The Changing Role Of Crowdfunding Platforms In The Hardware Ecosystem

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Forbes  |  Rakesh Sharma, Contributor  |  Sep 4, 2013

Crowdfunding HardwareGoing 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.

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