It is virtually impossible to go online today without coming across any number of great innovations promoted on a variety of reward-based crowdfunding sites. From travel accessories to board games, it seems everyone is eager to promote or support (“Back” in CF jargon) the “next big thing.” While crowdfunding is an incredible tool that has helped countless innovators and entrepreneurs realize their dreams, it has also led to some outstanding failures and can cause irreparable damage to businesses and backers alike.
I know this because my company also thought crowdfunding was the right approach; we thought it would be an efficient way to raise funds for our autonomous drone platform, which had already gone through its first stages of R&D. We kicked off our crowdfunding campaign, and very quickly saw that it would not succeed.
In the drone industry in particular, crowdfunding is a sensitive topic. There have been countless drone entrepreneurs who have run successful crowdfunding campaigns. However, if entrepreneurs in this industry have not done their homework, crowdfunding can lead them down a very challenging path.
The Complications of Crowdfunding
Crowdfunding entrepreneurs have two types of costs they need to cover: R&D costs (developing the product they are envisioning), and marginal costs (including materials, marketing, production and shipping). Crowdfunding only tends to be successful when just one of these cost channels needs to be covered. For example, the successfully crowdfunded card game, Exploding Kittens, had completed its R&D phase; the game was fully developed. The creators simply needed to cover the marginal costs to get the game out to consumers. $8,782,571 and 219,382 backers later, the game is now in the hands of hundreds of thousands of enthusiasts.
However, crowdfunding becomes complicated when an entrepreneur requires financing of both the R&D and marginal costs. This complication becomes problematic as backers buy in, because they have started to see crowdfunding sites as online marketplaces where they pay money and expect to receive a product sometime in the future. But this is simply not the case. Like any investment, backing a crowdfunding effort always carries a risk, exacerbated if you are buying in to an unsubstantiated vision.
If crowdfunding wasn’t complicated enough, it becomes even more so when dealing with hardware, such as the highly complex aerospace technology of drones. These technologies are difficult and costly to develop from an R&D perspective, and even more challenging to bring to market. Yet, young drone companies come to crowdfund, unknowingly requiring funds for both R&D and marginal costs, when they don’t even know what these costs will be. Such companies – even well-intentioned – often use a “fake it till you make it” approach – making promises which they genuinely intend to keep but, in reality, won’t be able to.
The only ones to gain in these cases are those less-than-scrupulous consultants advising drone startups to crowdfund first, and then take the campaign to investors as proof of the market for their product. Such consultants – offering their own marketing services – stand to gain based on a campaign’s success at raising money, regardless of the company’s ability to bring a product to market. And the crowdfunding sites themselves – collecting some 4% of the money raised on their platforms – do little to discourage such practices. However, potential stakeholders are savvy enough to see through inflated crowdfunding numbers and will hold off from investing, at least until a product is ready and mass manufacturing can commence.
Delving Deeper into Drone Crowdfunding Challenges
The drone industry provides a perfect case study to understand the challenges of crowdfunding, and why drone industry entrepreneurs should use this model sparingly as a funding channel to get their companies off the ground.
Why is it so difficult for drone companies to successfully bring crowdfunded products to market?
As a rule, “hardware is hard” – being challenging to develop – but drones are even harder. Within the world of hardware, drone technology is among the most complex. There have been countless drone companies or concepts, such as the well-funded, yet undelivered Lily drone, that have raised money needed to feed both the R&D and marginal cost channels. These companies all failed to deliver. The trouble is, drone technology is difficult, even for companies with vast experience and hundreds of millions in funding from investors. Even industry heavyweights, such as GoPro, with vast financial backing have struggled to deliver a quality drone to the market.
The result is that backers invest and companies do not deliver, either because they fail to complete the R&D of these highly complex devices, or have miscalculated their costs. Most start the campaign without even visiting China, where most hardware is being developed today, in order to learn the basic manufacturing know-hows needed for such projects. The list is long of these failed crowdfunded drones: Zano, Rook and Robot Dragonfly, to name but a few. Having completed successful crowdfunding campaigns, these companies ended up in a race against the clock to deliver a product to their backers rather than taking time to reassess their strategy and invest enough in R&D. Consequently, though each company raised significant sums, they ultimately failed to get their products to their backers or the larger market.
What We’ve Learned
As mentioned, crowdfunding can be an excellent tool to bring new, interesting and innovative products to market. However, backers and innovators alike must learn how to most effectively leverage the crowdfunding model. For my company, failing at crowdfunding was the best thing that could have happened. Had it worked, we would have been trapped in a race to deliver a product to consumers without having the experience and data we needed. Instead we re-focused our attention, further developed our strategy, and learned what was needed to deliver a professional drone to the market.
Backers need to understand that – as with any “CF investment” – they are taking a risk, especially when backing complex embedded products, such as drones. The best crowdfunding investments for consumers are in products that are fully developed and simply require funds to bring that product to market.
As for entrepreneurs, inventors and visionaries hoping to introduce the next game-changing drone to market – they need to be informed. While “fake it till you make it” can work in some places, when trying to launch a real business, you need to be smart. Know your costs. Know your market, and come with a fully developed product before making grandiose promises on which you cannot deliver. Because ultimately, the most successful businesses are those that consider the needs of the users first.