Entrepreneurs are Taking Kickstarter More Seriously; VCs Should, Too

You don’t often hear venture capitalists talking about the world’s biggest crowd-funding site, Kickstarter. But maybe they should. While the three-year-old platform has long been a way to launch creative projects – albums, art projects, books, documentaries, and performances – more first-time tech entrepreneurs are catching onto its power, and they’re using it to prove market demand for their products.

Founders have a growing number of reasons to think that Kickstarter is an ideal test bed, starting with the Nomiku, a $359 kitchen device that people can use to sous-vide food. The company’s San Francisco-based developers raised $586,061 from 1,880 individuals in 30 days’ time on the platform, all without giving away a share of equity. Now they’re using their success on Kickstarter to generate demand on AngelList, where they hope to secure seed-stage funding to grow their operations.

Ouya, a $99 video game console that’s built on the Android operating system and shaped like a boomerang, is another founder success story. In July, the console became the eighth project in Kickstarter’s history to raise more than a million dollars. In fact, even though Ouya was only looking to raise $950,000, it received pledges of more than $2.5 million in just 24 hours on the platform, ultimately raising a stunning $8.6 million.

Founder Julie Uhrman told Engadget this summer that Ouya isn’t looking to raise additional funds, but the company is listed on AngelList, and AngelList founder Naval Ravikant told me that “if they want to raise money” going forward, it’s going to be “much easier, given that they can show that there’s a passionate, loyal user base for the product.”

Of course, notes Ravikant, market demand isn’t the “only signal” that seasoned investors consider. Kickstarter doesn’t vet teams or a product’s long-term viability, for example.

The marketing of Kickstarter products is also bit too transparent for some VCs’ taste. “I’m not comfortable with a startup that tells everyone what they are going to do,” says Venky Ganesan, a managing director at Globespan Capital Partners. “The best companies talk with two investors, get a term sheet, and don’t talk with anyone else.”

A recent piece on NPR noted that many of Kickstarter’s hottest projects have yet to really prove themselves. Uhrman has until March to deliver 57,000 Ouya consoles to her company’s backers. Meanwhile, smart wristwatch maker Pebble Technology — which raised $10.3 million from 69,000 people on Kickstarter in May — reportedly just missed its first delivery deadline.

The reality is that most Kickstarter projects are “one-offs,” not companies that can produce more than one product or service. (Nearly 20,000 of the roughly 29,000 projects to reach their funding goals have fallen into the $1,000 to $10,000 range.)

Still, proven market demand is “one signal you can’t get anywhere else,” says Ravikant.

And now may well be the “moment” for hardware entrepreneurs, many of whom see Kickstarter as the natural place to develop and refine their products. Indeed, Ravikant estimates that upwards of 80 percent of electronics startups coming out of hardware accelerators like Haxlr8r and Lemnos Labs are heading to Kickstarter.

They should be, says David Shen, the West Coast director of early-stage investment firm LaunchCapital, based in Cambridge, Mass. Shen, a former product designer at Apple, Frog Design and Yahoo, believes the timing couldn’t be better for consumer electronics entrepreneurs.

“The cost of building hardware products has dropped dramatically,” says Shen. While certain kinds of big, ambitious products might still eat up a lot in funding, hardware startups with $1.5 million can “now do as much [with the money] as a software startup. Accelerometers, a gyroscope with GPS – you can get a lot of these things right off the shelf now; you don’t need to have scientists or chip designers customizing them for your business.”

What about differentiation? What of too much transparency?

“It’s the Internet-only companies that are so easy to copy; it’s almost frightening how fast it happens,” says Shen. But there are now far more software engineers than hardware engineers, he observes, and “just the scarcity of finding someone who knows what to do in this area makes it more competitive.” In fact, Launch Capital is “pursuing” an investment in a project that got its start on Kickstarter “right now.”

“There are a lot of fun [projects] that don’t need a lot of money but are intriguing to be involved in,” observes venture capitalist Brad Feld, who has already funded “around 30 projects” so far.

As for whether his firm, Foundry Group, might invest in a company that’s paid for its development costs through the platform, he says that it “might” and that VCs “absolutely should be” paying attention to Kickstarter projects. Says Feld, there’s “some awesome stuff” being created with the service’s help.

Image: Courtesy of Kickstarter.