Thursday, January 5

Kickstarter a boon to entrepreneurs

Many entrepreneurs take a big risk when they start a business.

There are usually significant fixed costs. A retail store, for example, has to lease its space, buy a sign, cash registers, advertising, etc. — before they sell their first product. It's intimidating. There's the potential for major rejection — customers might not like what you're selling, and the business goes bankrupt.

What if you could remove that potential for rejection? What if you knew with certainty that the moment you opened your doors, your business would have enough customers?

A new innovation may alleviate some of that uncertainty. Kickstarter bills itself as the "world's largest funding platform for creative products." In a nutshell, people with a business idea can share it online and let people know how much funding they need to get it off the ground. Anybody can then contribute money to the project, but their credit card isn't charged unless enough people donate to reach the amount needed for the idea to be implemented. If not enough people fund the business, no one pays a dime.

In essence, Kickstarter removes all the risks for entrepreneurs, because before they go and blow their money on fixed costs, they can find out if there's a big enough market for their product. Take this example: somebody has the ingenious idea of making 20-sided chocolate dice. But there are significant fixed costs to making chocolate dice. You apparently need a mold, thermometer, fancy pots, vacuum chamber and shrink-wrap equipment. An entrepreneur could just take the risk and buy all the materials, hoping there's a large enough market for his product. But with Kickstarter, he can find out whether or not that market exists. People can commit to buying chocolate dice ($15 for a box of six, with various quantity discounts), but they only pay if the entrepreneur's requirement for getting the business off the ground ($950 in the case of chocolate dice) is reached.

Malcolm Gladwell wrote an engaging New Yorker article a couple years ago, where he suggests that successful entrepreneurs try to minimize risk, rather than take unneccessary chances. Good entrepreneurs do their research ahead of time and know there is a market for what they intend to sell. If Gladwell is right, then Kickstarter may help increase the number of successful entrepreneurs.

Five years ago, a talented potential entrepreneur wanting to make chocolate dice may have never gotten into business, since it was too risky. Thanks to Kickstarter, they can cut out the risk. The world will be a more innovative (and yummier) place for it.