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Musings on Crowd Funding

by / Thursday, 10 January 2013 / Published in Blog

Like any good tech company we seem to constantly be coming up with fresh ideas for new products or new applications for technologies. The challenge facing us and thousands like us is how to successfully fund the development of these ideas to a point where they can be integrated into our line up of products and services.

Funding for development has traditionally come from one of two sources, we can either fund things ourselves or we can turn to outside investors for help. Whatever method of funding we choose the business case for each product needs to be watertight, after all no sane person wants to plough money into a project without a full understanding of the risks and potential rewards.

In 2009 Kickstarter launched in the US and presented us with a completely new way of funding projects and opening up opportunity’s for millions of business’s and individuals. Since 2009 many more sites have joined the party including Indiegogo, Crowdfunder and Rockethub. Recent data from Massolution puts he amount of capitol invested via crowd funding for 2012 at $2.7 billion and predicts that for 2013 that figure will reach $5.1 billion.

Moving from more traditional methods of securing investment to crowd funding seems like an attractive option but it’s not as easy as it seems. There are a number of very important considerations.

You are selling your product, not your business

Traditionally, when engaging with an investor you would expect to present them with a lot of financial information. They would also expect to see detailed market research and other things that assure them you know what you are doing and you don’t just intend to have a good time spending their hard earned money.

Crowd funders on the other hand are looking for the product they want to own. In many ways, crowd funding has more in common with creating an Amazon wish list than investing in a company. The vast majority of crowd funders are enthusiastic members of the public looking to back something they enjoy so your business model becomes irrelevant and your marketing becomes the single biggest driver of success.

You will be competing with people who either lack the capacity for shame or simply don’t understand their business

The single most galling thing we have come across in crowd funding are the sheer number of projects attracting funding despite the fact that they will either never launch or will run out of money before they can meet their initial orders.

I don’t want to publicly bash any particular products or businesses, but as an example of what I am talking about: we recently took a look at a project that offered a very interesting device similar to something we have been thinking of developing for the past few years. The main incentive for backers was that for each level of investment you would receive a certain amount of their devices. This is a perfect way to attract backers and what you are doing in essence is taking pre-orders. All good so far.

However what struck us was the fact that the prices just seemed way too low. We did some homework, and by the time we had listed the components for such device, we were already over the retail price being put forward by the developer. This is before we factor in manufacturing, shipping, taxes, certification, and so on. Rather than just jump to a hasty conclusion I decided to contact a good friend of mine who works with one of the larger factories in Shenzhen – if anyone can manufacture electronics at low cost it’s them. I set out the specifications for the product and asked if his company could produce and ship it based on an order of 10,000 units (I have not factored in import taxes here). Below is my favourite quote from his reply to my email.

“We are Chinese, not magic.”

He went on to explain that, based on an order of 100,000, we would still be around 10% above my target price. Import duties would add another 5%, and that is just to get the goods to me. Once we account for storage and shipping to the end user, the overall loss is up to almost 25% (45% in Europe due to VAT).

Now I have no grounds to suggest that the person who created the project is being deliberately dishonest, but they are at the very least guilty of some appalling arithmetic.

Making one of our products stand out ahead of similar ones that have such dubious pricing is obviously a very big challenge.

It’s all about the hype

Attracting backers for your project depends largely on the amount of interest you can generate through social media and third party websites and enthusiasts.

A major problem we have faced is the fact that our focus is on developing solid solutions to real world problems, not just trying to keep up with the latest industry craze. You will never see a WRD Systems tablet device or the WRD Social Network. We make things that people need and that just work (to borrow a phrase). We are not in the habit of just tacking on Bluetooth or other extras to make things “cool”, so finding ways to make our offerings compete with the latest trends is challenging.

We will be launching an Indegogo campaign in the next few days so I will update this blog regularly. You can check back to see if we have managed to master the crowd funding model.

Wish us luck!

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