[backspace]

I humbly offer a contrary view.

It's the fashionable thing to joke about VC's making wrong investments, investments at bubble prices, not knowing what they are doing, etc. But let's face it, it's their job to make sound investments. Sure, they may not get it 100% right, or even 50% but their job is to continually improve this success metric.

It's great that companies like Kickstarter are giving average consumers the capability to fund these sorts of companies but let's not equate the consumers' endorsement of the startup as the potential for value or ability to succeed. VC's do their due diligence for a reason, they want to back successful companies. Average consumers funding on Kickstarter are not doing their due diligence, they're looking at the marketing pitch and handing over their hard earned dollars. I fear this is bad for both the startup ecosystem as well as for consumers.

There will be companies on Kickstarter that take money and fail. My prediction is that it will be higher than the startup space. So before we get caught up on buying exclusivity with this fundraising, let's do our due diligence.

[snowwrestler]

It's not just "make sound investments," VC's need to make investments that will pay off big enough to meet their promised rate of return over the promised time horizon. (They are investing other people's money.) It's certainly possible for VC's to think that an idea has merit, but is not right for VC-type investment.

Kickstarter allows time horizons and rates of return of arbitrary size. These guys now already have everything a business needs: capital and customers. Unless they commit outright theft there is no reason they can't succeed with this project. But there is also no requirement that they keep it going after their last investor gets his or her watch. They can just do it to the size needed to hit the natural demand, and then call it quits. You can't do that with VC money.

[backspace]

VC's are working for their investors, and this startup is probably more apt for Kickstarter funding.

But my salient point is that average consumers cannot and usually will not do their due diligence on whether the people who are raising the money have a good chance of succeess.

I hope you're not suggesting all a business needs to be successful is capital and customers. Because that's just plain dangerous.

[wpietri]

I disagree.

An important part of investor due diligence is to try to figure out if there's a market for a product. A sizable Kickstarter campaign proves that in a way no due diligence ever could. Kickstarter campaigns also have an "with enough eyeballs all bugs are shallow" property. So failure rates could be lower.

Even if Kickstarter failure rates are higher than VC failure rates, Kickstarter still may be a good thing. First, Kickstarter can fund projects that are too small for VCs to bother with; there's a lot of value in the long tail. Second, they can fund projects that will be "merely" a 2-3x return. Third, this is making more capital available; if Kickstarter didn't exist it's not like the money would end up at Sequoia. Fourth and most important, Kickstarter campaigns will put less capital at risk. Most VCs can't afford to invest in less than $1m lumps, but Kickstarter campaigns can be 100x smaller.

[backspace]

Never argued that Kickstarter is a bad thing. Like I said originally, it is a very good thing and as you stated, it is great for certain types of projects (too small for VC's, not large enough return, etc.)

VC's have to judge if there's a market and Kickstarter helps with that. But VC's also try to judge whether the founders have the ability to succeed, whether their business plan (costs vs. revenues) are sensible, etc. How does one do that through Kickstarter? I'm sure you'll agree more than 50% of the people who've funded the project on Kickstarter didn't even bother to figure out whether the startup is set up to succeed. (For additional evidence, see "Diaspora")

Btw, when you say Kickstarter campaigns can be 100x smaller, I'm assuming you meant to exclude ones raising upwards of $3.8 million right?

[wpietri]

When I say campaigns can be smaller, I mean that most VCs can't afford to do small deals. Their partners are too expensive. 10k projects are common on Kickstarter, though.

Your 50% number seems meaningless to me. Not everybody has to do the full research. Even with VC investments not everybody does full due diligence; as long as there's a lead investor willing to do the work many are much more casual. The larger a Kickstarter grows, the more likely it is to be scrutinized, both by funders and by outside participants. In this case, there was plenty of info available to evaluate the team.

Also, pointing out one failure like Diaspora is worse than meaningless. For every Kickstarter failure you find, I'm sure we can come up with 20 VC ones. Failure isn't the problem; failure is the point. Reward requires risk. Risk means some failures. As long as they continue to be, like Diaspora, interesting failures, then we're doing fine.