos of the actual current prototype; and to create a "reasonable" reward system in which backers received a reward based on their level of participation, which in most cases included a working version of the project in question. Kickstarter prohibited the use of multiple quantities at any reward level: Kickstarter was not a store, but an opportunity to invest in good ideas. The company also included the use of investors' funds in the project creator agreement. The regulations stated that if funds were collected, the creator was required to use those funds toward the creation of the project. If the funds were used for any other purpose, legal repercussions would follow. In 2013 Kickstarter did a "major overhaul" on the set of tools project creators used to communicate with backers, including a "rewards sent" checklist, a tool to survey backers regarding rewards, and a project " dashboard" so that creators could track their progress. Even if Kickstarter was able to sustain its success with the implementation of tougher approval policies on its end, the future of the size and success of projects was also to be determined by the government and its ability to police the crowdfunding world through its own set of regulations. Recent federal legislation showed the government's intentions to do just that. The lobs ArtSigned into law in April 2012 by President Obama, the Jumpstart Our Business Startups (JOBS) Act supported entrepreneurship and the growth of small businesse in the United States and emphasized the new phenomenon of crowdfunding. The act eased federal regulations in regard to crowdfunding by allowing individuals to become investors in new business efforts. However, it also set out specific provisions to regulate just how much funding was acceptable, in order to ensure the financial safety and security of the investors. The new act stated that, as of January 2013, an equity- based company could raise no more than $1 million a year. Additionally, a company could sell to investors only through a middleman-a broker or website that was registered with the Securities and Exchange Commission (SEC). The middleman could sell only shares that had originated from the company. The JOBS Act did not yet apply to Kickstarter, because there were no equity sales under its current business model-on its platform, the project creator maintained 100 percent ownership of the product or service."With no cap to investments and minimal federal regulations, people could be more inclined to contribute to a Kickstarter project than invest in projects from an equity investment-based competitor. The Future for Kickstarter During the early days of Kickstarter, Perry Chen, the co-founder and person responsible for the idea behind Kickstarter, spoke about Kickstarter's optimistic future. Chen talked about funding business start-ups and stated that Kickstarter was not interested in that model: "We're going to keep funding creative projects in the waywe currently do it. We're not gearing up for the equity wave if it comes. The real disruption is doing it without equity."49 In March 2019, Perry Chen stepped down from his role as CEO after two years C 57 and Aziz Hasan, the head of Kickstarter's design and product teams was made interim CEO. Chen only planned to return as CEO for six months to help with the transition in leadership. In a blog post on the company website, Chen wrote, "Those months quickly became two years dedicated to developing a better way to deliver on the core aspects of our service through a robust operating system, a strong product, and the team we have assembled at Kickstarter today."50 Chen's decision to resign followed the company staff's announcement to unionize with the Office and Professional Employees International Union (OPEIU) Local 153. Kickstarter staff said they were forming a union to promote "inclusion and solidarity, transparency and accountability," and gain "a seat at the table." In April 2018, BuzzFeed News reported that the company was in turmoil under Chen's leadership. At the time of BuzzFeed's reporting, nearly 50 of the company's 120 staff had reportedly left, including seven out of eight members of the company's executive team. 32 In April 2019, Kickstarter partnered with Kodansha, one of Japan's leading publishers, to support creators in Japan. Through the partnership, Kickstarter aims to provide Kodansha's team with the tools, knowledge, and resources to help creators in Japan bring projects to life on the Kickstarter platform." The company also celebrated as backers had pledged more than $1 billion to Games projects onIn April 2019, Kickstarter partnered with Kodansha, one of Japan's leading publishers, to support creators in Japan. Through the partnership, Kickstarter aims to provide Kodansha's team with the tools, knowledge, and resources to help creators in Japan bring projects to life on the Kickstarter platform."The company also celebrated as backers had pledged more than $1 billion to Games projects on Kickstarter. Since launching in 2009, the Games category has grown steadily, helping titles like The Banner Saga, Exploding Kittens, Darkest Dungeon, Kingdom Death, Shovel Knight, and many more.54 Although its funded projects are heading to good places, what is Kickstarter heading toward? With disruptions from inside the company and outside, would it be able to optimize its business model for better? While it seemed to have a clear mission and was certainly profitable, as Wharton School researcher Mollick warned, 'Crowdfunding represents a potentially disruptive change in the way that new ventures are funded." Going forward, the Kickstarter founders needed to consider whether they had the right business model for the future