In September 2012 Phil Bousua needed money, and lots of it. He needed it to market his connected light bulb. Rather than approach potential investors in the classical way, Bousua presented his project on the crowdfunding platform Kickstarter, where founders request donations for their ideas and frequently promise the product or at least the promotional t-shirt in return. Bousua was hoping to raise around $100,000 within two months. Six days after he launched his campaign more than 9,000 crowd funders had invested around $1.3 million.
$600,000 for development board
True, success stories like that of LIFX, as Bousua’s company is now known, are few and far between. Crowdfunding can fail to raise the cash even though the idea is good, as Spark Labs founder Zach Supalla found out. In 2012 he too found a way to equip light bulbs with a connectivity component, but his fundraising campaign failed to reach its $250,000 target within 30 days.
A year later, Supalla was more successful. He needed to raise $10,000 for his tiny Arduino-compatible WiFi development board Spark Core. Developers can use it to implement their ideas, such as a refrigerator magnet that shows tweets or connects with devices that can be controlled by a smartphone or tablet. This time he raised nearly $600,000 in advance sales and donations to help his startup to manufacture Spark Core. After this success on Kickstarter he found it easier to raise capital from institutional investors. Spark Labs has since raised $4.9 million in venture capital.
The crowd as a source of capital and feedback
For entrepreneurs like Bousua and Supalla crowdfunding platforms have long ceased to be just a source of capital. They also deliver important feedback. At the time of the campaign the Spark Core’s hardware was almost complete, for example, but during the campaign Supalla and his team received some good ideas, as he notes in a blog post on delays in Kickstarter projects that is well worth reading:
But we got some great feedback during our campaign and decided to add some new features like a different antenna option and an RTC crystal for accurate time. These features extended our timeline in exchange for a better product, and most of us founders would gladly make that trade.
Crowdfunding campaigns also provide entrepreneurs with answers to other important questions such as: Is there a market for my product? Who is my target group? What price would buyers be prepared to pay? Founders then no longer run a risk of investment in development, production, and marketing coming to nothing. Successful crowdfunding campaigns can, moreover, boost investor confidence, making it easier for startups to gain access to venture capital. If the capital for prototype development and kickstarting the supply chain has already been raised, entrepreneurs can then raise capital to fund the first product batch, for example. Crowdinvesting portals are also of interest in this connection. Crowd investors acquire a stake in the company, however. They are thus entitled to a share in company profits and, frequently, in the sale proceeds. Shareholdings can also be sold on.
Transparency has its risks
For founders a Kickstarter campaign involves additional expenditure. Crowd funders expect to be informed regularly on how the project is progressing. If delays occur or problems arise, support can fad fade. Here is what Supalla has to say on this aspect:
At first it starts with a couple of rabble-rousers whose frustration is quelled by the supportive masses. But at some point, people start asking for refunds, and the grumblers begin to overwhelm the supporters. This is every project creator’s worst nightmare.
That is why it is advisable to plan project milestones with a sufficiently large time buffer. Unforeseen delays can always happen in the course of a project, putting creators in a tight corner if schedules are too tight. Kickstarter has summarized in a Creator Handbook what founders need to bear in mind when planning a campaign.