This is a very helpful post; makers should be very aware that there are a lot of costs to producing things, many of which you're unlikely to pencil out when dreaming something up (e.g. 1% of revenue going to storing shipping supplies). This is why so many companies appear to have high margins: money leaks out of businesses all over the place.
To the criticism that Kickstarter isn't about making money: part of enabling people to make things is compensating them enough that they can afford to put in the time.
Nitpick: I think your tax estimate is high, given that pretty much everything else is a business expense, and thus deductible, unless your income is high enough that you have to pay $3K in taxes on roughly $8K in net income (38%: 5% Utah + 33% Fed tax bracket).
Also, you're left with the asset of 800 posters which you're offering for $120/ea + shipping. Sure, you probably won't sell all of them at that price, at least not anytime soon, but you do have to attribute that revenue to the project, since you attributed the costs to produce them to the project, and selling just 10% of them will double your net revenue. (Assuming $130 in revenue each, $6 in transaction costs, $15 in shipping & packing costs, $4 in miscellaneous costs = $105 net per poster sold * 80 = $8400 net pre-tax.)
To me this is an excellent example of why it's important to budget out, in advance, any venture. It seems like shipping was way over budget because he didn't take into account materials and postage, and I'm not sure why anyways would set a funding goal of $10k for a project they already spent $15k on if they actually expected profit.
It's important to define your goal to yourself beforehand. Are you looking to fund a cool project you just want to see exist, or is it profit? I imagine most people are somewhere in the middle of those two, but it's important to know where you are before you sit prices and goals.
One thing that I got out of this article that I really appreciate is the early backer concept. One of the benefits of kickstarter is that it is a bit more community, and people are forgiving of mistakes- the early backers even more so. Something that people may want to do in the future is offer to ship to the early backers first so that way if there are problems it's discovered sooner and it effects a smaller group of people.
I have to agree with tedivm. It seems somewhat disingenuous for him to act like he barely broke even if he was able to pay off $15k of debt that he was prepared to eat regardless of whether he sold a single poster or not.
Frankly, it sounds to me like he should consider himself lucky that, despite grossly mis-estimating the actual cost of printing and delivering his posters, he actually received enough funding to meet his obligations to his backers. If he had only raised the amount set as his goal, we'd be reading about yet another guy who's project was never delivered.
Maybe I'm being too uncharitable here, but I think his article is really a case study for why people should be wary of funding low-cost kickstarter projects that require delivery of physical goods.
He precisely estimated the cost of printing:
"Printing was precisely what I estimated it would be: $9,500 "
The cost of re-printing, and re-shipping the posters came out to $7,073, or 9% of the total amount raised. I think we all make these large screw-ups occasionally, but rarely enough that they're not in budgets. I think I cost my last job 20k in an afternoon once.
I don't think this at all indicates people should be wary about funding projects: everything was delivered.
He would have been able to print the posters, but had he only raised 10,000, he would still be in the hole for:
Less shipping supplies ($5,811)
Less storage lease for 5 months ($690)
Less postage ($4,701)
Less temporary help ($741)
Less charity: water contribution ($2,000)
$13,943 in addition to his $15,000 loan, as well as Kickstarter taking 5% and the 5% merchant fee, which would have come out to ~$1000. I don't think people would have received the poster.
I'm not sure why anyways would set a funding goal of $10k for a project
they already spent $15k on if they actually expected profit.
Kickstarter campaign contributors have an auction mentality. eBay listings that start with a low starting bid counterintuitively tend to sell for higher amounts; similarly Kickstarter campaigns that are overfunded are more attractive to donors because they are feel they are backing a winner.
Either its an expense counted against his profit, and he never expected to make a profit (since he was already in the hole if it was exactly funded) - or it doesn't count as an expense and he made $20k. That's over 30% profit, as opposed to the 9% he's claiming.
I think it is really good for people to see the break down of a Kickstarter campaign like this. I see that he gave a short summary into his feelings and I am sorry he was upset with the outcome of this business experiment. I am sure his backers are glad to have his work but would be sorely upset that the artist feels this way at the end of the experience when they put their hard earned dollars into backing his dream.
I guess if an artists point in making a kickstarter is to fund or pay back an interesting and fun side project, ~$4,000 and a number of people now owning your art and knowing your name is a huge payoff (with many hundreds of units of unsold merchandise left over being icing on the cake). If an artists hope was to make this their full time income, then I hope this business experience was a learning one. Kickstarter has made funding business different, not any easier.
I backed the project, I have a copy of the poster.
I don't read that post as Cameron being upset about the outcome, more of a frank look into the profitability of the venture so far. He has been up front with everyone along the way, including during the tyop issue. He'll continue to sell the remaining posters (at a higher price than many backers paid) to pull in additional revenue.
Very happy with the outcome, indeed. I thought it was important, however, for others to understand what goes into (and comes out of) creating a Kickstarter project, and how they might avoid misjudging costs—as others have pointed out here.
I'm in the home stretch of fulfilling a Kickstarter and had something similar happen: I realized that I left a page out when I put together the master files for my comic. When I had an advance copy in my hand and 399 more on a loading dock in China.
So I sighed, and threw pretty much all the expected profit for this print run into a corrected reprint. With a couple little tweaks I'd noted down as "fix this in the second edition" anyway. And I looked at the point in the process where I made this mistake and did my best to make sure it'd never happen again.
I kept the backers updated and they've been pretty cool about it.
That was a fun read, it strikes that heart of business naivete. Not particularly in a bad way, these lessons need to be learned somehow, but in a real way.
I've advised a few folks on doing Kickstarter projects. It can be a wonderful experience, and it can be soul crushing. In this case they got their rewards out, and at the end of the day debt free and a few thousand $ in free cash flow. That seems to be an unusual outcome for the ill prepared.
It is a challenge to understand the costs associated with building something, it takes an ability to face unpleasant realities, deal with folks who are possibly unscrupulous, and keep risks under control. Fall down and you can end up out of money and deeply in debt, unable to fulfill your rewards. That cannot feel "good."
This article covers some of the interesting bits (error in your final product results in re-doing a bunch of stuff) paying off costs to third parties for licenses and such, and storing mailers (something a lot of people totally miss). At some point I hope there is a "Kickstarters for Dummies" book that helps people make good estimates about future costs and potential risks.
Since when you pay taxes on "unearned revenue"? If you don't deliver goods before end of the year, all of that income from Kickstarter is unearned revenue which means non tax-assessable income until the revenue is actually "earned" by fulfilling your obligations to backers.
Also, looking at https://www.kickstarter.com/help/taxes, it looks like you can possibly classify portion of the funds received as nontaxable gift which means even lower tax liability.
To be clear, companies can elect for accrual-based accounting (in which case the revenue is unearned) or cash-based accounting (in which case the cash is taxed in the year received). In fact, many small businesses use cash-based accounting.
We are talking about income. From the page you linked:
> Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year.
Your argument only applies to accrual accounting:
> Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy.
You are referring to that "all events that fix your right to receive the income". That is really tricky since there is no legal obligation to deliver the final product.
You are right, I've deleted my comment. IRS doesn't allow capitalizing unearned revenue if you pay taxes on cash-basis.
But it's not fair to tax payer because then on expense-side, IRS actually forces you to capitalize your prepaid expenses whether on cash-basis or accrual-basis.
So I don't agree with this but it's law and you are right.
FWIW, I think it would be better to leave the original comment, and edit it to say "I was wrong - read below". This way you preserve the context, and also other people who make the same mistake as you (like me!) realize what you think and why it's not true.
For those of you who've started a Kickstarter Project, have you used it for:
a) Market validation?
b) Fund raising?
c) Inspiration to get yourself going?
d) All of the above
I'm considering starting a Kickstarter project for a project management application to boot (yes, I know it's been done a million times over but it seems like most ideas have been done already) and wanted to validate the market and provide myself some temporary income to build the solution.
Definitely did it for validation. While it's awesome that we hit our goals and have some early customers for our product on Day 1, it's going to be tough to re-attain those users and get them on a monthly subscription once we launch. My guess is we'll lose over half of them. That's mostly because we're using an outside channel (kickstarter) to take payment. Also, I'm sure there will be some people that just don't think the product is what they thought it to be.
What KS did do was give us a very easy way to validate the product. We're self-funding and basically said... hey, if we can't raise $20k, this project likely isn't worth investing more time and money in. Granted, we were hopeful, and even assumed we'd do better, but that's the way we looked at it. It's basically fail fast with a real timeline. Sometimes (and I've done this before) you can get emotional about a product and not walk away.
Running a KS campaign is also a small preview for the marketing you'll need to do for the actual product once it's launched (example: a post like this). You go through some peaks and valleys and have a 30-day roller-coaster ride. If you end up funding your project, even if it's a small amount, that's a great feeling of "win" that can carry you through the first few months of your project. Small teams need some early wins to keep positive.
I highly recommend it as a replacement for seed funding for software companies. We'll likely end up around $40k when we end. That'll break down like this.
1. $2000 for video.
2. $4000 in fees.
The other $34k will let us operate for a few months as if we were making decent revenue. We'll also likely invest more of our own money into the idea now that we know it has an audience. Now it's just up to us to deliver on the promise and sign up our customers.
One tip I'd give to people thinking about KS. Keep it simple. You don't need to give Tshirts and stuff. If you're building software, just build software, don't do anything that will take away from you doing that.
While Market validation is a killer use of kickstarter, it shouldn't be the first validation test you do.
A professional campaign will cost some dollars. Best to get a sense of the market opportunity prior to launching a kickstarter.
Plus, pre crowd-funding validation done right will result in a pile of emails and interested persons to help kickstart your kickstarter.
It's also a great reason to get people talking about your project. Pairing a remark worthy product with a kickstarter campaign can be the story that gets you covered around the internet.
Thanks for the thought. My assumption of how to get a sense of market opportunity would be to reach out to my target audience, build an MVP and try to get some beta users going.
I've done two KSs for my comic[1]. Like a lot of comics people, I was mostly using Kickstarter as "preorders as a service" - I had every page drawn when I started the campaign.
Basically they called the campaign itself profit neutral which was their intent but it gave them the ability to launch a new product line. I think that is what people should expect if anything they'll have extra product sell or to use it as a launch pad rather then to expect to pull in a ton of extra cash.
Hm, I've always assumed that Kickstarter funds should be exactly what they're called - kickstart funds that allow you to bring a project/product to market. In more recent times, it seems that the majority use of Kickstarter has skewed towards a preorder style in which the creator of the project is basically already selling the product and looking to make a profit on that first run. It is much harder to bring the project to market AND deliver it with the same funds, as opposed to spending most of it towards the former and sending out t-shirts for the support. Of course, way less people would back projects if they only got t-shirts. Thus, the current state of Kickstarter, where creators promise a lot from the beginning just so they can be successfully funded.
I'm not implying that this was a bad shift, just that if you plan to use Kickstarter rewards in a preorder style, its much more important to get the numbers pinned down so the project doesnt fail altogether.
I was once the backer for a campaign that deliberately underbudgeted, because "project like theirs" were routinely getting 2x to 3x their goal, which was actually what he needed.
His project made it, but barely. It, rather predictably, failed miserably.
This is such a terrible thing to do. You are intentionally taking advantage of your backers by giving them the false sense of security that you will be more likely to complete your project if you get far more then your goal, when in reality you could be far below what is actually needed to deliver because you really expected to get even more.
Again, you are taking advantage of your backers if you do this and it shouldn't be OK. I wish Kickstarter had a penalty or some other system in place to discourage this.
Indeed. This whole post is a frustrating exercise in how not to do arithmetic. It's not Kickstarter's fault that he failed to budget the vast majority of his costs -- and failed to proof the product before shipping. Maybe next time he should invest a couple thousand up front and get a competent project manager.
Where in the post is he blaming kickstarter for anything? It's not the post I'm reading.
The post starts with the kickstarter & transaction fees because they come off the total amount raised.
The entire thing seems to have been delivered on time, and would have returned a reasonable amount of money without the reprinting & 2nd mailing costs.
As someone who saw the original version (with typo), and missed it entirely: it's easy to miss.
"It's not Kickstarter's fault that he failed to budget the vast majority of his costs..." Definitely not. But this is a primary reason for authoring the article—a heads up to others who may launch a KS campaign and not fully understand where all the money might go.
Well, that's the trouble with the all or nothing part of Kickstarter. Each poster he printed was profitable, so he was much better off setting a small goal and making some money, than setting a large goal that he missed and making no money.
Curious as to why nobody mentioned the travel expenses for multiple trips to New York. I somewhat sarcastically asked on Designer News why multiple trips were required for a simple poster design, to which Cameron responded (for anyone else curious):
"Research. But yes, I could have done that via Google. There's a special amount of knowledge, however, that comes from studying the architecture and stone in person, speaking with type designers familiar with the history in which it was built, etc."
Great write-up. Care to shoot me an email at alex@monthlyboxer.com? We're a fulfillment company specializing in Subscription Boxes and Kickstarter fulfillment. I know it may not be much help to you for this campaign, but we might have been able to bring your fulfillment and shipping costs down quite a bit. I'd love to chat with you about your experience. If you're planning on doing anything like this again, it'll be good to have an idea of shipping supply and postage options. In some cases our volume discounts on postage and materials save more than our total fees, meaning it costs you less to ship with us than do it yourself out of your garage. And you get to keep your garage empty and your weekend free!
I think this is a great lesson for any budding entrepreneur. Business Plans get a bad rap around most startup communities, but it's undeserved.
Sure, writing a formal business plan to conform to some standard in an MBA class is ridiculous. And it's true, most numbers in a business plan are made up.
BUT, most entrepreneurs these days never even bother to put pen to paper and think of the basic costs of their business. Sure, some of this post is about mistakes, but a lot of it is things that anyone with a shred of business experience could've foreseen. All it took is sitting down and doing the damn math.
Kickstarter projects aren't exempt from having to make the math work on a business. Neither are startups, incidentally.
Just want to be devil's advocate with a couple questions:
Do you think Zuck could have made a business plan which correctly predicted Facebook's growth curve?
If he had put together a more modest, defendable one, do you think it might have slowed down the company or made them focus on the wrong things to hit key milestones?
That's actually not really the point of a business plan. The costs is the important thing. The bjallions in profit in year 3 are almost always pure fantasy.
There's nothing wrong with writing down the fixed costs (which will often be estimable) and getting close on the variable costs. Revenue projections in a new company will be made-up usually, but you're correct to point that out.
This article would have been more appropriately called "Basic Budgeting of my Kickstarter Project." I really was expecting to see some average cost/marginal cost curves etc.
I understand the money-and-art-dont-mix vibe that I suspect you're coming from. But I don't think there is a conflict between "passion project" and "profit" at all. Keep in mind that profit---from the perspective of a sole proprietorship---means living wage.
Most people have to eat, feed their kids, pay a mortgage, support a spouse, etc. In an advanced society, we also have reasonable expectation of some social expenses as well.
While internet culture projects the identity of the passionate 20 year old eating ramen and sleeping on a friend's couch, that's actually the minority. Passion projects are great, and being scrappy is great, too. But we (the startup community) of all people should endorse the idea of making money off our labor.
As an artist who uses KS to fund printing collections of her comic, I've got to disagree. If you're going to be able come back to KS and do another project, you have to keep an eye on your expenses.
I mean, yes, it is wonderful that KS provides a way for people to come together and Make Art Happen. But art doesn't come out of nowhere; people have to pay their rent while making it, they like to eat too. In the long run Kickstarter can be an important component in transitioning from doing art part-time to doing it full-time. And that, my friend, is one hell of a passion project.
Yeah, the ideal way to do this kind of project would be to do the Kickstarter to raise the funds to create the print (the $15k in sunk costs). It's hard with art though because people are reluctant to buy something they can't see.
I am surprised there isn't more talk about the costs of delivering t-shirts for these campaigns. This project was an exception, but most of the ones I see are selling shirts that have to eat more than half of the contribution from each $30 donor.
There should be a way to have Kickstarter discount the low donations that require shirts or stickers because they end up contributing much less to the project goal than someone contributing $200 for a product.
I've sponsored 63 projects:
- 42 shipped.
- 8 broke.
- 6 not only never shipped but I never got replies from the project team when I inquired about shipping.
- All but 4 were late, most significantly.
Overseas manufacturing problems plagued most of the projects. Inadequate budgets took down many. Some just seemed to drop off the face of earth.
Its gotten worse IMHO, I don't know why, but I do that I rarely sponsor projects anymore.
First and foremost, congratulations on a wonderful piece of art. The realities of accounting should not distract you from the fact that the project was a success and enriched people's lives.
Although you paint a pretty bleak picture of the finances, as others have pointed out above, this does not reflect the economic reality.
The typo impacted your profit margin significantly - without it, you would have had an additional $7k and a margin of 19%.
But this is only a side show. Even if you had made 0% on the posters shipped to the Kickstarter backers, the 800 posters remaining represent a book value of $96k. (Less a few hundred dollars for storage).
Assuming you can sell at this price, your three years work will be amply remunerated for a part-time project.
In the end, Kickstarter functioned as it should. It reduced your risk by providing a pool of known buyers and left you with the infrastructure for approaching your market. That market is your final reward.
Right, but you are left with an extra 800 posters, which have already been printed and just have to be shipped. Had you just done a printing run to fulfill the commitment to the backers, you'd be left with more profit from the project at this point, but instead you've been paid less, with the potential for more revenue with higher margins. More risk, (potentially) more reward.
I worked at a video game company that had the Atlanta Olympics license. As Manager of Development instituted a "sign off" on all documents and packaging. I left the company after a few months of banging my head on a wall. The next day the CEO sent a memo around recalling all of my procedures. The next game they produced was for the "Olympcis". All copies had to be recalled off the store shelves.
Silly analysis. He disregards all of the real value he got for the money he spent. E.g. he paid off $15000 in loans - what was that, chopped liver? It was cash in his pocket - or rather, cash that didn't go out of his pocket.
So he made a profit of $25 (minus about $5k for a printing error) doesn't sound too bad to me.
You have to take into consideration your costs for producing your extra's, as well as things like shipping and fees.
To the criticism that Kickstarter isn't about making money: part of enabling people to make things is compensating them enough that they can afford to put in the time.
Nitpick: I think your tax estimate is high, given that pretty much everything else is a business expense, and thus deductible, unless your income is high enough that you have to pay $3K in taxes on roughly $8K in net income (38%: 5% Utah + 33% Fed tax bracket).
Also, you're left with the asset of 800 posters which you're offering for $120/ea + shipping. Sure, you probably won't sell all of them at that price, at least not anytime soon, but you do have to attribute that revenue to the project, since you attributed the costs to produce them to the project, and selling just 10% of them will double your net revenue. (Assuming $130 in revenue each, $6 in transaction costs, $15 in shipping & packing costs, $4 in miscellaneous costs = $105 net per poster sold * 80 = $8400 net pre-tax.)