I don't think it says anywhere that the prototype has to work. I'm reading this in a way that says I have to show what I've already accomplished. It is ok if the prototype doesn't work yet, and I think it is ok to expect the project creators to do some of the work before they create a kickstarter project.
That's kind of the point. The fact that you have to show the prototype allows potential backers to make a judgement about whether they think you are likely to succeed or not.
