Crowdfunding and the Counterintuitive Value of Constraints

by Peter Rojas

I was chatting with Josh Guttman from SoftBank Capital the other day about crowdfunded hardware projects and whether or not a successful campaign made him more likely to invest in a company, as it would presumably provide early validation for product/market fit. His opinion was that there's minimal correlation between running a successful crowdfunding campaign and building a successful business. This may surprise some people since lately investors have been pouring money into companies which have used Kickstarter or Indiegogo to launch new products.

This view certainly resonates with my own negative experiences backing various hardware projects. After a half-dozen projects that I’ve supported overpromised and underdelivered, I've given up on backing any kind of gadget on Kickstarter or Indiegogo. None have shipped on time, and without exception, the products I eventually received have all been disappointments.

It's so common for crowdfunded hardware products to fail to deliver on time -- or to fail to deliver at all -- that it's become something of a cliche. I thought perhaps I was just picking the wrong projects, but according to data collected by Matt Witheiler of Flybridge Venture Capital, by the end of 2014, even venture-backed products shipped on time only 1-in-5 cases -- and it's not hard to imagine those numbers are even worse for companies or individuals which haven't raised venture capital.

I don't want to leave anyone with the impression that I am anti-crowdfunding. I think it's an amazing tool for helping products see the light of the day that might otherwise not get created. And it gives those who most want to see a new product become a reality a way to directly participate in its creation, something that wasn't especially easy before. But using crowdfunding to muster the resources to finance a product can have the unintended consequence of shielding a startup from the market forces that would otherwise force them out of business.*

It's counterintuitive, because you'd think having fewer challenges when you're starting out would always be a good thing, but figuring out how to deal with the constraints inherent in starting a new business (whether it's limited access to capital, difficulty in finding the right people to hire, scarcity of time, etc.) is key to building the foundation necessary for long-term success. Constraints force founders to either focus their priorities on what's truly important or to go out of business. Finding creative ways to elide those constraints in the short-term may just be postponing the inevitable -- and in the case of a crowdfunding campaign, in ways that can come back to haunt you.

Despite steps that Kickstarter and Indiegogo have taken, it's still too easy for both creators and backers to get enamored by a vision and lose sight of a project's feasibility. Relatively few controls are in place to protect would-be backers from projects without the know-how to execute. It’s hard for those without much experience developing and manufacturing hardware to understand the full scope of what's needed in terms of time, expertise, and money to build what they've envisioned.

Obviously backers should exercise a heavy dose of skepticism before committing money to any project, but creators would benefit from that skepticism as well. A crowdfunding campaign might validate that there is a market for the product, but it doesn't prove that the product can actually be produced and delivered at the price point offered or at the quality or speed promised. Being able to gauge demand and pre-fund production certainly de-risks a project for a creator, but it also often commits them to delivering something before they know how long it's going to take, how much it's going to cost, or whether they are capable of doing it. This inversion of the logical order in which products are typically manufactured and sold has its advantages, but it has also led a lot of well-intentioned creators into predicaments where they’ve taken customers' money, only to find themselves unable to meet expectations.

In many cases creators would have been better off assuming more of the risk themselves rather than going the crowdfunding route, since it would have given them a strong incentive to make sure they could deliver on their promises before offering a product to the public. This is especially important because while using crowdfunding to shift risk from one part of the stack to another can certainly pay off, when it doesn't you haven't simply lost your own money, or that of professional investors who made a calculated bet, you've taken it from a bunch of regular people who put their trust in you. A crowdfunding campaign can help you figure out pretty quickly whether or not there are people who will pay money for your product, but as important as that is, it's not the only thing a startup needs if it wants to be successful. You also need to make sure you have the right talent, expertise, and resources to actually accomplish your goals and build a sustainable business.


* Of course, startups which raise too much money can face a version of this, they'll often end up losing focus and failing because they no longer feel as much pressure to get to profitability. It's hard to underestimate the importance of being forced to make tough decisions about how to allocate scarce resources.