To crowdfund or not to crowdfund

Crowdfunding for products is a relatively new phenomenon in India. Successes are few and far in between, platforms are only just maturing and there are as many stories of failed delivery as there are of delayed delivery.

And yet, it is proving enormously popular — especially among hardware startups. It would appear as if everyone wants to crowdfund. But should they?

A successful crowdfunding campaign promises to be an utopian ideal — funds to develop the product and buyers to take them off you!

But when you need to develop the product is precisely where the promise fails.

Crowdfunding raises money through pre-orders and unless your overall profits are sufficiently high you will not have capital for research and development. Only enough to buy material, make and deliver.

I have lost count of the number of startups who estimate pricing based on material and labour expenses. Anything sufficiently new and innovative which excites people needs a lot of expensive iterations. Building supply chains needs trials and perhaps travel to establish the right networks. Building great user experiences needs a lot of research. So on and so forth.

In a typical product you ammortise these costs over multiple sales cycles and often, multiple versions of your product. Crowdfunding doesn’t leave a lot of room for discovery.

One often paints the destination and promises the most beautiful sunrise but doesn’t know how to get there.

So when does it work?

With most products costs are a function of volume. For instance, one particular startup we support knows that they can lower procurement cost by over 50% if only they could go to volumes of 1000 units and over. More importantly, they already know how to make the product and with those volumes they can tap into an established, trustworthy supply chain.

How awesome is that? They could split those savings with their customer and still increase their net profitability. This is where I believe crowdfunding can deliver the utopian ideal — if you can pull off that large demand. Use every howto trick out there and get those 1000 buyers!

But first, know your way to the destination.