When should you crowdfund?
Every hardware startup should consider — but not necessarily go through with — a crowdfunding campaign. Crowdfunding allows you to raise money without giving up equity, and it may help validate your idea. That said, my advice has two caveats:
1) Crowdfund only when the timing is right.
2) Crowdfund only when your goals for the campaign align with the long term.
Launching a crowdfunding campaign before you’re ready or before you’ve considered how it will affect your other funding options and business model can at minimum lead to angry first customers who wait and wait and wait for you to ship. At most — especially if you haven’t done the math — your impatience to launch a campaign can sink your company.
There are only three times, therefore, when you should crowdfund.
1) You’ve done this before, you know what you’re doing, and you’re going through the process of market validation. You know you’re going to ship. You know the costs for your product all the way up the margin stack. You have taken product all the way to market previously. You know what it takes to do a good crowdfunding campaign and how it fits in with your funding and manufacturing cycle. This campaign is for pure market validation.
Not your first validation, however. If a crowdfunding campaign is the first time you’re putting your product into customers’ hands, you’ve already failed. For example, before they launched their Kickstarter campaign, PCH Access company and Highway1 alum Podo did user testing and received great feedback. They knew the product they were promising was something customers liked and wanted.
2) The optimal time for a crowdfunding campaign is when you’re ready to go to market and you want to maximize your pre-order campaign strategy. In this situation, you’re at least at the design for manufacturability stage (DFM), preferably at the design validation test phase (DVT), and you know what your bill of materials (BOM) is.
Pebble Time is a great example of this strategy. Pebble had the added bonus of an existing community of Kickstarter backers from their first campaign. At their size, they could have hosted the pre-order campaign on their website, but instead they maximized their returns by leveraging Kickstarter’s platform of nearly 10 million backers. At the time, they estimated they’d ship in three months. They shipped in four.
3) I’ve only recently added this third point to what I consider the only possible reasons to crowdfund: You need a Hail Mary. You’re out of options, a bridge loan isn’t possible, and you need to infuse your company with some money. This is the riskiest option, and it requires the most analysis and thought to determine if it makes sense. And remember, you’re not using this money for product development; you’re using it to ship.
This third course can be used smartly as in the case of Highway1 company Fishbit. They were in between raising rounds and needed more money to keep going, but they were nowhere near retail-ready. Instead, we encouraged them to run a small crowdfunding campaign for a beta release. They successfully sold out 30 beta units to passionate aquarium owners eager to try the new hardware, and raised over $11,000 from 183 backers who wanted to see the product come to market. Not only was this enough to keep them afloat, it gave them the chance to cost-effectively conduct user research and build up their early fan base. Now they’re in a much better place as a company and can plan a bigger pre-order campaign with a product that’s highly likely to ship.
If you don’t do the math correctly on this third course, however, you risk the company. Many, many hardware projects have charged customers far less than it cost to make the product because of unrealistic BOMs, shipping fees, and marketing spend. As a general rule, our PCH Access and Highway1 programs reject teams that fall into this trap: We don’t want to take on the burden of their missed deliveries, and we don’t want to work with companies where we can’t picture a way for them to secure follow on funding.
That leads me to another core tenet for us: Set a goal high enough to learn from, not just one your friends and family can help you easily hit. It’s better to miss a $200,000 campaign goal then hit a $50,000 goal with only $50,300 raised.
When shouldn’t you crowdfund?
Hardware products for the enterprise or B2B are typically a bad fit because of the number of decision makers involved. The sales cycle for enterprise doesn’t mesh well with short deadlines to purchase.
Beyond this, there are three times when you definitely should not crowdfund.
1) You haven’t put in the pre-campaign work. Many startup founders underestimate how hard it is to pull off a successful crowdfunding campaign. At bare minimum, you’ll need three months to prepare PR, messaging, video and graphic production, copywriting, email marketing, community building, and much more.
2) You haven’t done the math. If you have an email list of 10,000 potential customers, that’s great, but consider that maybe 20% of that email list will click on your crowdfunding link and only a percentage of that will actually convert. Consider what else you’ll need to do to achieve your goals. If you expand your marketing efforts, can you still afford to ship the product at the price you’ve listed?
3) You haven’t researched those that came before. One of the best things about crowdfunding platforms is the ability to see what similar products to yours have done to succeed or what they did that failed. If you’re not learning from others, you may be doomed to repeat their mistakes.
These three common problems in crowdfunding have made the backer community more skeptical of hardware projects. Crowdfunded products never have a 100% guarantee, but as an industry, we’ve seen more and more hardware startups fail to ship their crowdfunded projects on time if at all. The most recent example of this is Torquing Group, a UK drone startup that managed to only ship 600 units (of 15,000 orders) before shutting down. I worry about the potential for a backlash in the market from customers who stop believing crowdfunding campaigns will ship their products.
This increasing lack of trust in the marketplace could cause a chain reaction that hurts startups long term. Platforms could enforce stricter standards for each campaign, but the real solution comes from the startups themselves: Crowdfunding is just one possible marketing moment in your company’s life. Make sure you think it through before you decide it’s right for you, or right for right now.
