Why Crowdfunding Is Still Booming, Especially For Chinese Tech Companies
Based on recent media reports, it looks like crowdfunding is now in the “disillusionment” phase of the famous Gartner hype cycle, after peaking a few years back. I will argue that crowdfunding has in fact reached the “plateau of productivity,” where creators mostly deliver successfully. Additionally, crowdfunding has been quietly booming in China.
Let’s Acknowledge Failures First
You might have heard of the Lily selfie drone, the Sense sleep tracker, the Skully AR bike helmet or the recent fire-sale of Pebble, the smart watch pioneer. Their businesses are all gone now. Yet, is it fair to label them “crowdfunding failures” and thereby undermine the reputation of Kickstarter, Indiegogo and other platforms? Maybe less so than it seems.
-Let’s start with Pebble: They shipped over 2 million products, and even raised venture funding. So the company eventually faced was more a business problem than a crowdfunding one.
Both Lily and Skully misrepresented their actual development stage in their campaign, misleading their backers. Still, they went on to raise venture funding, which suggests some level of due diligence. In addition, a fresh cash injection should have mitigated the risks for backers.
Eventually, Lily couldn’t get the technology to work and competitors caught up with them, rendering the company unattractive to investors. They are now trying to refund the $34 million they collected in pre-orders. Sense shipped a product which didn’t prove popular and ran out of the $40 million they had raised from investors. Skully’s founders seem to have used their funding for things unrelated to their product, and didn’t ship.
In short, these high-profile failures were not mere creators who made mistakes, they were fully-fledged venture-backed companies who went out of business like many startups do.
And all of these stories are already a few years old — since then the platforms have become stricter, and backers have become more discerning.
Most Creators Ship
Recently HAX collected data on crowdfunded connected device projects. As of July 1, 2017, 100 Kickstarter projects and 30 Indiegogo projects had raised over $1 million.
Based on updates from each of these projects, we found that the majority had shipped, while others were still in progress. Relatively few failed.
Additionally, many of the consumer electronics startups we invested in have used crowdfunding to launch their product and test the market. Out of over eighty campaigns they ran, a whopping 11 raised over $1 million and entered Kickstarter’s global Top 100. As of today, all these hits are in progress or already shipped. None have failed so far.
Crowdfunding Has Picked Up In China
Until recently, I thought China’s crowdfunding scene was not “real” crowdfunding: it was only pre-sales as creators had to ship within 30 or 60 days — hardly the original spirit of crowdfunding in the West. No project was raising significant amounts and no local platform resembling Kickstarter was doing well. However, while researching our annual “Hardware Trends” report, we found a different picture: thousands of real crowdfunding projects, including dozens raising millions of dollars.
Do you know who the leading Chinese crowdfunding platforms are today? They are run by e-commerce giants: Taobao (Alibaba group), JD (China’s Amazon, worth $60 billion on NASDAQ), and Xiaomi’s “Smart Home” platform. On JD, projects have raised a total of $670 million — already a fifth of Kickstarter’s $3.2 billion. The top project on JD, the “PowerEgg” egg-shaped drone, raised $15 million. On Taobao, 61 projects had raised over $1 million — twice as much as smart devices on Indiegogo.
Last but not least, some Chinese startups have discreetly ventured out on foreign platforms: the voice A.I. startup Mobvoi collected over $2 million on Kickstarter with its voice-controlled smart watch. It even returned with a new project already over $1 million. Founded in 2012, Mobvoi is no joke: they raised over $250 million from investors and are rumored to be the latest Chinese hardware unicorn.
A few others Chinese projects like the Omnicharge AC/DC and USB charger raised $3.2 million on Indiegogo, and the consumer robotics startup UBTech, another unicorn, sold $1.4 million worth of its Alpha 2 smart family robot on Indiegogo.
Makeblock, a company creating STEM robots and devices and recently raised a $30 million series B and completed no less than six Kickstarter campaigns. This filled their coffers with a few million dollars in pre-sales, and informed their decisions as to which products to focus on going forward.
Differing from their foreign counterparts, Chinese hardware startups have an easier time managing their supply chains — a quick conversation on WeChat, a call, or a visit to a supplier solves the many problems that could bug foreign companies and delay them… unless they move to China.
After completing the HAX program and a million-dollar Kickstarter campaign, Mindset — a HAX startup that creates headphones capable of tracking brainwaves — decided to head back to Shenzhen to accelerate their product manufacturing.
“When you’re in China, you only need short discussions to fix small issues. The time saved on back and forth can avoid months of delays,”says Jacob Flood, cofounder of Mindset.
Beyond their proximity to the supply chain, the success of Chinese crowdfunded projects might also stem from the fact that they tend to launch projects that have reached more advanced stages rather than mere concepts or early prototypes. It might also be that Chinese early adopters are more cautious than foreign ones and do not support projects until they are near completion. Likely, both explanations are true, and feed each other.
Crowdfunding Is Here To Stay
Crowdfunding remains a privileged channel to test a market and get real feedback from real customers. The number of hits seems to have stabilized, yet millions of backers remain enthusiastic. Crowdfunding has already given birth to many companies who would never have existed without it, and will almost certainly continue to do so.
The rise of equity crowdfunding like the recent Regulation A+, part of the JOBS Act (which allows ‘mini-IPOs” up to $50 million and even listing on exchanges like NYSE or NASDAQ) might soon allow those early supporters to benefit from the success of the companies they backed.
With such prospects, crowdfunding is certainly here to stay.
Originally published at www.forbes.com on July 18, 2017.