WATCH THE SEGMENT: http://chicagotonight.wttw.com/2016/03/31/crowdfunded-businesses-get-running-start
Crowdfunded Businesses Get a Running Start
Nick Blumberg | March 31, 2016 3:31 pm
Watch the full segment here: http://chicagotonight.wttw.com/2016/03/31/crowdfunded-businesses-get-running-start
Crowdfunding – small, individual investors pitching in to fund a product or a project – has seen massive growth over the last several years.
According to one industry analyst, in 2016 crowdfunding could surpass venture capital as a source of cash for entrepreneurs.
Here in Chicago, some very successful startups have used crowdfunding to get their businesses not just off the ground, but off to a running start.
Still, while a successful Kickstarter campaign is undoubtedly a good sign for what's to come, it's hardly the full picture for the company or the consumer.
Phil Ponce: Sitting at a desk all day is the reality for many office workers, but it’s also a well-documented source of health woes. So, three University of Chicago grads came up with the idea of a small, under-desk elliptical to keep active at work. It launched on Kickstarter in the summer of 2014 to what co-founder Shivani Jain calls an overwhelming response.
Shivani Jain, co-founder of Cubii: We had raised three-point-five times our goal, and we were over the moon, and we were just really happy that this was a success. But then, very soon reality started to kick in. We had 1,100 people who had trusted us, who had invested in us and wanted to see us deliver a product that’s going to make a difference in their lives.
Ponce: The product went through several iterations and several months of delays.
Jain: We ended the campaign in August and we had promised the backers that we’re going to deliver by January 2015. That was not going to happen.
Ryota Sekine, Cubii co-founder: Because our volumes weren’t too large, a lot of manufacturers hesitate to work with a smaller company because of the initial investments involved.
Ponce: Cubii finally shipped in December, 12 months after their target. Its founders freely admit Kickstarter gave them cash, but not all the know-how they needed. A lot of advisers helped them get up and running. Those advisers don’t come built-in with a crowdfunding site, like they might with venture capital. But they’re often key for startups.
Waverly Deutsch, University of Chicago: Advisers do things like help them not make the mistakes that everybody else has made, help them correct mistakes quickly and learn from them, help them really think about strategy and execution. So it’s not just, what’s the right thing to do, but exactly how are we going to do it, and connect them to resources – so make introductions to potential hires, potential funders, potential customers, things like that.
Ponce: So, here’s some free advice from Deutsch, for investors and entrepreneurs – things take longer than you think.
Deutsch: I’ve participated in many Kickstarter campaigns, and not a single one of them has shipped in the deadline that they thought they would ship by. Everything takes longer.
Ponce: Patience might not have been Pavan Bapu’s strongest quality. He’s the guy behind Gramovox, a company that aims to blend vintage design and modern technology in home audio. He was so eager to get started he quit his job with just $10,000 in the bank.
Pavan Bapu, founder and CEO of Gramovox: Pretty embarrassing. Probably should have saved more money.
Ponce: Gramovox’s first product was a Bluetooth-enabled gramophone-style speaker, which launched on Kickstarter in November of 2013.
Bapu: It was tough to get hardware venture capitalists to invest in a product that didn’t exist, didn’t have any market traction or validation, so they’re betting on it blindly.
Ponce: After huge success with the Bluetooth gramophone and an influx of cash from bigger investors, Gramovox went back to Kickstarter to help launch the floating record vertical turntable. You might wonder, why go back to crowdfunding when the company’s up and running? Bapu says it’s not just money. It’s market research.
Bapu: Their validation of your product gives you great forecasting ability into the viability of the product long term.
Ponce: And you get valuable feedback from people who feel invested in your product – no pun intended. Here’s an example.
Bapu: We had a volume knob in the front and we had an on-and-off switch in the back, and there were lots of Kickstarter backers that said, ‘You know, you really should simplify that experience.’ So we incorporated the on-and-off with the volume controls in the front. When you turn it on, it clicks on, and then as you continue clockwise the volume increases, or decreases as you go counterclockwise.
Ponce: So, crowd-funded startups get money, exposure, and feedback – but they face a lot of competition for dollars. Waverly Deutsch says the next big frontier is equity crowdfunding. Basically, buying stock in startups, which she says raises some concerns.
Deutsch: You’re getting a relatively unsophisticated group of investors trying to do what angel investors and venture capitalists spend a lot of time, energy, and due diligence doing, which is investing in startups. Well now we’re getting the everyday man on the street who can put $5,000, $10,000 into an equity deal when startup failure rate is pretty high, are we going to get another bubble, and this one that’s going to more directly affect individual consumers?
Ponce: And just as equity investing isn’t right for all or even most people, Cubii’s Shivani Jain says crowdfunding for startup capital isn’t right for every business.
Jain: You get a lot of exposure, and you’re out there, and your brand is out there, and you have all these great customers, but because it’s so high-profile, if you fail for whatever reason – just because, nothing to do with your product, maybe the time is not right – then you fail on that scale as well. So, really evaluating when is the right time and whether it’s the right thing for you.