Backers trade money for something they want that they can't create themselves or get anywhere else, which means they are justified in paying a premium. Project owners get to realize their vision, bootstrap a production process, and potentially hold onto profit if they so desire.
There's a reason that this: http://26.media.tumblr.com/tumblr_m1wvyad1np1rrallbo2_500.jp... is a meme, and kickstarter is precisely the sort of platform designed to translate those "shut up and take my money" dollars into profit on the one hand and realized products on the other.
So this its not an equity swap, it is a shop front. The benefit for startups is up front cash and a pool of early adopters?
What alternatives are available?
Here, check this out: http://www.kickstarter.com/projects/1804944614/the-sutro-mis...
Look at the number of backers at the $6 reward level, at that level all you get is a postcard, the equivalent of a pat on the back or a firm handshake. Yet 29 people pledged that amount or chose that reward level. Also, look at the total backers vs. the sum of all the backers at each reward level, you get a difference of 30 people (170 vs. 140). 30 people who either kicked in a mere dollar or two or who chose not to receive a reward. That's at least $200 in funding with almost no return to the backers, a full 2% of the overall funding goal. And the 2 higher levels of rewards are similar, a $20 poster, a $30 t-shirt. There's another thousand dollars, 10% of their goal level, just with that.
Why?
The answer is that economics turns out to be a lot more complex than we've been led to believe. The ideal of the efficient and ruthless economic model human being, Utilitus Maximus, is a myth. Economics meshes with culture and society and they play off of and interact with each other. Here we have about a hundred folks who are willing to collectively chip in $1200 for a project that they believe in. Is this charity? Not in any conventional sense, there are no sick or hungry children here, just bicycles. But people are willing to support projects which bring about slight changes to the world, even if it's just introducing a new product, which advance their ideals or enthusiasms. And that's a very substantial indirect benefit even if there is no direct benefit. Ultimately transforming the world around you into the world you want to live in can be the best and most effective use of your money.
More than anything I think that's the flame which fuels the growing popularity of kickstarter.
The benefit for project owners, who are not always startups, is validation of the marketability of their concept, a pool of early adopters, up front cash of course, but also a more intimate connection between makers and enthusiasts. A while ago the singer Jonathan Coulton did an experiment where he forced himself to come up with a new song every week, which he debuted on his blog. Afterward he collected the best songs together and released an album. Similarly, a few years ago Markus Persson, aka "Notch", created an early prototype of an innovative PC game and he decided to put it out there into the hands of folks all over the internet and charge a relatively small fee for preorders of the full game when it would become available. As he iteratively developed the game, Minecraft, in full public view eventually it hit a point of critical mass and gained a huge amount of interest, and with it a large volume of pre-orders. He made so much revenue via pre-orders that he was able to found a game studio, hire several other developers, and even begin development of other games, before Minecraft even officially launched. To me that sort of heavily customer focused bootstrapping process seems very much of a kind with kickstarter. It's very much an extension of the new modes of business that are possible today due to the internet, due to social media, due to the ease of doing business without any middlemen other than the bank and UPS.
Granted, even on a simplistic level kickstarter still makes economic sense (makers take a profit, backers receive products of significant utility), but the higher order effects are interesting too.
There are alternatives out there, most of them are fairly similar. Soon there will be alternatives that support equity based investments. To my mind the biggest alternative is just to do it yourself. For some projects it doesn't make sense, but for a lot of projects it can be easy to incrementally bootstrap your way up the revenue/product development chain.
90% of the Kickstarter projects I back because I like increasing the amount of awesome in the universe (which also explains my involvement with the Awesome Foundation - awesomefoundation.org). Only 10% of them are because I want to "buy" the product. I generally expect that I'll actually get nothing when I contribute to a Kickstarter.
I simply want to reward others for having initiative, drive and interesting ideas and abilities.
We all know what you mean, but the conventional phrase is "Homo economicus".
There are many things I see, either real things that already exist or design ideas, and think "that's great" or "that really should exist" but which I myself might not need/want to own or use. Some of the funding going into kickstarter projects, especially at the higher funding levels, comes from that sort of thinking.
Edit: The point is that you are funding a project for its own sake, because you want to see it brought to fruition, not necessarily because you stand to gain anything by it.
The market seems to think otherwise :) and there's clearly a place for a market for up-front selling of (perceived) cool new products :) . I hope it's them.
I love the Kickstarter idea. It's the ultimate customer validation, too :) . I only hope they take extra care not to get burned by the inevitable first high-profile failure.
The whole point is to see the product come to market. A good project is expected to try and sweeten the deal somehow for backers who pledge more money. (Signed pieces, interviews with founder, etc etc.)
Plus, sometimes Kickstarted projects end up in all kinds of places; for example, I got a CustomSLR strap: http://www.customslr.com , which is exactly as good as I'd hoped, and the product / company was originally funded through Kickstarter.
It would be fascinating to see a breakdown from pebble afterwards though to see what they felt the advantages and disadvantages are, and what they would have done differently.
For instance, suppose I invent a new type of transformer with some benefit or the other. I approach the power companies with my prototype and explain that I need capital to produce it, so if they pre-order, I'll offer them discounts and other benefits.
This helps me approaching the banks and investors too, if I can get firm orders out of the power companies, because it demonstrates a market interest in my product.
What kickstarter has done is made it possible for this sort of arrangement to work with the public, pre-buying new consumer goods.
But to answer your question, what the customer gets is 1) a product that they want, which otherwise wouldn't be available, 2) in exchange for their risk that the product won't be delivered, they get various incentives, typically discounts.
Somebody has a cool idea, others are interested, others pitch in to help get the product made.
And no, the backer doesn't necessarily get the product, that depends on the "backing level" rewards. Generally, yes the backer gets the product at a reduced price (compared to retail estimations) and a bit more chance that the product will actually see the light of day. For "non-physical" stuff (e.g. video games), there also tends to be swag or other artifacts at higher backing levels, for physicals there can be exclusive series or customizations.
> How much money will Pebble be left with after this process?
Who cares? They can be left with essentially 0, they'll have a product ready to sell and a fab chain, they can go to more traditional retail.