One of the things we talk about here at Forward Partners is backing a hardware startup at the idea stage and then helping them launch a crowdfunding campaign. It ‘s nice to think that the crowdfunded dollars could provide leverage for our investment and build a company’s profile so it can raise a Series A.
Kickstarter is five years old now and the data coming from them, Indiegogo and other crowdfunding sites shows that the above strategy can work, although it is highly risky. The chart below shows the money that VCs are putting into crowdfunded companies and which sectors it is falling into:
That’s $503m in total that went into 94 hardware projects from a total of 443 that Techcrunch found across the major crowdfunding sites when they looked in June this year (2014). However, the top 10 of those 94 took $336m, leaving the remaining 84 with an average of $2m each. That’s not much for a hardware company.
The takeaway is that only around 10 of 443 hardware projects went on to get significant funding. That’s a hit rate of just 2.3%, which tells me that whilst the theory of using crowd dollars to leverage an early stage investment is attractive it doesn’t work in practice often enough to be an investment strategy.
We will still make hardware investments (arguably Lost My Name falls into that category), but I doubt we will rely on crowdfunding as part of the investment thesis.