Despite Billions in Crowdfunding, Only Three “Venture Scale” Exits

Data from the last five years of tech IPOs shows that startups that raise large sums of venture capital don’t perform any better than companies that raise small amounts. It turns out that the concept of “Efficient Entrepreneurship” also applies to crowdfunding.

Among the top 100 projects in Kickstarter’s eight-year history, there are two clear venture-scale wins; Facebook acquiring Oculus for $2B and Electrolux acquiring sous vide manufacturer Anova Culinary for $250M. Surprisingly, neither of these companies cracked the top 50 in terms of money raised on the platform. Check out the data and links to the project here.

Over at IndieGoGo, none of the site’s top 100 projects have had major exits yet, though the stylish fitness tracker Misfit, the 183rd most funded project in the site’s history, was acquired by Fossil for $260M.

There aren’t many encouraging stories beyond those three:

To be fair, crowdfunding is still in its early days, and some emerging companies may become new models to follow.

But at the risk of overgeneralizing, there are a couple of lessons that can be gleaned from the data.

Big Markets are Riskier than Niches

With crowdfunding, niches hold riches. Oculus was pitched as a dev kit for hackers. Sous vide fans are second only to Crossfitters in the lengths they’ll go to satiate their craving for boiled chicken. These products are targeted towards enthusiasts who would bear with the bugs found in any first generation product — quite literally in the case of the Flow Beehive which raised $13M on IndieGoGo.

More importantly, these products also represent categories where there were few viable substitutes. VR was a mid-nineties curiosity, and water cookers were largely limited to high-end kitchens. Kickstarter made insane sounding projects tangible for enthusiasts.

Compare that to the smartwatch category which has been around since the mid-90s. Even before Pebble reenergized the market, there were still enough smartwatches to fill out a buyers guide. Likewise, Ouya was trying to crack a crowded video game console market where existing systems have cult-like followings. Perhaps one of the half dozen crowdfunded wireless headphone concepts that have been funded in the last couple years will become a breakout and challenge Apple’s AirPods. However, the data so far suggests that in crowdfunding passion projects outperform polished consumer products.

Setting Records can Sink You

Success can be a curse in crowdfunding. Kickstarter is debt. Projects that require significant R&D efforts can burn through crowdfunding capital leaving insufficient funds for manufacturing if product development hits a snag. Even if a product is ready to produce once a campaign ends, any blip in production can bankrupt a fledgling company.

A couple of high-profile cases illustrate the dangers facing overly successful crowdfunding campaigns.

A small sample of the knock-off Fidget Cubes based on the original design by Antsy Labs.

Balancing Capital and Customer Commitment

Many entrepreneurs want to raise as much money as possible during a campaign, yet fail to fully appreciate the relationship between capital and customer fulfillment. For instance, Pebble had 65,607 product orders in its first campaign, while Formlabs had 1,028. Pebble raised 3.5X as much money as Formlabs but also had to handle fulfilling orders, customer service, etc. for 64X more customers. As a mass market product, the Pebble team was further divided by preparing for retail launches. That is a lot to take on all at once.

Capital won’t make you smarter. It comes with no special insights and can’t solve problems unless the company is properly designed to deploy it. Consider this when calibrating your ambition for a campaign.

These stories don’t mean that heavily funded projects are doomed. The Flow Beehive raised $13M on IndieGoGo, had 38,000 backers, shipped successfully and is now a going concern. But it’s a flat pack wooden frame that the buyer assembles. There are only so many points of failure, and the core technology is as old as modern agriculture.

Don’t optimize your campaign to set records

This data isn’t a criticism of Kickstarter or the creators of these projects. Kickstarter has always told creators that it is “not a store” or a replacement for VC. It’s also important to say that a VC-scale outcome shouldn’t be the goal or even the primary metric of success in crowdfunding. Still, many entrepreneurs view it as such.

Fundraising isn’t an end unto itself and won’t determine your ultimate success or failure, so keep focused on the real mission. Remember, Misfit “only” raised $847K on IndieGoGo, which is only a modest success by comparison to other projects, but it also represents the second best exit for a company that launched via crowdfunding.

Facebook Doesn’t Just Want Social Blood, It Wants To Kill Off Apps

Facebook is a behemoth that seems to show no sign of slowing down. After bolstering their instant messenger services to take on What’sApp and recently adding the Stories functionality as a slight to Snapchat, they’ll seemingly stop at nothing to try to see of any of the challenger social brands.

Why is this? Typical academic management literature would say focus on your core competency. The game has changed though. Nowadays, it’s all about consumption and Facebook is the king of the pack at getting you to consume as much as possible within their platform. They know that their future ad revenue depends on you being in the Facebook platform. After all, if you go elsewhere on the internet to play, consume, or chat then you’ll get served ads where someone other than Facebook is benefiting. They definitely don’t want that!

They’re hungry though. They’re not content killing off just other social media sites: they want to kill off apps and here’s why:

Mobile gaming

Mobile gaming is huge business.There’s a definitive shift with the move to mobile towards gaming on the move. Certainly the big consoles are suffering from this revolt. In an industry worth $99.6bn, screentime and owning the user is king. Gaming is as much about tube time and being on the bus as it is being in front of a 4K screen at home.

Because it sees everything, Facebook has noted this and moved aggressively. It announced in November the launch of fully featured HTML5 games directly within Messenger. This means that Facebook can now provide a gaming platform directly within its infrastructure. For those wanting to get a mobile gaming hook, they can do so while chatting to their friends and checking out the latest CAT FAIL videos.

Ultimately this is a massive finger up to the respective app stores, and also app developers and publishers. This is huge as it’s also building a native co-op multiplayer element into what is the world’s second biggest messaging service — Facebook Messenger. As 5G is just around the corner, processing power without smartphones gets better and web compression continues to exponentially improve — you can only see that their ability to deliver rich, interactive gaming experiences within the Facebook platform looks set to explode over the coming months and years.

Chatbots

Facebook has bet big on chatbots. Mark Zuckerberg famously said that chatbots are the new apps. Launching a number of different APIs and tools for developers, Facebook has made it ridiculously easy for botmasters and developers to reside their bots within the Facebook platform. Chatbots enable users to speak directly to brands and movements that they care about and get a level of interaction that apps inherently struggle with.

The one sided nature of apps and push notifications is definitely a limitation as we move into seemingly even more social landscapes built on interactive messaging. Chatbots overcome this by giving a two way chat process that’s fully controlled by brands, that’s scalable and able to grow and develop over time. Only 12 months in there are already bots by Starbucks and British Airways — part of a Facebook bot bonanza that features over 30,000 bots already.

Again, by Facebook making moves to host as many chatbots as possible within their ecosystem, they’re making their users sticky. They’re looking at chatbots as being a way to keep people in the Facebook Matrix that little bit longer before venturing outside of the service and starting to consume media and content elsewhere.

Don’t forget, Google and Microsoft are betting big on bots too, so from a competitive perspective Facebook is striking while the iron is hot and using their social strength to outdo the competition within their messaging product.

What does all this mean

You have two major areas of the internet that are native within Facebook. HTML5 games have been around for many years and have experienced huge growth and are set to keep growing. By augmenting them with an area like chatbots that’s just starting to develop into a huge digital opportunity, they’re spreading their bets cleverly on two pieces of tech that will be here for the long haul. Supporting them not only on the Facebook platform, but within messaging services (which is where many of the millennials spend a huge amount of time, make decisions with friends and generally go about their business) is a clever strategic move from Facebook. Only time will tell whether it’s successful in its quest to take over the whole of the internet.

You can definitely foresee that this will kill off more than just a few burgeoning social sites. Apps are going to take this move very seriously and it will be interesting to see whether there’s another strong wave of app development, or whether devs and bot makers will look to developing directly on the Facebook platform as being the best way to scale quickly and monetize their offerings in the near future.