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Overfunding through Crowdfunding Hamstrings Performance

A recent post by Jeanne Pi of Appsblogger underscores some of the inherent challenges associated with crowdfunding platforms like Kickstarter. Initially unable to capture a full set of data because Kickstarter used “noindex” robot meta tags, she still pulled enough data to draw some interesting conclusions.

Today, Pi will tell you that her initial analysis was off target. With help from Professor Ethan Mollic of The Wharton School of the University of Pennsylvania, Pi has revised her original analysis and released The Untold Story Behind Kickstarter Stats. [See infographic below.]

My question is, what do you do when your crowdfunding project is oversubscribed by more than 100x?

What Pi found was that only 25% of Design and Technology projects deliver on time. Interestingly enough, the more oversubscribed the project, the longer the delay. Pi asked some spectacular questions about Kickstarter projects in general and generated some compelling stats (which you can check out here).

Over-investment Derails Performance

I’d like to consider the impact significant oversubscription has on the outliers. Let’s take a look at Pebble Technology, a watch that renders information from your iPhone or Android.

Pebble was funded through Kickstarter on May 18th of this year, with $10.27 million pledged. People overfunded the project by 10,266%.

If you read the Pebble story in the Wall Street Journal you’ll see how founder, 26 year-old Eric Migicovsky,  responded. He appears to be doing everything he can to ensure the company delivers on a commitment of 85,000 watches. While admirable, I wonder if he can build a company without looking longer-term in the short-term.

While the question may seem ludicrous with that type of funding in the bank, consider the following:

  • It took little to no discipline to obtain the funding, and it is so far outside the scope of what Migicovsky hoped for that he doesn’t know how to apply it
  • Investment demonstrates that almost 70,000 people were willing to pony up approximately $150 to buy a product based on a very interesting video of the prototype—demand beyond these early adopters is still an unknown
  • A product, or an app, does not make a company

When thinking about building a sustainable business and value in the marketplace, you have to consider the size of the market from early adopters—through fast followers, early majority, and so on. How large is the market and how much of it will you capture? What’s the adoption cycle? What follow-on products or apps will generate recurring revenue in an industry that has very short cycle times?

Wait! Those would be trick questions if the Pebble is creating a new market or a category segmentation (think Smartphone or tablet). One can only speculate market size and adoption rates under those circumstances. So, it’s time to take a closer look at the ‘problem solved.’

A Gadget with An Umbilical Cord

As cool as the product looks (the geek in me is very fascinated by this device), it fails the practicality test.  Bluetooth dependency on a Smartphone limits its range and usefulness. My headset bugs out when I wander from one end of the house to the other. So will your Pebble. People stopped wearing watches because they became an unnecessary fashion device. Our Smartphones could tell us the time… and so much more.

The Pebble needs to become a smart device or it will just be a cool—but unnecessary—accessory attached to your wrist. Unless the company develops a long-term strategy with a product roadmap based on market relevance, infrastructure, and the talent to deliver against that roadmap, Pebble will very likely be a one hit wonder with little staying power. At this point Migicovsky has developed a product rather than a company.

Too Much Money Diverts Focus

As the Pebble example demonstrates, vastly oversubscribed crowdfunded projects can really work against the founder. Too much funding acquired too quickly means you don’t have to be gritty to grow. First time entrepreneurs don’t learn by making mistakes needed to develop the intuition and business savvy required to lead a successful organization. Any other outcome is an anomaly… just like funding at the magnitude of 100x.

One of the fundamental problems with overfunding projects is that it can focus the founder’s attention on the wrong things. To be a viable business you have to:

  1. Solve a need in the marketplace (real or perceived)
  2. Have a large enough market opportunity to build a sustainable business
  3. Have a leadership team that can establish a viable strategy and business model… and lead the company through the early stages of its lifecycle
  4. Build a team that can execute effectively

Good luck, Pebble. You’ll need it. The kind of money you landed brings out the sharks. You need guidance on how to spend those dollars wisely. And, until you further validate your customer model against market dynamics, I think you’re still drilling for oil. As other founders can tell you, it doesn’t take long to burn through $10 million when you execute the wrong strategy.

Oh, and if you haven’t read it, perhaps now is the time to pick up The Four Steps to the Epiphany: Successful Strategies for Products that Win.

© 2012. All rights reserved.
The Untold Story Behind Kickstarter Stats [INFOGRAPHIC]
Like this infographic? Get more business startup tips from AppsBlogger.

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