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« 50 Most Read Music Think Tank Posts In 2010 | Main | The Unfamiliar Sound of Competition and Managing Your Rights »
Thursday
Dec162010

Microfunding Is The Future of Labels! (...But Kickstarter Is The Wrong Model For Bands)

By now we’ve all at least heard about Kickstarter. Many of us have helped to fund projects. I’ve supported 5 or 6 myself. The best I can discern is that Kickstarter projects follow one of thee models. The explanations are a bit long, but I hope to tie this back into music and into why I believe the Kickstarter models are mostly not the correct models for funding recordings, but are great models for other types of projects.

Additionally, if I ran Kickstarter, I’d disallow projects that did not meet a stricter set of guidelines because I believe that many projects that are on the site actually damage the Kickstarter brand and the entire concept of microfunding. I end this post with a proposal for a new fan-investment label model that I believe is viable, won’t burn out fan interest in investment, and inherently creates a dedicated “street-team” to help bands promote their work. Let’s start with my taxonomic breakdown of Kickstarter models:

Model 1 - Donation / Support

These projects are designed to produce art, ideas, operations, movements, or objects that supporters want the world to have. These notions (I’ve decided to use the term “notion” to describe everything in this category) are not really owned by any of the supporters and the supporters’ only reward is that they get to know in their warm, fuzzy hearts, that they helped make an otherwise impossible notion come into being.

Supporters may receive a token of contribution - a thank you inscribed on the notion, an attribution of contribution associated with the notion, etc. However, the primary reward is not an object that is owned by supporters or an attribution to supporters, but rather just the existence of the notion. One campaign that I supported in this category is the New Hampshire Mystery Journalism Project . I found the backstory fascinating enough that I wanted to contribute money just to find out what the damn thing is.

The notion in this case is empirical information providing clues that will help solve the mystery. Sure, at my contribution level, I do get a token (a signed copy of the eventual article), which I will enjoy, but I didn’t support this to receive a signed article, I supported this because I wanted to help the world solve this mystery. There was a set cost to advancing the notion and less money than that would not allow the notion to exist.

Model 2 Gauging Interest In The Production of Goods

The purpose of model 2 is to help provide upfront money to allow the design, manufacturing, and distribution of a physical good. The key, in my mind, to what makes this a viable model is that, although you are essentially pre-buying, your pre-purchase enables the entire process. If this project is not supported, the objects will not exist.

I view this as money to provide the means to produce innovative goods. These goods are essentially sold via the campaign at a fair market price. That is, no portion of the money is a “donation” or contribution beyond the value of the goods offered. An excellent example of this (that I supported) is the Lockpicks by Open Locksport project. Schuyler Towne, a recreational lock-picking expert, wanted to manufacture an innovative set of picks.

This would require lots of time to design, money to prototype, time to test, etc. Schuyler wanted to start a company selling picks, but didn’t have the capital with which to make it happen. So, he put up a Kickstarter campaign to see if his idea was even viable. Would people buy picks? He got over $87k of orders, far, far exceeding his $6k goal, an amount deemed necessary to cover the overhead of producing the picks.

Why did these contributions continue after the goal was met?

Essentially, supporters were pre-ordering the unique, innovative objects that he was selling. Supporters helped prove that he had a viable business idea and that there was sufficient interest in his goods. Unlike model 1, supporters are contributing because they want to own a specific object. However, like model 1, the funding goal is the minimum dollar value at which the project becomes possible.

Model 3 - The pure pre-order

In model 2, the objects produced could not exist without Kickstarter funding. I.e., Schuyler would not have made his lockpicks without that funding. The overhead was simply too high to afford. Perhaps he would have found a way to make it happen, but a failed funding would indicate that the interest wasn’t strong enough to merit investment. In this model, the production of an object is either already in process or completed.

That object is destined to exist regardless of whether the project is funded. The project goal is essentially arbitrary. It has no bearing on whether or not the project will be completed. Sure, with funding, maybe the scope can be expanded - e.g., an album can be mastered by a more expensive studio.

However, the band that doesn’t get funded for their album is not going to call it quits. They are not using Kickstarter to gauge interest in their project, they are using it to pre-sell an object.

Sure, while they are pre-selling, they also offer some packages that essentially constitute aspects of model 1 (i.e., donations). Give us an additional $10 above the normal cost of our CD and we’ll come to your house and slow dance with you, etc. Model 3, in my opinion, does not belong on Kickstarter.

The funding goal is arbitrary and meaningless. The project will happen whether or not the goal is met. Why set a hard goal value? Why allow Kickstarter to take a percentage of the $ and why risk getting nothing when you fall short of the goal? Instead, projects using this model should just pre-sell packages. I’ve contributed to many of these projects because I want to support my friends’ artistic efforts, even if I believe they are misguided in technical approach.

Worse than just misguided, I believe that Kickstarter will wear out its welcome by allowing Model 3 projects to exist. Supporters need to feel like they are contributing to the genesis of a notion or object that absolutely WOULD NOT exist without their contribution. That is what will draw supporters to the site. A fancy transaction system for pre-buying will not.

Most people have come to view and understand Kickstarter as the latter and not the former. I’ve seen numerous people with Kickstarter burnout. People are going to stop paying attention to projects. The use of model 3 poisons the prior models, both of which I consider extremely interesting and valuable.

Should bands then use models 1 and 2?

I’d argue that it depends on the specific project. If bands are looking to create or obtain something that doesn’t result in a specific sellable product, then perhaps model 1 would work. If bands seek to produce a unique and innovative piece of merchandise that requires specialized manufacturing, then perhaps model 2 is appropriate.

If the band is in the middle of recording an album and looking for an injection of capital to help move things forward or help afford additional studio time, a high cost professional, or cover some or all of manufacturing costs, then I’d argue that they should set up a Paypal account and ask fans, friends, and family to either donate money to the cause or pre-purchase their upcoming release. Why? No specific amount of money is necessary for the completion of the project.

The band will make do with whatever their fans, friends, and families can help them with. Funding directly through Paypal (or even taking checks) will also reduce the overhead significantly. Finally, if any advantage exists for setting up these projects through Kickstarter (i.e., supporters are familiar with, or excited about Kickstarter projects), this form of enthusiasm will be gone in the near future as the “market” of Kickstarter-style projects becomes even more saturated than it is.

I’ve already seen several bands fail to meet their goals. Some have sheepishly backed off using that model and asked for pre-purchases and donations as I suggest here. Others just ended up spending more of their own money to get the job done.

What does the future look like?

Both the entire business end of the music industry and the artistic pool have been asking this question for years, hoping for a simple replacement for record labels. Labels served as risk aggregators. They made modest investments in relatively large numbers of artists with the hopes that a small percentage would lead to big payoffs to offset the losses on the majority of investments.

In recent years, label rosters have shrunk to only really include sure bets. The major labels only invest money in artists already making money. We need new risk aggregators. What if microfunding didn’t serve as a donation or a pre-order? What if, instead, it served as an investment? Would you buy “stock” in your favorite band? There are very concrete ways that artists could sell futures in their work.

How does it work?

I am not aware of any labels or collectives operating under this concept, but I would also be surprised if they don’t exist. I’ve been contemplating the formation of a label operating under this very concept for some time under the Launch Over umbrella.

Here is the template of one possible operational scheme: BandX wants to make a new album. In the modern climate, BandX will raise the capital to fund the financial cycle of this album by contributing their own money to the project, asking for donations, or pre-selling a product.

Perhaps the band could hire the producer they want to work with, pay for recording, pay for mastering, pay for art design and photography, hire a publicist for a press campaign, hire a radio promoter, make and distribute a music video, and cover other operational costs for $20,000 (this budget could be scaled to any particular project). If the band plans to include 10 songs on this album, they could sell non-controlling ownership, songwriting rights, mechanical rights, etc. equivalent to 49% interest in each song.

In order to raise $20,000, this 49%. This would mean that for every $40.81 cents invested, a supporter could own 1% of a song. This would mean that they’d receive 1% of revenue from album/mp3 sales, 1% of the writer’s share of back-end songwriter/performer royalties (BMI, ASCAP, SoundExchange, etc.).

Thus, if a song earned $4081, supporters would make back their investment. If a song ended up being successful and it earned $100,000, the supporter would earn $1000, 24 times the original investment! BandX gives up money, but no rights or control. BandX can sell and distribute their music however they want. BandX can take whatever licensing opportunities they want and reject those that do not fit their artistic mission. BandX also now has an investor who is financially motivated to help promote the music, to help pass it along to their friends. The exact numbers could be adjusted of course. The terms could be time-limited, scope-limited, etc.

In addition to the financial motivation, fans and friends now feel emotionally invested in the success of the artist. They have the pride of ownership. This, to me, is a real fan-funded model. It’s not begging for money, it’s not trying to shift the financial timeline to frontload, it’s creating an actual, traditional business structure. Fans will not primarily expect to make money by investing, but if BandX wins, its fans/investors also win.

I’m very interested in hearing your thoughts on this idea. Great? Terrible? What are the upsides and downsides? Will bands go for it? Will fans go for it?

Michael J. Epstein is an artist, writing and performing with The Michael J. Epstein Memorial Library,Do Not Forsake Me Oh My Darling, Neutral Uke Hotel, andThe Motion Sick. He is also developing a Boston-centric music licensing company, Launch Over. Along with writing about his bands, he frequently posits his thoughts on the present and future of music on his blog.

Reader Comments (17)

I fully agree on "model 3" being detrimental to the Kickstarter brand in the long run. I too have supported a couple of those projects but I feel they miss the point of the platform—to try something new that wouldn't be possible otherwise. (And why burden "fans" with something you could / would certainly pay for on your own?!?). I touch on that bit more here.

Otherwise, a true fan-funded / ownership model is likely the future, but artists will need to generate some degree of "pull" before people buy in. And I just wonder—once the novelty has worn off—how motivated the average investor / fan will be to hustle on behalf of an artist. Sure there's a potential profit motive, but the pool will need to be constantly refilled as people cash out. "Investor churn" will become a label management topic du Jour...

December 16 | Registered CommenterBrandon Walsh

Great post Michael! I especially appreciate your breakdown of campaign types. My argument against fan funding was also directed towards model 3 campaigns, and I regret not taking the time to more clearly define the target of my criticism.

While I think your song ownership model is an excellent way to turn a donation into a true investment, it's probably a bad bet for investors in the vast majority of cases. There are also several legal, accounting, and oversight hurdles to overcome. I don't see Kickstarter supporting that type of campaign, if only for liability reasons. When a supporter eventually receives that $0.06 royalty check and feels they were ripped off, who will they cry foul to?

December 16 | Registered CommenterBrian Hazard

I admit I didn't read the first section and skipped straight to the idea that you think might work.

With my very thin knowledge of investment I would guess that there needs to be a fairly certain idea that the band will make some money. Proving that (see elsewhere on the site for a proposal that computers might be able to predict hit potential 'soon') is almost impossible, no, actually, with an unknown artist, it is impossible.

So you're left with investors being on the level of adults sponsoring children for a fun run, where it's the taking part that counts and if they don't finish that's not the reason why they 'invested' and it was only a small amount, anyway.

This article serves to reinforce my own belief that artists should be in mourning for the passing of the, admittedly corrupt and inequitable, system run by the major labels that you describe here, also.

We are now all accepting, stupidly, that we have to prove our own selling potential before and despite our artistic worth.

Unless we get lucky whilst busking...

December 16 | Registered CommenterTim London

A great breakdown of Kickstarter campaigns. I'm going to suggest people read this post for that alone.

The challenge with anything that suggests an "investment" are the laws. You can pitch it to friends and family easily enough, but going to strangers for funding can be tricky. Blue sky laws and all that.

There is some history of film makers using a private placement model to raise funds. I'm not going to cover it here because I'm not an expert; I just wanted to toss it out there.

December 16 | Registered CommenterSuzanne Lainson

Good post Michael, I highly recommend reading about a similar but potentially better investment model I devised in 2009, called Virtual Geometric Investment:

http://www.innerversion.com/vgi.php

It's completely automatic to the end user, scales well (as long as the parameters are reasonably well tuned) and can apply to any business, not just music. An advantage it has over your suggestion is that it favours the early supporters of a musician or product.

What are your thoughts on that?

December 16 | Unregistered CommenterChris Gibbs

I'm actually working on something very similar to what you're speaking of here & it's almost complete. It's called Hifidelics & we can found on twitter @hifidelics

December 16 | Unregistered CommenterErik

Thanks for the comments and the links. I'm excited to see that others are thinking about similar approaches. The idea isn't really that this is a viable investment so much as it's a way of giving a little more to family, friends, and fans than just a pre-ordered CD.

December 16 | Unregistered CommenterMichael Epstein

I pretty much agree with all of the post, and have been considering your model three for a while. I personally question whether it is a valid model for a business, though. It would seem much more practical for an artist to solicit shareholders on his own rather than paying another middleman to do it for him, along with giving up the revenue points.

December 16 | Unregistered CommenterCraig Byrd

Michael, very thought provoking indeed. I'm not sure why you picked on KickStarter since there are many other sites that follow similar models.

Clients of mine have had some success raising funds through fans and I have to say I am a big supporter of fan funding as a way for artists or other businesses to get started.

Your idea of setting up a PayPal account and raising money without a partner is an interesting one. It raises a couple of issues. First, when an artist is looking for more than just a couple of thousand dollars, the artist will have to cast a wide net to be successful. This net goes well beyond friends and family and requires some trust on the part of a contributor to know thongs are running in a professional manner. For example, KickStarter has an all or nothing policy. If the goal is not reached the card of the contributor is not charged. KickStarter also runs charges through Amazon, a trusted source. As a contributor, I want to know my money is going toward the project and not into the drinking fund if the goal is not met and the project can't be completed. In tour PayPal model, the artist could agree to hive back the money if goal is not reached or the contributor might oy pay if the goal is net, but both of those ideas have problems.

Any of the current sites provide some legitimacy to the fund raising which an artist can't do on his or her own.

There certainly are some improvements that can be made to the process but over all this concept of fan finding is a very good one and we should all support it.


The investment idea while perhaps a good one, would require registration and other expensive legal work in order to be possible.

December 16 | Unregistered CommenterTodd Murphy

While we are dealing with analysis of the new models, Drive By Truckers offered their fans to participate in their 2001 Southern Rock Opera album, by buying shares, to fund their album and purchase of a van, promising 15% interest.
Read this : http://clatl.com/2001-11-21/earshot.html for more details.

So, people had done it before and did it cleverly, in 2001.
Regarding your post, I think all the models works, it only depends on the bands' status and following. I personally believe there should be a complete transparency, to allow the fans understand exactly why the specific sum is needed (i.e. - producer costs X, manufacturing costs Y etc etc). I believe that if you address the public, just like in the stocks market, you should reveal your reports or biz plan and let people decide if they think it's reasonable their dollar should be a part of the sum that goes, say, to the producer or a brand new Rickenbacker for the bass player.

Yair

December 16 | Unregistered CommenterYair Yona

Michael,

Thanks so much for explaining these three models so vividly. I've been trying to explain fan funding to artists for a while now, and I admit I have struggled to do a good job of it. I'm going to refer artists to this article from now on. Killer.

Chris

December 17 | Registered CommenterChris Bracco

This was a great post. The ideas of micro-funding are idealistic and will further creation through pitfalls, promises and successes alike. I thought about a stock market of music in the past as well, in an idealistic sense and it would be great. If parameters were set to "qualify" a band or valuate in essence. Take for example a member going solo after being in touring bands for years. There are plenty of us out there that could benefit from other buying stock in a project. What’s the worst case? You print up some records and a few people pay for an individualized release. I'm thinking small and what many are doing out there in micro-fund land seems to be a transfer of aid to other artists - and that is great. Yes, I am new to this concept but with the current climate of music and the availability to "paint-by-number" web guides that assist a new band with anything and everything, it's very easy to see how exploitation of this system is inevitable. Safe guards can be in place and parameters set for a donation to invoice, but ultimately a required registration process to fund a project would alienate and work against the principle it was created for - to give a small voice a chance. If anyone out there is interested in brainstorming about a plan that could work. Please get in touch. I stumbled on this and was impressed by the post itself and the comments by everyone.
Glad I found this - Jarett

December 17 | Unregistered CommenterJarett Quintana

I guess I will be the person that disagrees. If a band is smart and handles their business in a conservative way, there shouldn't only be the need to do a fan-funded campaign for a music project one time. You won't find me continuing to give the same artist my money over and over just to help them get another project released.

This "fatigue" that is suggested is kind of a wild assumption. As someone that has supported a couple of projects on Kickstarter, it is weird for me to believe I would ever be that interested in throwing in on projects that have not been recommended by people I trust. If anything is wrong with Kickstarter, it is the fact that they don't really have the surefire value proposition that will get me to just throw money at some children's project when most of us live in the real world and are bombarded with similar idea that hit closer to home.

Micro-funding is a great option when the agent has a true plan on how to use the funds to build their enterprise.

I recently helped a local artist set up their Kickstarter campaign for their debut album. The band would never have considered it if I hadn't pushed it. They were riddled with doubt and uncertainty, which is what plagues many when considering making a career doing what they love. After some hard-line thinking, we were able to project how we were going to be able to make the campaign successful. We dropped the silliness and offered a rudimentary program that allowed the investors to feel like they were getting involved with a business, instead of a band. Honestly, that is what people should be doing.

Any fan-funding campaign should be built on some idea of sustainability. If a band cannot tell me how they will be able to do with the money, then I know I stop listening. It takes more than just creating the album, pressing it up and hitting the road. In terms of the act I am currently aiding, I know they have a long-term vision and are looking to build up to bigger business opportunities that relate to the brand they are growing.

This post makes me believe that Kickstarter has been given more credit than it deserves. It is not a solution to the dilemma of the modern creative. An entrepreneurial attitude needs to be assumed and used to truly create a real solution.

micro funding is so not where it's at - and this has been proven time and again... although your post/ideas are creative in principal - they still harbor the same old music biz theory... raise "money", make "a record", with "a producer", and get "radio play"... these terms were getting stale when the hookers and blow went the way of hitmen in one decade and spitzer the next...

the future of the record biz will look nothing like this...

why do you think they call it "new media"?

stay tuned...

December 18 | Unregistered Commentertone bloke

I agree that the type of projects that are posted to Kickstarter should be more limited. Their model is not right for every project, especially music projects. But there are sites that operate specifically for music, but with a model like Kickstarter. Check this out:

PledgeMusic

December 20 | Unregistered Commentercoylejoh

Great article. I'm surprised you didn't mention SellABand (SliceThePie is another, but SellABand is the more prominent) - they've been testing out the model you proposed as a solution... for a couple of years now.

The main comparison I see is that
1. SellABand lets people invest and receive ongoing rewards like stock (as you suggested)
2. KickStarter lets people get motivated behind a Specific Deadline and welcomes generous quasi-donations, as you suggested in "model 1"

Both of them are hypothetically platforms for
1. a fan/investor to give a large portion of money to a project
2. a fan/investor to tell lots of other fans they can get access to the project early

But KickStarter in reality seems to attrack small and BIG donors, whereas SellABand seems to attrack small and medium fans/investors.

The bottom line (and this is one thing the record labels are still kings of):
To sell alot of individual albums or "band-stocks" to alot of individual people, a large promotional budget/campaign goes along way. If I was advising artists on what to do at the Beginning, I would use something like KickStarter, where you're more likely (in addition to alot of small donations) to have 1 or 2 people drop a few hundred or thousand on your project. Then, you can take some of that money to help promote a campaign on something like SellABand, to get lots of smaller investments and fans, without starting from scratch.

I'm actually about to do a little Funraising starting with a post tonight on http://www.rapOets.com/fb

Well articulated Michael! Kickstarter fatigue set in almost immediately after the initial buzz wore off.

March 14 | Unregistered CommenterGreg Grinnell

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