Data from the last five years of tech IPOs shows that startups that raise large sums of venture capital don’t perform any better than companies that raise small amounts. It turns out that the concept of “Efficient Entrepreneurship” also applies to crowdfunding.
Overdosing on VC: Lessons from 71 IPOs_by Eric Paley & Joseph Flaherty_hackernoon.com
Among the top 100 projects in Kickstarter’s eight-year history, there are two clear venture-scale wins; Facebook acquiring Oculus for $2B and Electrolux acquiring sous vide manufacturer Anova Culinary for $250M. Surprisingly, neither of these companies cracked the top 50 in terms of money raised on the platform. Check out the data and links to the project here.
Over at IndieGoGo, none of the site’s top 100 projects have had major exits yet, though the stylish fitness tracker Misfit, the 183rd most funded project in the site’s history, was acquired by Fossil for $260M.
There aren’t many encouraging stories beyond those three:
- Pebble’s time is up and sold for $23M despite raising over $60M from backers across three record-breaking campaigns and $15M from VCs.
- Ouya, #8 in Kickstarter’s rankings, is a two-year-old game platform with $33.6M in crowdfunding/VC and ~1,200 titles, which is respectable except for the fact that as many new titles are added to Apple’s store every week.
- Neil Young’s Pono music player (#12) hasn’t built an audience beyond the hardest core audiophiles.
- Micro-drone Zano (#26) crashed and burned so spectacularly that Kickstarter commissioned a journalist to examine the wreckage.
- Social robot Jibo is the 13th best-funded project at IndieGoGo, has raised $3.6M from backers and ~$70M from investors, and has yet to ship the product two years later.
To be fair, crowdfunding is still in its early days, and some emerging companies may become new models to follow.
- Formlabs is the 41st most funded project on the Kickstarter leaderboard and subsequently raised $55.8M from Foundry Group and others (disclosure: we’re also proud investors) to scale their thriving business.
- At IndieGoGo, home security system Canary has raised $40M in addition to its $1.2M campaign and Y Combinator-backed smart luggage maker BlueSmart raised $22M in VC on top of a $2M pledge drive.
But at the risk of overgeneralizing, there are a couple of lessons that can be gleaned from the data.
Big Markets are Riskier than Niches
With crowdfunding, niches hold riches. Oculus was pitched as a dev kit for hackers. Sous vide fans are second only to Crossfitters in the lengths they’ll go to satiate their craving for boiled chicken. These products are targeted towards enthusiasts who would bear with the bugs found in any first generation product — quite literally in the case of the Flow Beehive which raised $13M on IndieGoGo.
More importantly, these products also represent categories where there were few viable substitutes. VR was a mid-nineties curiosity, and water cookers were largely limited to high-end kitchens. Kickstarter made insane sounding projects tangible for enthusiasts.
Compare that to the smartwatch category which has been around since the mid-90s. Even before Pebble reenergized the market, there were still enough smartwatches to fill out a buyers guide. Likewise, Ouya was trying to crack a crowded video game console market where existing systems have cult-like followings. Perhaps one of the half dozen crowdfunded wireless headphone concepts that have been funded in the last couple years will become a breakout and challenge Apple’s AirPods. However, the data so far suggests that in crowdfunding passion projects outperform polished consumer products.
Setting Records can Sink You
Success can be a curse in crowdfunding. Kickstarter is debt. Projects that require significant R&D efforts can burn through crowdfunding capital leaving insufficient funds for manufacturing if product development hits a snag. Even if a product is ready to produce once a campaign ends, any blip in production can bankrupt a fledgling company.
A couple of high-profile cases illustrate the dangers facing overly successful crowdfunding campaigns.
- The Coolest Cooler (#2) raised the ire of backers when the founder began selling units on Amazon ahead of fulfilling Kickstarter pledges. Despite raising $13M via crowdfunding, the entrepreneur needed sales to generate working capital to fulfill the campaigns 60,000+ outstanding orders after production problems ate into his budget.
A small sample of the knock-off Fidget Cubes based on the original design by Antsy Labs.
- Manufacturing 150,000 Fidget Cubes (#9) took longer than expected and allowed an entrepreneur with more manufacturing expertise to copy the design and beat the original creators to market. Raising less money might have made the challenges of fulfilling these campaigns less difficult and not encouraged copycats.
Balancing Capital and Customer Commitment
Many entrepreneurs want to raise as much money as possible during a campaign, yet fail to fully appreciate the relationship between capital and customer fulfillment. For instance, Pebble had 65,607 product orders in its first campaign, while Formlabs had 1,028. Pebble raised 3.5X as much money as Formlabs but also had to handle fulfilling orders, customer service, etc. for 64X more customers. As a mass market product, the Pebble team was further divided by preparing for retail launches. That is a lot to take on all at once.
Capital won’t make you smarter. It comes with no special insights and can’t solve problems unless the company is properly designed to deploy it. Consider this when calibrating your ambition for a campaign.
These stories don’t mean that heavily funded projects are doomed. The Flow Beehive raised $13M on IndieGoGo, had 38,000 backers, shipped successfully and is now a going concern. But it’s a flat pack wooden frame that the buyer assembles. There are only so many points of failure, and the core technology is as old as modern agriculture.
Don’t optimize your campaign to set records
This data isn’t a criticism of Kickstarter or the creators of these projects. Kickstarter has always told creators that it is “not a store” or a replacement for VC. It’s also important to say that a VC-scale outcome shouldn’t be the goal or even the primary metric of success in crowdfunding. Still, many entrepreneurs view it as such.
Fundraising isn’t an end unto itself and won’t determine your ultimate success or failure, so keep focused on the real mission. Remember, Misfit “only” raised $847K on IndieGoGo, which is only a modest success by comparison to other projects, but it also represents the second best exit for a company that launched via crowdfunding.