Kickstarter in Your Future?
The first question you might ask yourself when starting a new business is: “Am I selling something that people actually want?” This may be stating the obvious, but nowhere is this concept more true than in retail. For entrepreneurial first-time retailers, this is a huge challenge.
Alternatively, instead of making a bunch of stuff and hoping people want it, young, innovative brands are taking upfront orders and hitting minimum goals, ensuring that everything they enter into production is accounted for.
How is this possible? Smart millennial retailers are thinking differently and borrowing from the crowdfunding model pioneered by Kickstarter.
Here is how it works:
- Creators can post an idea or project that has a finite completion period when it has to be produced.
- The creators set goals, at different price points, that backers can ‘pledge’ to buy in advance. If the financial goal is achieved, the backers pay up, and the project moves into production.
With over $59 million already pledged, and a 24.75% success rate, can Kickstarter and its model level the playing field for new entrants into the retail industry?
I think so.
Capitalizing on the low risk, high-level learnings of their peers over at Kickstarter, menswear retailer Gustin has taken the model and embraced it as a company. Their website screams, “Crowdsourced Fashion — Artisan quality, classic American garments at true wholesale prices.” And they claim, “We design, you back our product, we deliver.”
Gustin has built a legion of devoted followers due to the iterative changes made between product batches and their high degree of communication with customers. It doesn’t carry any physical inventory; even top selling items must be pledged for during each run, insuring a near 100% efficiency of orders to sales. This approach also lets Gustin judge consumer appetite for new product launches — a low-risk mechanism that has allowed them to quickly grow out of the denim industry with little stress.
The pitch for the consumer? Low prices for very high quality goods they have a say in creating. Gustin co-founder Steve Powell explains, “We pass along the savings to consumers. Before our crowdsourcing business model, I would charge $205 for a pair of blue jeans at a high-end retailer. Now I charge $100 and we still get the same 50% gross margin as we did before.” You don’t pay until it ships, which makes the purchase expectations for the consumer very tolerable.
The Perils of Expectations
The original poster child Kickstarter campaign for Pebble, a customizable low-cost smart watch, was an absolute smash success. Launched in 2012 with a modest but realistic goal of $100,000 to produce the first watches, they raised over $10 million from 69,000 customers. As you can imagine, for a first-time run at producing a complicated piece of hardware, going from 6,000 orders to 85,000 units created some serious delays.
The crowdfunding method is based on a high degree of transparency; get money in advance, tell them when it will ship, and execute on that delivery time.
After two months of delays, the Pebble team had to go as far as postponing a deadline altogether. This hit a crescendo when Pebble inked an exclusive deal with Best Buy, and there was a threat that the wholesale order would be delivered before original backers got their watches. This is a crazy instance where the viral quotient almost destroyed the company before it could even get product out of the door. A strange problem to have.
If I Back a Project, and It Is Acquired for $2 Billion, Do I Still Own Equity in It?
The Oculus Rift, an immersive and innovative virtual reality headset to play video games, watch movies, and be transported to an alternative reality, launch tugged at one of the fundamental grey areas of the crowdfunding model. Oculus co-founders, Palmer Luckey and John Carmack, set out to raise a modest $250,000, mostly because they believed in the project and wanted to get it into the hands of other early adopters who could help prove the use case. Instead, they blew by that amount to raise over $2.5 million. Fast forward a year later, Facebook purchased the company for $2 billion, and backers asked, “why settle just for a prototype headset when I essentially helped get the company off the ground. Where are my shares?” Crowdfunding can get complicated. Consumers pledge money for something that doesn’t exist, playing the traditional investor role for new direct-to-consumer ventures. They take on the risk by purchasing something based on the promise of what it could deliver. Kickstarter co-founder, Yancey Strickler, calls this buying into the “journey.” Whatever you call it, this unique consumer/manufacturer arrangement starts to blur the lines of ownership, expectation, and objectives. While a $300 headset prototype would be cool, owning a piece of a $5 billion company sounds a bit better.
The crowdsourcing field itself is a journey, evolving constantly as we speak. It is one of the few ideas that has come along to solve the fund poblem of supply and demand of retail. It doesn’t matter how large or small your business is, the concept of 100% sales efficiency is something to take note of … if you can manage the perils of unpredictable success.