The Changing Role Of Crowdfunding Platforms In The Hardware Ecosystem

Going by numbers alone, hardware projects should be a win-win proposition for both entrepreneurs and crowdfunding platforms. Seven of the top ten most-funded projects on Indiegogo, a popular crowdfunding platform, are hardware projects. Cumulatively, they account for 83 percent of the total funding (a number that exceeds $2 million) garnered by such projects. Kickstarter, which is arguably the most popular crowdfunding platform today, has a similar story: hardware projects regularly rank amongst the most-funded projects across multiple categories on the site.

The funding amounts reflect enthusiasm from communities on such sites to participate in an entrepreneur’s dream. However, delays in delivery (and outright failures, in some cases) are sullying that dream. According to research conducted last year, approximately 85 percent of hardware projects funded through Kickstarter failed to deliver finished products. In other words, only 15 percent of total hardware projects are successful.

Even among projects that have successfully delivered to their backers, delays are common. Pebble and Ouya may be the most prominent examples; however, based on conversations with several hardware entrepreneurs, it seems to me that delays are the norm rather than the exception. In turn, such problems have resulted in negative publicity for crowdfunding platforms.

A Problem Of Identities And Expectations

The problems for hardware projects on crowdfunding sites are multi-layered and range from manufacturing processes to delays in delivery due to supply chain issues. Mostly, though, they are a case of misplaced expectations.

In their function, crowdfunding platforms closely correspond to the forecasting stage of a manufacturing supply chain. This is because estimates made while planning for a crowdfunding campaign define corresponding funding goals and subsequent timelines.

In their role, however, crowdfunding campaigns resemble venture capitalists. They provide capital to entrepreneurs through a community of backers. Unlike venture capitalists, however, these backers do not ask for a stake. Instead, entrepreneurs reward them with finished products or thank you notes. The ambiguous nature of a backer’s role (combined with the crowdfunding platform’s function which requires an entrepreneur to accurately forecast requirements and funding for their product) feeds into confusion over the timeline and nature of this reward.

According to several entrepreneurs, backers often confuse the crowdfunding platforms for online stores. “They (backers) expect a finished product delivery within two weeks just like Amazon,” says Michael Topolovac, two-time hardware entrepreneur. Topolovac was referring to communication with some backers from his latest crowdfunding campaign.

Do Backers Need To Reset Their Expectations?

Although they are technically not responsible for product delivery, crowdfunding platforms *are* responsible for vetting projects. By accepting commissions to host projects on their platform, such sites implicitly share responsibility for success (or, failure) of campaigns. A large number of failures, thus, negatively affects their ability to attract good projects and communities.

An employee of a popular crowdfunding platform told me that backers need to reset their expectations while funding projects on their platform. “Part of the value that backers get is access to the creative process behind these products,” he says. Their platform, according to him, is not philanthropy nor is it a store.

Associating themselves with a creative process and dissociating responsibility from the product delivery process is thoughtful (and, smart) marketing by crowdfunding platforms. However, the creation process holds value only under certain circumstances. For example, it holds value when the product is a work of art or innovative (that cannot be replicated) or related to an iconic brand (such as Apple AAPL +2.07%). In other words, the intent behind backing a hardware project is as much about altruism as about collecting unique artifacts.

Crowdfunding platforms attract communities of backers when they host a large (and successful) number of such products. For example, Kickstarter is a successful site because it has a large and dedicated community willing to fund projects and not vice versa.

The Solution: A Change Of Role And Requirements

That gap between expectations and reality has proved fertile ground for new initiatives and entrants in this space. Crowdfunding platforms have responded with changed requirements and by redefining their role for hardware projects.

Boston-based Dragon Innovation, a manufacturing services firm, announced a new platform for entrepreneurs earlier this month. Exclusively targeted at the hardware community, the platform charges an upfront fee to host campaigns on the site. For that fee, entrepreneurs can access expert advice and get help writing their manufacturing plans. While opting for Dragon’s downstream contract manufacturing services is not mandatory for entrepreneurs, the crowdfunding site is placed strategically in the sales funnel to market the firm’s downstream services.

Similarly, San Francisco-based Indiegogo has started a free Mentor in Residence for hardware projects. As part of the program, a mentor (Adam Ellsworth, who I have written about earlier) will help hardware entrepreneurs “think strategically” about their campaign. According to Ellsworth, the initiative is a result of hearing “horror stories” from past campaigns. He says he has already reached out to existing hardware projects on the site and about half of them have expressed interest. In addition, he will also be featured in a series of interviews with experts on the site.

Crowdtilt, another crowdfunding site that enables entrepreneurs to host platforms on their own site, has a value proposition that is related to control. According to James Beshara, chief executive officer at the company, their platform helps hardware entrepreneurs integrate crowdfunding into their startup process and build a sustained relationship with both customers and investors. In practical terms, this means that their platform integrates with the front end (helping during fund raising activities) and back end (payment processing and further capital raising).

Given that it already has a large and dedicated community of funders, Kickstarter has stayed true to its roots as a curation platform. The site has introduced specific product guidelines for hardware projects last September. These guidelines detail specific requirements and documents for hardware projects.

These changes push the envelope on a crowdfunding platform’s role for projects. By offering consultation and advice to hardware projects, crowdfunding platforms are reconfiguring their identity and role within the hardware ecosystem.

SOURCE: Forbes