Crowdfunding- a boon or a burden to Tech Startups

These days we see quite a few technology companies going the crowdfunding route(Indiegogo/Kickstarter) to get to market sooner rather than wait for the traditional way of raising money to build the product. It appears as a beautiful idea if co-founders do not want to give out equity but raise money to get to market.  But I personally feel that this is a double edge sword and entrepreneurs have to be very careful with the choices as it may end up hurting more than helping in the long run.

What I have noticed is companies look forward to crowd sourcing mostly for either one of the following reasons

  1. Raise money to help them accelerate the engineering cycle time and help them reach market faster with confirmed orders  – The challenge with this usually is if you are not far enough into your engineering /product cycle with most problems solved the money raised through these campaigns are in most cases is not enough to get to production and delivery.
  2. Create a sales and marketing buzz which then later helps them to get leverage with retailers and opens up many channels – This is a fantastic model because getting into some of the traditional channels to sell a product is not easy. But these days Bestbuy/Amazon etc. have a separate focus on successful products from these campaigns. So this will enable the startups to get into shelf faster if they are successful. This also gives a better chance of getting picked up by some distributors.
  3. Show the demand the product has in the market to convince tradition VC’s to put in money into the company – This is a good idea only if you are convinced that your product is going to be a runaway success else the chances are that it can do more harm.  Any thing less than a runaway success is going to raise more questions and challenges when startups try to raise money than help.

I have read few statistics and based our experience, the projects mostly do not make it out in time. This ends up damaging credibility with the same customer base which supported the product. And now if the product turns out to be below par after a long wait, we have a very unhappy customer to deal with also.

What I noticed is that many of these companies fail to deliver on time because

  1. These companies are either trying to solve some really challenging engineering problems which need a tremendous amount of money than what they can get from a Kickstarter/Indiegogo campaign. So they start falling behind on development goals and delivery deadlines
  2. They have the right idea and concept but limited experience in delivering products end to end and when they start dealing with it they realize the unknowns are lot more than the knowns and they start slipping
  3. These companies are fighting battles on many fronts and crowd sourcing is just one of the avenues. So they do tend to get carried away in their engineering cycle when they see greener pastures which ends up adding delays.

My personal thought always has been crowd funding is a good platform if you are done with 80% of your engineering . As I mentioned earlier this is because the money you raise from pre-selling this product is usually good to pay for your production needs only. However, if you are planning on doing your core engineering and delivering product based on this money then the likelihood of failure and delays are very high. The only exception I can think of is if the company has a reliable partner/team in a country like India, China where a bulk of the engineering is being done then this money does tend to help even if they are behind in their product lifecycle.

I think backers need to check with the company before putting money in as to how much of engineering is already done and ask to show working prototypes, actual Industrial design mockups, software demos etc. before trying to put money in.  Also, it may help to ask how the money collected is going to be spent because it gives you an idea of the readiness of the product you are backing.

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