Customer Crowdfunding: Not So Fast, Entrepreneurs

Wil Schroter is the co-founder and CEO of Fundable.com which is a crowdfunding platform for startups, so it is not entirely surprising that he would pen a very pro-crowdfunding piece in GigaOM recently. In the piece, he righty calls out a few of the advantages: customer-sourced funding does allow you to test the market before you build, and it does allow you to fund the product before it is built avoiding the need to amass dilutive capital on a speculative basis, and it does allow you to engage with and build buzz amongst your potential customers even before they are your customers. (The recent hysteria about the Pebble Watch is a good example of this.) But what is totally misleading, even disturbing, about Schroter’s GigaOM article is that it so utterly and completely misses the bigger picture.

Let’s take the Pebble Watch as an example: if I am SONY, Apple, Fossil, Nokia, Microsoft, Swatch, Motorola, Garmin or any number of other players in this space, what have I learned from watching the Pebble Kickstarter campaign?

  1. there is a big market here
  2. a lot about the demographics of that market
  3. the necessary price point (at or below the Pebble price)
  4. exactly what features & functionality the first entrant has
  5. exactly what the first entrant’s design looks and feels like
  6. exactly when the first entrant will be able to bring it to market.
That’s a pretty detailed competitive blueprint. Now all I need to do is take that blueprint and use my massive production and distribution resources to absolutely obliterate the market for the Pebble before it even ships. My market research expense? Minimal. My marketing expense? Greatly reduced by the publicity Pebble generated for the category. My R&D time and expense? Greatly reduced by seeing the competitors prototype in advance. The risk to me? Pretty low. Who knows, I may even be able to pick off a chunk of the Pebble pledgers, depending on where in the pledge cycle I hit them.

So I get right to work making a competing product. And while I am at it, I might as well have the staff in my IP department pave over the entire area with every patent I can get (leaving just a little room for Pebble patents, if they got around to filing before disclosing.)

How well does this story end for the entrepreneur? Arguably, not well.

Customer crowdfunding is a cool idea, no doubt about it. And by funding at the product level rather than the company level (a concept discussed in detail in my post on crowdfunding), it may allow some beneficial innovations in smaller less competitive markets to get to market (such as the very cool Twine ”internet of things” project by SuperMechanical) that might otherwise never happen.

But for entrepreneurs who dream of building something at scale, funding at the product rather than company level may not be such a great shortcut. You give up your competitive edge by losing the element of surprise and under-the-radar momentum. And in so doing, you give up the one and only advantage smaller, more nimble competitors have over big companies: they can be more creative and innovative.

Creative and innovative enough, you are betting, to be able to build a following and get going before the big guys discover the market and come in and out-execute you (which they will: over time it is always the execution that matters more than the idea – see this discussion of the myth of the first-mover advantage or this piece in Inc. Magazine for more on that.)

Using customer crowdfunding, entrepreneurs might be able to make a quick buck cashing out a single product on Kickstarter, but can they build an enduring company?

Afterword: Although I’ve focused only on the competition piece here, it is also worth noting that these platforms end up costing a fair amount: 5% of funds raised for one of the popular ones, plus 3% or so to the credit card company, plus 2% or more to a fulfillment platform like Amazon. That’s 10% off the top of a business model in which all your capital is tied up in inventory, which doesn’t exactly give you a lot of pricing flexibility when bigger players try to come in and buy market share in your market.

You can follow Christopher on Twitter @cmirabile and on Google+.

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