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Collective Wisdom

Why It Wasn’t Crazy for VCs to Back Quirky

There’s been a lot of discussion about the downfall of “Invention Platform” Quirky. Bolt’s Ben Einstein wrote a great piece explaining what went wrong and I largely agree with his diagnosis. But there’s also been a fair amount of chatter about why Quirky’s investors put so much money into the company and if Quirky’s failure portends the popping of a bubble.

We weren’t investors in Quirky, but we’ve co-invested with many of their backers on other deals, several of which have become amazing companies. These are some of the smartest investors in venture capital today.

While there are many observations I have about what the company could have done differently, I want to answer the question that many have asked: How did investors pour so much money into Quirky?

I have no inside knowledge on what happened at Quirky or what the board room deliberations looked like, but here’s an educated guess as to how they processed the company’s need for funding.

Ben Kaufman is an Impressive Founder: I don’t know Ben personally, but you don’t often hear of founders who can basically take an idea from a dorm room to a $200M business. Especially in hardware. But that’s what he did with Mophie.

He did this before hardware was hot and when it was still hard. There was no Bolt or Dragon Innovation to help guide him through Shenzen. He figured out how to navigate factories while his peers were getting their first business cards. While barely old enough to drink an appletini, he got national distribution at Apple’s Stores.

Paul Graham calls this type of founder “formidable.” Basically, Ben learned a lot of hard lessons on other people’s money and that’s exactly the kind of entrepreneur VCs want to back.

“Bleeding Money” = Investment: Big ideas cost a lot of money. When you’re working with partners like GE, Target, etc. you can’t easily run the “lean startup” playbook. Plastic molds cost more than an engineer’s salary. Stocking orders for 30,000 store retail chains cost quite a bit more.

One person’s “bleed” is another’s calculated bet. I agree with my friend Ben Einstein that trying to build 20–50 hardware products a year is borderline insane, but it is certainly the kind of swing for the fences ambition that energizes billion dollar venture funds.

Fortune Favors the Brave: Hardware isn’t for the weak-willed. If your bet pays off, you’re the new LG, Whirlpool, or KitchenAid. If not, you’re in the bargain bins. Quirky was taking a big swing, essentially trying to bring GE’s aging consumer products and appliances brand into the connected age.

With the benefit of hindsight, it looks irrational, but this team was thinking big and going for it. They could have easily run a bunch of Kickstarters, pivoted into a single product (or family) company, but by that logic:

  • Amazon could have been the world’s biggest bookstore
  • Uber could have dominated the app-enabled black car business
  • Airbnb could have been a prettier version of Craigslist
  • Facebook could have become a Harvard tradition, like the Hasty Pudding troupe.

But instead all these companies swung for the fences and today we’re living in a world they helped to shape. Some of the sharpest, top-tier investors passed on Airbnb. Other’s thought Zuckerberg was nuts for passing up a billion dollar sale. The bold decisions of these founders ended up paying off and I’m sure the investors, and management team at Quirky, felt there was a credible path to being a huge player in the $18B appliance market.

In this context investing a lot of money is viewed as a feature, not a bug.

Investors HAVE to be Optimistic: In the history of everything that has ever worked, there was a time when it didn’t. One of the mantras we have at Founder Collective is “Imagine What This Would Look Like if Everything Went Right.”

When making big bets investors need to accept that many of them will fail. In baseball getting a hit one of three times across a career leads to induction into the Hall of Fame. It’s about the same in venture capital. So Quirky is one of two strikeouts that is required to go with a big hit. Most of their investors can live with that.

It’s easy to be a doomsayer, it’s hard to stick with startups that struggle, but have the potential to change the world.

This is especially true when you see encouraging signs of progress. It’s not easy getting the CMO of GE to sit on your board as an early stage startup. Quirky pulled it off. Getting booked repeatedly on the Tonight Show is a tall order for the toughest PR exec. Ben’s recurring segment was almost as popular as “Jay-Walking.”

You also have to consider the context. Pebble raised $30M in two Kickstarter campaigns. A Cooler raised $13M. The idea that Quirky could capture some of that magic isn’t insane when viewed through that lens.

The Investors Have Lived This Story: As you noted the investors that backed Quirky were top-tier. The team at A16Z have been involved in multiple industry defining companies. And if you read Ben Horowitz’s great book, The Hard Thing About Hard Things, you’ll see that at points his company came close to folding many times. It ultimately went on to a multi-billion dollar exit, which makes him look like a genius, but the same reporters would have had a field day playing arm chair CEO if things went pear-shaped.

Scott Weiss who led the investment in Quirky had certainly heard those stories, and likely lived a few of his own en route to selling his company IronPort Systems to Cisco for $830M.

Protecting Investments is Important: VCs get a bad rap, but in the best cases there’s alignment between investors and founders with a shared goal of ensuring a company’s survival.

I’m sure the investors recognized the struggles, but believed in the potential and kept funding on the hope that things would turn around. I’ve written a few checks through clenched teeth to keep a company afloat. Sometimes those checks have been the fuel that have turned a company around. Other times, it just prolonged an inevitable doom. But in all cases I felt a responsibility to my investors, as well as the founders I’ve backed.

Quirky, even in failure, is something to be admired, not snickered at. I think one of the key things to remember here is that Ben Kaufman and his investors tried to build an incredibly ambitious business. There are plenty of richly funded startups that will never have a fraction of Quirky’s “success.”

Not every startup can be a massive winner, but we should offer congratulations to people bold enough to try to put a dent in the universe, or even just the white goods section at Sears.

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Essays on Tech, Startups, and Trends from Founder Collective, a seed-stage VC firm that has invested in companies like Uber, MakerBot, Buzzfeed, & Hotel Tonight.

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