Business Matters: Are Kickstarter Pledges Taxable Income?
Business Matters: Are Kickstarter Pledges Taxable Income?

Union Square Ventures and a host of smaller investors have put $10 million into Kickstarter, the fundraising site that allows fans to fund projects. The funding actually happened some time ago but had been kept quiet until now.

Why should the music business care about fan-funding platforms like Kickstarter? Fred Wilson of Union Square Ventures wrote that Kickstarter is part of a wave of new ways to fund creative ideas. "Creative people will continue to produce amazing works. We do not think technology and the Internet will change that, other than possibly to accelerate the rate of creativity."

Judging from the number of artists who have flocked to Kickstarter to fund their projects, Wilson may be right. From musicians to filmmakers, artists of all stripes are using the site to raise amounts of money that would have otherwise been unattainable. Now that artists have a new path to obtain funding, the rate of creativity, as Wilson put it, could increase.

But here's the main reason to care about this business model: the emergence of fan-funded platforms will play an important role in the transformation of the record business. Independent artists already have the means for sales (iTunes, etc.) and distribution (TuneCore). They also have inexpensive tools of production (GarageBand, Pro Tools ) and marketing (blogs, email services, social media).

The missing piece of the puzzle tends to be the funding. With Kickstarter, PledgeMusic, Cash Music or other tools, artists can reduce the financial burdens of their projects through the help of their fans. Two things come out of this. First, an artist can create projects that otherwise would not have been made. Second, an artist can reduce or eliminate financial uncertainty and undertake a project only if it's feasible.

Kickstarter is filled with projects that have little chance at traditional funding. Fans are usually led to Kickstarter campaigns by an artist's solicitation. But the site does allow a potential backer to browse highlighted projects, search by city and browse recently launched and soon-to-end projects.

And in some cases, Kickstarter can save a project that has stalled due to lack of money. Take "A Good Country Mile," the unreleased album by Kevn Kinney and Anton Fier. Kinney, the singer for Southern rock band Drivin' n Cryin', and Fier, a member of the Golden Palaminos, have completed about 80% of the album using $18,000 their own money.

But as Fier explained at the project's Kickstarter page, the pair was "thinking that somewhere along the way a record company would pick it up and bail us out" but they "forgot that the world had changed" and the old music business no longer existed.

Enter the new music business. Kenney and Fier are seeking another $10,000 to finish recording, mixing and mastering and then manufacture the CDs. Using Kickstarter, they have raised over $14,000 from 169 backers for the project. There are 18 days left if you'd like to make a pledge.