Crowdfunding Is No Panacea for Product-Market Fit
On the role of crowdfunding in hardware startups
I’ve been thinking a lot about hardware startups and, in particular, the role that crowdfunding plays in building a new company and v1 product.
A new hardware startup milestone
Crowdfunding platforms like Kickstarter and Indiegogo have pioneered a new model for marketing, selling, and financing hardware products. Now startups can validate market needs and collect $ through pre-orders before going “all in” on product development, manufacturing and distribution.
It’s a powerful model that’s reshaping how entrepreneurs and investors approach building hardware startups. There’s an obvious allure to demonstrating customers and revenue for a product before ever investing serious time and capital bringing it to market. As a result, crowdfunding is becoming a de facto milestone and financing hurdle for pre-product companies (a point hammered home by three separate articles last week).
Here’s the rub: crowdfunding gets at how many and much people will pay you to solve the problem — not whether you’ve actually solved it. For early stage startups, “the only thing that matters is getting to product-market fit” yet crowdfunding tilts attention towards pre-product traction and away from product-market fit.
The “product” in product-market fit
In a sense, crowdfunding signals market demand for the product promise you are making. The quality of this signal is only as good as the clarity you have about product fit, and this clarity comes from deeply understanding:
- the product definition and scope (“what”)
- the jobs your product is hired to do (“why”)
- that the product (1) successfully enables customers/users to do these jobs (2) within its technical and economic constraints (“how”)
Much of the above can be explored through feasibility studies, prototyping, studying users, running marketing tests, etc. before ever launching a crowdfunding campaign. There are limits to how fast and how much can be figured out before launching broadly, but the point is that it’s not an either-or proposition. And it certainly needn’t wait until a crowdfunding campaign or, worse, a product launch to invest in.
A new norm?
Matthew Witheiler of Flybridge Capital Partners is seeing early signs of a New Norm in which hardware startups raise an angel/seed round before launching a crowdfunding campaign and then go on to raise much larger rounds. I’d like to think that these “pre-crowdfunding” rounds are for exploring and de-risking the product side, and that in turn is driving successful crowdfunding campaigns, but I don’t really know. (I’d love to hear from hardware entrepreneurs and investors on this point). Either way, you can sketch out a rough staging for hardware ventures along these lines:
- Pre-Crowdfunding: de-risk product-market fit (angel/seed: ~$0-$2M?)
- Crowdfunding: validate product-market demand
- Post-Crowdfunding: commercialize v1 product (series A: $5M-$10M+?)
While this probably makes sense for the average hardware startup, there are also a few scenarios where crowdfunding may not play a conventional role and should be thought through critically:
- If the product has lots of technical risks and market risks, you may need a lot of up front funding just to build a capable team and work out the product prototype and promise for the crowdfunding campaign. The product is likely to change dramatically from where you start, you don’t want to trap both your backers and yourselves with the original pitch.
- If you’re playing the long game in a slow market or creating a new market, success may be defined by quality of usage over quantity of users or revenues and so you’d approach crowdfunding from a very different angle than the conventional “raise as much as from as many backers as possible.”
- If you’re building a high-priced product (or starting small) you can hit crowdfunding funding targets with a relatively small number of backers. This makes it harder to distinguish through crowdfunding alone whether the market demand you’ve identified is niche vs. broad and sustainable.
Crowdfunding is a game-changer for hardware entrepreneurs and investors, but it alone is no panacea for achieving product-market fit. At its worst, crowdfunding is a distraction from product fit; but at its best, it’s a force multiplier on it.