START-UPS: How trial by crowdfunding sorts winners from losers

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START-UPS: How trial by crowdfunding sorts winners from losers

“The funds are needed for the first build of products and it’s ideal to validate that anyone cares about the product before spending time and money on it,”

Fundraising on online platforms is gaining ground among inventors, says Brian Groom

 

Joe Lemay, a former software engineer and sales executive, was fed up with scribbling notes in meetings and losing them, so he came up with an imaginative solution: a notebook that can be microwaved.

 

After jotting down ideas in the book, users scan and save their notes to the cloud via an app. They then microwave the book with a mug of water to erase the writing, making it clear and ready to be reused.

 

The Rocketbook Wave raised $1.3m on crowdfunding platform Indiegogo in 2015, dwarfing the original $20,000 goal. Further campaigns followed: Rocketbook Innovations, the company Mr Lemay co-founded, has so far raised $4.2m for notebook products on Indiegogo and Kickstarter, another platform.

 

Mr Lemay is typical of a growing number of company owners who are using crowdfunding not just to launch businesses, but to test the market’s response to new products and seek customers’ help in developing them.

 

“The funds are needed for the first build of products and it’s ideal to validate that anyone cares about the product before spending time and money on it,” he says.

 

“Throughout the process, we engage our backers. They weigh in on design options, give us ideas for useful features and even vote on which product we do next,” adds Mr Lemay.

 

His latest product, the Everlast notebook, can be wiped clean with a damp towel and reused 1,000 times, compared with about five for the Wave. It came about in part because Wave customers said they wanted the product to last longer. “I think we will continue to use crowdfunding with future products,” he says.

 

Crowdfunding lets companies test demand, build brand awareness, make advance sales and receive feedback, as well as securing investment.

 

Product validation applies mainly to rewards-based crowdfunding - a market dominated by Kickstarter and Indiegogo - in which backers contribute small sums in exchange for a reward that is often the item produced, such as a watch, album or film. Rewards-based platforms accounted for just under 10 per cent of the $34bn raised globally through crowdfunding in 2015, according to consultancy Massolution.

 

So far the technique is a route that has appealed mainly to smaller entrepreneurs, though larger companies such as General Electric, toymaker Hasbro and brewer Anheuser-Busch have also worked with Indiegogo to aid their product development.

 

GE Appliances successfully crowdfunded Opal, an ice maker, and Paragon, a cooking device, on Indiegogo. The time taken from concept to production was just four months and upfront costs were a 20th of what would be expected from a traditional product rollout.

 

Crowdfunding is not an easy route, however. It requires time and effort. Two-thirds or more of projects fail to achieve their funding target. Mr Lemay failed with his first crowdfunding project, a whiteboard system. Failures, though, can be useful in identifying quickly whether products are likely to flop, before spending years and millions developing them.

 

His first successful campaign also encountered a common snag: “We delivered somewhere between seven and nine months late,” he says. “That was one of the most painful times in my professional life. People on the comment threads were very angry.”

 

Even a successful campaign does not guarantee a sustainable business. Pebble, a smartwatch company, raised $40m on Kickstarter, but struggled to make enough sales and ended up selling its intellectual property to Fitbit.

 

Crowdfunding success can lead to a wider breakthrough, however. Josh Malone, a father of eight from Texas, invented Bunch O Balloons, a toy aimed at transforming water balloon fights. It is a hose attachment with flexible tubes that fills as many as 100 balloons in 60 seconds.

 

The product raised nearly $1m on Kickstarter in 2014, beating its $10,000 goal. That led to an exclusive deal with toy distributor Zuru, which manufactures and distributes the product worldwide.

 

“The funds were helpful but passing the test of marketability had huge implications. All of a sudden retailers wanted to secure the product,” Mr Malone says.

 

Clay Hebert, an expert in crowdfunding, says it tends to suit “creative projects with a beginning and an end, in which something new gets made and shared”, and which have already attracted early consumer interest. “The biggest thing is finding your tribe before you launch,” he says. “Do not count on the platforms to bring in the people.”