16 PUGET SOUND BUSINESS JOURNAL

COVER STORY

THEY GET A KICK Seattle’s surprising Kickstarter bounce

BY STEPHANIE FORSHEE sforshee@bizjournals.com 206-876-5438, @PSBJ_Lists

One of the largest funding rounds for a Seattle startup so far this year didn’t come from a professional investor. It came from thousands of individ-uals handing over small amounts in

response to online pitches.That’s how Seattle comic artist Matthew Inman’s

“Exploding Kittens” card game raised $8.8 million this year.

And that’s how Dan Shapiro’s “Robot Tur-tles” game bounced onto the shelves of Target and Nordstrom.

The two companies are among the 1,700 in Seat-tle and nearly 1,000 more in the rest of Washington state to be launched by Kickstarter, the crowdfund-ing leader, since the site’s origins in 2009.

Seattle is the nation’s 21st-largest city, but ranks among Kickstarter’s top five cities for the number of projects launched, projects that get fully funded and overall rate of success.

And the companies propelled by crowdfund-ing aren’t just making exploding kittens and robot turtles.

Ballard’s Touchfire, for instance, has sold more than 55,000 iPad keyboards and cases that started out as a Kickstarter campaign.

Back in 2011, Touchfire founders Steve Isaac and Brad Melmon were a year into development and pitching their snap-on keyboard concept to inves-tors. But not a single one was willing to write a check. When a final funding prospect fell through, the pair launched a Kickstarter campaign 24 hours later.

The goal was to raise $10,000; that was exceeded by $190,000. Today, Touchfire is bursting out of its 1,700-square-foot headquarters.

Around the nation and in Washington state, crowdfunding is defying initial predictions that amateur online capitalists would eventually lose interest. Instead, it has grown from a geeky novel-ty into an indispensable source of seed money for thousands of new businesses.

Pay in advanceCrowdfunding evolved with the spread of e-com-merce to allow individuals scattered around the world to put money into a creative endeavor or a product idea pitched online. These backers essen-tially pre-pay for a product they hope will eventu-ally get made.

The dominant site, Kickstarter, has raised more than $1.6 billion doing this, spread across more than

80,000 funded projects worldwide.Tech and gaming are the two highest-funded

categories on Kickstarter. So, in a tech and gaming community as prominent as Seattle’s, it’s no sur-prise that the region has witnessed a multitude of successful campaigns.

Kickstarter is far from alone in the rewards-based crowdfunding space. It competes with platforms such as Indiegogo and GoFundMe. But Kickstarter has the most users by far — more than 8 million, said Kickstarter spokesman Justin Kazmark.

Kickstarter, he said, “lets backers voice the type of culture they want to see exist.”

That voice certainly got heard at Kirkland-based Harebrained Schemes, a game developer that has grown from eight people working from a storage closet into an employer of 50.

The company just wrapped up its third Kick-starter campaign, bringing in $1.2 million earlier this year. Its first two brought in a combined $2.3

million.“This growth is directly related to our suc-

cess with our Kickstarters,” said Mitch Gitelman, co-founder and studio manager.

Noble failuresFor every success story like Touchfire or Hairbrained Schemes, there’s a crowdfunding campaign that doesn’t catch on. Only half of all projects pitched on Kickstarter from Seattle have gone on to see day-light, at least through Kickstarter itself.

Seattle coffee chain Uptown Espresso and Break from Reality Games teamed up last spring to turn Uptown Espresso into a “Gameporium” and, in the same project, create a barista-themed board game.

Although Break from Reality had previously created three successful funding campaigns that raised more than $250,000 collectively, the coffee shop collaboration did not pan out. It raised just shy of half of its $8,000 target, which meant it had to

Touchfire founders Steve Isaac (left) and Brad Melmon (right) and operations manager Jerry Howard hold up some of their innovative iPad cases and keyboards at the company’s headquarters in Ballard.

SEATTLE’S TOP FUNDED KICKSTARTER PROJECTS

THE TOP EIGHT SEATTLE-BASED CAMPAIGNS ON KICKSTARTER: Te

chno

logy

Comics

Food

Design

Gam

es

$1.5MARKYD:

Publicly accessible space telescope

$1.05MCASTAR: 3-D

holographic projects for augmented reality

$823KSANSAIRE:

Sous Vide food circulator

$693KMOMENT:

iPhone case for mobile photography

APRIL 17, 2015 17

OUT OF YOU

return all funds to backers. “The problem with that project is it was two proj-

ects in one, and I think it was confusing for peo-ple,” said Eric Salyers, president of Break From Real-ity Games. “Backers outside of our area didn’t feel compelled to help, so it was a matter of getting the word out to enough people in the Seattle area, and we didn’t succeed at that.”

Ultimately, Uptown Espresso had to pour in its own money to rejuvenate its Delridge location in West Seattle, now equipped with hundreds of board games to play and buy.

Even when crowdfunding campaigns meet their funding goal, founders also must be mindful that traditional investors look at a product’s value prop-osition very differently than consumer-focused online backers.

Gary Rubens, for instance, is an angel investor based in Seattle who has made upward of 50 deals in less than two years. Rubens said he’s not opposed to

crowdfunding — rewards-based or otherwise — but he prefers to act solo when investing in the devel-opment of a company.

He has encountered a handful of entrepreneurs who have started with Kickstarter and later pitched him.

“I think Kickstarter-type funding efforts can be cool, but they may, in some cases, create a false sense of market validation,” he warned — especial-ly since there is no data just yet about how many of Kickstarter’s campaigns have gone on to survive as sustainable businesses.

Technical difficultiesBack at Touchfire, it wasn’t just a matter of signing up for a Kickstarter account and posting the idea for the masses to buy into.

Isaac and Melmon had extensive backgrounds in tech. Isaac, the designer, had worked for Sun Microsystems and Microsoft, while Melmon, who focuses on the mechanical engineering, previously had worked for HP, Ideo and Speck.

Before ever launching their campaign, the duo dedicated a full year to perfecting the prototype for the original 3-D silicone keyboard with small mag-netic clips.

“I was surprised it took me as long as it did,” Melmon said, “but I needed each piece to be exact-ly right.”

Post-Kickstarter, Touchfire was set to ship out more than 3,000 products. But that proved beyond challenging. Isaac and Melmon ran into technical difficulties that resulted in the keyboards being delivered about six months behind schedule.

Despite the hiccups with production in the first go-round, Isaac and Melmon decided to give it another shot with a second campaign – and addi-tional products – in 2013.

This time, Touchfire raised nearly $34,000 from about 560 backers. This once again validated Touch-fire’s marketability among consumers.

Isaac and Melmon haven’t abandoned the search for traditional investors to help fund the compa-ny’s expansion as it rolls out a new wall mount and, eventually, accessories for products aside from just iPads.

While the pair are open to trying out Kickstart-er for a third time this year, the hope is that angel investors or venture capitalists will pump money into the company so it can add manpower and real-istically build out expansion plans.

Investors play a different role than Kickstarter users, Isaac said, noting that he’s looking for inves-tors to add value to the product with distribution channels, industry expertise or even another man-ufacturer with a complementary product line.

“Investors will play an ongoing, long-term role in the success of our company,” he said. “Kickstart-er is about getting a particular product to market effectively.”

ANTHONY BOLANTE | PSBJ

$661KPICOBREW ZYMATIC:

Automatic beer-brewing appliance

$631KROBOT TURTLES: Kids board game

about programming

$556KREPUBLIQUE BY

CAMOUFLAJ: Video game

$528KPENNY ARCADE

SELLS OUT: Business support for web-comic

Kickstarter and its ilk cater to people captivated by a creative or technical idea. Their dollars amount to an advance purchase of a future product — once it materializes.

That’s called “rewards-based” crowdfunding.

A rising variant is what is known as equity crowdfunding. This enables small online investors to gain an actual ownership stake in a company — not unlike what professional investors do on a larger scale.

Federal guidelines have traditionally limited equity investing to people who already hold a certain level of wealth — $1 million in net worth, or income of $200,000 annually — who are known as accredited investors.

The rationale was that opening up investing to the masses could lure the unsophisticated to sink their nest eggs into the schemes of fast-talking pitchmen.

The Jumpstart Our Business Startups Act or JOBS Act of 2012 was supposed to shake things up, allow ordinary Americans to fund small businesses and move investing into the digital age. Yet the Securities and Exchange Commission has been slow to come up with new guidelines, and Washington became one of a handful of states to go ahead and open funding up to the masses on its own.

With the passage of HB 2023 last year, Washington allowed people with less than $100,000 in net worth or annual income to gain equity in a company. The investment cap is $2,000 or 5 percent of the investor’s annual income; the cap goes up to 10 percent if the investor makes more than $100,000 a year.

Washington’s exemption from the federal rules became effective in November. But after five months, the state Department of Financial Institutions (DFI) has yet to receive any applications from entrepreneurs in search of investors through the platform.

For starters, the new law is not without its restrictive handcuffs. Washington-based companies can solicit only within the state, which makes it challenging to ask for funds online.

Moreover, private companies must act as a public company in some regards: Equity crowdfunding recipients must release quarterly reports that detail executive compensation and a management analysis of business operations and financial conditions.

“The law is certainly not perfect, and I know that a lot of companies will be hung up on the disclosures,” said Joe Wallin, principal with Carney Badley Spellman.

Still Wallin, who helped draft the legislation, predicts more companies will take advantage in the next six to nine months.

— Stephanie Forshee

EQUITY CROWDFUNDING

ANOTHER SPACE IN THE CROWD

ONLINE EXTRA

QTake a deeper dive into the numbers and see what other industries and ideas were

funded in Seattle. bizjournals.com/seattle