Backing a crowdfunding project in 2017 is a terrible idea. You’re more likely to lose your money than receive the thing you pledged to buy. Remember the Coolest Cooler, with $13.2 million raised? It was selling on Amazon before shipping to backers. Lily Camera’s selfie-drone didn’t ship, even with $34 million in crowdfunding and $15 million in venture capital. Wearables company Pebble raised $43 million on Kickstarter and $10 million in outside capital, but still didn’t survive in the long run. All of these are stories of defeat.
As a three-time project creator, I can understand why backers are becoming jaded. The epic failures dominate any semblance of the good. It’s gotten to the point where much of the appreciation—for the difficulty of creating an idea, funding it, and delivering it to backers—is now lost. I mean, shit, anyone should be able to deliver the product you saw in the video, right?
Unfortunately not. Making a new hardware product is really hard. Let’s make a giant assumption that you can engineer the product you promised. Even then, you have to manufacture it, and that’s not just a difficult engineering problem, at also a cash problem. As your project grows more ambitious, the cash problem grows with it.
Manufacturing has two general phases. The first is pre-production: engineering reviews, tooling, testing, certifications, and the building of demo units that you don’t sell. These costs are prepaid, so you incur them months before your first unit has shipped. Also, these costs don’t scale down just because you are a low-volume producer. They’re fixed and based on the complexity of the product. An iPhone battery case, for example, takes about $200,000 just to get through this pre-production phase.
The second phase, the actual production, requires you to buy a lot of inventory. The payment terms on parts, labor, and logistics generally require 50 percent down and 50 percent upon delivery. Throw in minimum order quantities, often in the thousands, and a 5,000-unit run of a $25 product is another $125,000.
Those costs add up quickly, and very few people have that kind of cash on-hand. For most project creators, crowdfunding is their only source of capital.
I’d forgive you for thinking that somebody other than the customer should pay to manufacture a new product, but that’s a much harder road. To raise the venture capital necessary to get a product made, you need a track record, a mind-blowing demo, or significant traction in the market. You can’t get any of those things without money. Angel investors will fund the engineering of new ideas, but they won’t fund manufacturing. Banks will loan you a dollar when your balance sheet is large enough to guarantee their return—which, again, doesn’t happen until you have money. You see the pattern here; it takes money to raise money.
Crowdfunding is the only way to enable a small group of people to turn their hardware idea into a sustainable company.
That’s why the people who truly fund the production of new ideas are customers. At my company, Moment, we just funded our third project on Kickstarter. Along the way, we’ve also raised some angel money and gathered a little bit of venture capital. Hang on, you might say—a company has done all that, and they’re still crowdfunding? WTF?
Correct. We actually need crowdfunding more than ever. For example, our Moment 2.0 project was made up of phone cases and an interchangeable lens system for smartphones. It included three new products across six different devices. The pre-production cost for all that hardware was $500,000—costs incurred before we even bought any inventory. If we didn’t get crowdfunding, we wouldn’t have had enough capital to bring those products to market. If we raised traditional investment capital and didn’t crowdfund, we ran the risk of being wrong about customer demand. If nobody was interested in buying the thing we made, we’d run out of money as fast as we raised it. Crowdfunding lets us know that yes, this is an idea people will pay for, and we can easily sell enough of these to cover the high cost of production.
As a small company, we need that guarantee crowdfunding provides. When Moment was just four people and an idea, the risk of failure was having to find a new job. Now, as a company with 20 employees, the bigger risk is that we go bankrupt and can’t make payroll.
This doesn’t mean you should back every project you encounter. To the contrary—you should be cynical about the company’s ability to deliver, selecting only projects you truly believe are worthy. But, at the end of the day you should keep betting on crowdfunding projects. Despite being a gamble on the consumer’s part, it’s the only way to enable a small group of people to turn their hardware idea into a sustainable company.
Unfortunately some creators will get the whole thing wrong and flame out in spectacular fashion, burning through a ridiculous amount of money. Others will take this responsibility seriously and actually deliver on their promise. They will build a sustainable business piece by piece, creating a relationship everyone can be proud of. Three years into Moment, we still have a long way to go before we reach our own expectations. But without customers betting on crowdfunding, we wouldn’t exist.
Marc Barros is the co-founder of Moment, Contour, and Hardware Workshop. Find him on Twitter at @marcbarros. WIRED Opinion publishes pieces written by outside contributors and represents a wide range of viewpoints. Read more opinions here.