Backers with Benefits: Why Companies Are Outsourcing to Kickstarter
Besides raising cash, crowdfunding can be a way to test product ideas and build relationships with future customers.
As the venture capital industry becomes more risk-averse, crowdfunding could become an important way for new technologies to get off the ground.
Ram Malasani, CEO and founder of the 22-person company Securifi, isn’t the typical newbie entrepreneur you’d expect to find on Kickstarter, a wildly popular website where people can pitch projects and receive small pledges of financial support from anyone (see “10 Breakthrough Technologies, 2012: Crowdfunding”). But with weeks still left to go on its campaign for the Almond+, a reimagined Wi-Fi router that can also control connected home systems like a thermostat or lighting, Securifi has raised more than $340,000—far more than the original goal.
Malasani’s company wasn’t exactly starving for funds. Almond+ is a sequel to Securifi’s first Almond product, a smartly designed router that has already sold tens of thousands of units on Amazon since it launched at the Consumer Electronics Show a year ago. Fund-raising is “definitely the secondary reason” for his company to use Kickstarter, he says.
The vast majority of the 85,000 projects launched on Kickstarter to date are the work of individuals with a dream—not established companies, much less ones that already have significant revenue, successful products, or venture capital funding.
But some startups and even larger companies are now looking to crowdfunding sites to serve other business functions, from market research and product design to customer relations and manufacturing negotiations.
“Crowdfunding is the ultimate form of consumer research,” says Scott Popma, an intellectual-property lawyer who advises companies about crowdfunding. “You are not just asking people’s opinions—you are getting opinions with their money.”
For Securifi, the campaign is helping it do early marketing and solicit high-quality feedback from enthusiasts while the product is still in development—far preferable to hearing criticism or getting a negative review after it is released. Right now, as a third-party seller on Amazon, Securifi can’t contact most people who have previously bought products to ask about their experience, or to promote future features or products. “We now know very few of our customers,” says Malasani. “We’re just removing the layer between ourselves and our customers.” They’ve already received more than 700 comments and messages.
Game companies with huge fan bases are among the largest businesses that have taken to the Kickstarter platform. Double Fine Productions, a decade-old independent studio that has won several awards, raised $3.3 million on the site from 88,000 backers last year, aiming not only to finance a new game but to “develop it in the public eye.”
For Days of Wonder, a maker of digital and board games, using Kickstarter was also not about the money. The campaign it launched in January was primarily meant to help determine whether its employees should devote months’ worth of resources to making an Android tablet app for their popular iPad game. Some customers had been requesting it, but in reality, few people have Android tablets yet.
The company set a goal of raising $190,000, a threshold it felt would establish sufficiently promising demand. The money itself was so beside the point that the company canceled the on-track campaign midway through. CEO Eric Hautemont realized that iPad owners and board-game fans were donating, so it wasn’t helping answer the primary question about Android demand.
This experience points to the challenges of using Kickstarter as a research platform. “We learned a lot,” Hautemont says. “We’re planning to relaunch it in March, focused on Android.”
For Kickstarter, which takes a small percentage of funds raised by successful projects, it could be good for business to attract companies that set larger funding goals or have more resources to promote their campaigns, especially if its early growth slows. But the company is also trying to maintain its credentials as a launch pad for garage inventors. Already, its guidelines limit technology projects to those that have some DIY, open-source, or hacker appeal.
Other crowdfunding platforms geared toward more established startups might not mind inviting even the largest companies to participate. Procter & Gamble and General Mills are working with the equity crowdfunding site CircleUp, a platform currently limited to accredited investors; the companies hope to keep a better eye on new ideas bubbling up from startups on the site and possibly buy from (or buy) them. The JOBS Act, a federal law passed last year, could soon allow CircleUp and other sites to open up to average individuals who want a stake in a business.
As the venture capital industry becomes more risk-averse (see “The Narrowing Ambitions of Venture Capital”), technology businesses could take to crowdfunding sites at even later stages. Crowdfunding is even changing the way some traditionally conservative technology companies approach product development.
Semiconductor startup Adapteva, a five-person company in an industry where it is usually hard to get funding, has not been able to raise more capital since its initial $1.5 million financing from a small strategic investor, even though it has already brought in more than $1 million by selling its powerful, high-end mobile chips to military customers. Now the tiny company hopes to bring its technology to a more mainstream market. But to do that, it needs enough money to place a manufacturing order large enough to bring down production costs.
Its recent Kickstarter campaign for Parallella, a “supercomputer for everyone,” initially met with skepticism from visitors to the site. “Chips are usually made by very big companies,” says founder and CEO Andreas Olofsson. “We were claiming performance numbers that were beyond anything these multibillion-dollar companies had done, and nobody had heard of us.”
But the campaign eventually took off after the veteran team posted more convincing demos and took the unconventional step of open-sourcing its hardware designs. The company raised nearly $900,000 and is now racing to deliver thousands of its $99 boards by May to its new backers, mostly developers who will help create applications for the product. Through the enthusiasts he’s met along the way, Olofsson has learned about applications for parallel computing he’d never even thought of. “Now we just have to make it work,” he says.
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