A memorable tale among venture-capital investors is that of Pebble. In 2012, after numerous firms along Sand Hill Road decided against backing the smartwatch startup, Pebble managed to secure over $10 million through crowdfunding platform Kickstarter. This remarkable achievement was a significant milestone for crowdfunding, generating substantial excitement and turning Pebble into a viral sensation. Subsequently, many VCs, driven by fear of missing out, sought to invest. Ultimately, Pebble amassed a total of $59 million.
Since that time, investors have been particularly cautious about overlooking promising hardware startups. In fact, venture capital for hardware companies reached its highest level in eight years in 2016, with an impressive $4.4 billion channeled into 624 startups, as highlighted by data from CB Insights.
At the same time, hardware entrepreneurs are keen to leverage successful crowdfunding campaigns as proof of market demand for their inventions. The rationale follows that if tens of thousands of backers are willing to pre-order a product that hasn’t been released yet, it stands to reason that millions would purchase it once it’s available in stores. Indeed, more than half of tech startups in this domain kick-started their funding through crowdfunding platforms, according to CB Insights.
However, bringing hardware to market is both a lengthy and costly endeavor. In the past year, several well-funded hardware companies have experienced dramatic failures. For instance, Jawbone, a wearable tech startup that raised $930 million, sold its assets earlier this year. E-cigarette maker Njoy, which received $181 million in funding, declared bankruptcy last year and liquidated its holdings. Similarly, Juicero, known for its kitchen appliances and funded with $100 million, shut down last summer. Additionally, tablet startup Fuhu, gaming console Zeebo, and sleep tracker Hello, all of which raised over $50 million, have also shuttered operations.
These failures highlight a crucial reality: crowdfunding success does not guarantee broad consumer demand. A recent investigation by CB Insights into the downfall of 382 hardware startups revealed that the primary factor contributing to failure is a lack of product demand. This suggests that a thriving crowdfunding project can sometimes create a misleading impression of market appetite. The study states:
“Startups may be successful in raising funds up to a limited release point, only to discover an insufficient market size to justify further investments and mass production.”
The research also identifies overspending as the second leading cause of failure, with diminishing interest following an initial crowdfunding campaign as the third. These reasons align closely with common challenges faced by startups. A previous CB Insights report found that the foremost reason founders attribute their failures to is the absence of a viable market for their offerings.
While this may seem evident, the culture of entrepreneurship often encourages founders to overlook signs that their concepts may not thrive. Building a vision for the future requires a touch of irrationality. Startup narratives typically spotlight successes, largely ignoring the many failures. As Steve Jobs famously noted, “A lot of times, people don’t know what they want until you show it to them.”
This sentiment is inspiring, yet most startups struggle to embody it. Crowdfunding can intensify this issue of misplaced optimism, making the perception of customer demand appear stronger than reality. Investors captivated by the allure of popular crowdfunding campaigns would do well to recall the fate of Pebble: In December 2016, the company ceased operations and sold its assets to Fitbit.