Recently, crowdfunding has been celebrated as a solution to this age-old challenge. But it is not a panacea, argues Tony Fadell, who sold Nest Labs to Google for $3.2bn. The founder and CEO of the company has critical insights into the new entrepreneurial strategy.
It is easy to appreciate the entrepreneurial need for speed. The sooner a start-up places its offerings in the market, the sooner it wins customers, establishes its brand and realises financial gains. However, while undertaking significant investment could speed time to market, it may also prove detrimental as it incurs substantial costs when the demand may simply not be there. This chicken-and-egg problem has been an integral part of every entrepreneur’s life. To establish market presence necessitates resource commitment, but such commitment can be prohibitively costly in the absence of market demand.
Enter crowdfunding. Consider the story of Pebble Watch, a customisable electronic wristwatch that connects to smartphones via Bluetooth. To develop the product, its inventors initiated a campaign on Kickstarter, a popular, reward-based, crowdfunding platform. In less than a month, they raised $10.27m, more than 10 times the original target. Importantly, the funding came from 68,929 individuals, each eager to see the finished product and secure one.
Crowdfunding can alleviate the entrepreneurial chicken-and-egg problem. The argument goes as follows: a successful campaign not only establishes the demand for one’s offering, but also secures the funds necessary to develop it, raises awareness, builds word of mouth and enhances reputation. Another potential key benefit is engagement with prospective customers. Early feedback from the crowd proves instrumental in fine-tuning the product and introducing additional, market-driven features.
Yet crowdfunding is not without limitations, warns Fadell. He has been a leader in the connected-home sector, which has experienced a flurry of entrepreneurial and crowdfunded activity in recent years. In a recent interview, he noted: "Anyone can make a houseware item that has no electronics in it, but something that is truly intricate and with lots of digital hardware, software, customer service and support is [very difficult] to pull off." He lauded the discipline of "going through the real financing and management routes private investment imposes".
Entrepreneurs should not lose sight of the challenges associated with meeting market expectations. In other words, certain products cannot be sped up. Technologically complex products, such as those that integrate soft- and hardware, usually call for a longer development and debugging period. Similarly, growth is not equal across all organisations. The time associated with scaling up a production-intensive organisation could be longer than that needed for the average software company.
As you contemplate your start-up strategy, consider the availability of demand for your offering as well as the ability to deliver a consistent supply of it. That is the Nest test.