Crowdfunding Good Entry Point To VC Dollars For Hardware Startups

There's something to be said about the guerrilla-style fundraising efforts taking place on crowdfunding sites for the startups that seek to later knock on the doors of venture capital firms for later-stage funding.

New research from a venture capitalist, along with another report released this week from New York-based CB Insights, show venture capital to crowdfunded hardware companies on pace for growth this year following 2013's record-setting levels. It's proof that sites such as Kickstarter and Indiegogo can actually serve as a complement to venture capital firms, CB Insights concluded.

"Many once thought that the crowdfunding model of financing would supplant VC financing for a number of less ostensibly scalable companies," CB Insights CEO and Co-Founder Anand Sanwal told CRN. "But as the data shows, VCs are seeing promise in a number of crowdfunded hardware projects that they believe can be successful companies on a venture level."

[Related: Follow The Money: 10 VC Investments To Watch In July]

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Crowdfunded startups receiving venture funding last year totaled 23 deals that amounted to $200 million. The bulk of that investment total went to Irvine, Calif.-based Oculus VR, which received a $75 million Series B infusion in December from Andreessen Horowitz, Spark Capital, Matrix Partners and Formation 8. Oculus, which got its start raising $2.4 million on Kickstarter, went on to be sold to Facebook in March for $2 billion.

Of course, not every Kickstarter project goes on to nab the kind of venture funding Oculus did, but the deal shows how crowdfunding sites can serve as a tool for venture capital firms.

"The rise of crowdfunding platforms is another hit to the idea of proprietary deal flow for VCs," Sanwal said. "What this means is that any VC can see, source deals and invest in successful crowdfunded projects. Oculus' $2 billion acquisition by Facebook helps prove that there are potential unicorn-sized exits to be found in hardware and those able to show initial traction on crowdfunding projects for VCs."

Companies able to successfully raise money on a Kickstarter or Indiegogo platform tend to look more attractive to venture capital firms, according to Matthew Witheiler, general partner at Flybridge Capital Partners.

"Startups who are able to validate customer interest in a meaningful way have a much easier time getting investors' attention," Witheiler told CRN.

NEXT: Asking The Market For Help

Witheiler studied 443 hardware companies that raised more than $100,000 on Kickstarter or Indiegogo that went on to raise outside venture capital. Those companies raised a total of $187.47 million in outside funding, with the majority going to companies in the wearables and entertainment space.

Witheiler, who focuses on the hardware vertical at Flybridge, decided to look into the subject further after initially observing the pickup in traction of hardware startups on crowdfunding platforms.

"The big thing that crowdfunding brought to the hardware world was the ability to test product-market fit," Witheiler said. "Back in 2006, when I was building hardware, the only way we could really tell if anyone wanted what we were building was to spend a lot of money, make a bunch of product, stick it on a Best Buy shelf and wait to see if anyone bought it. That made it expensive to figure out if you had the next winner or the dud, and made it really hard for VCs to place bets."

That's the reason why Pasadena, Calif.-based incubator Idealab went to Indiegogo in July looking to raise $375,000 for its 3-D printer startup New Matter. The company ended up raising $683,804 from more than 3,500 funders.

Pasadena, Calif.-based New Matter went the crowdfunding route to quickly assess product-market fit before spending a lot on equipment and for the benefit of growing a group of early adopters or fans of the company, Idealab Director of Business Development Alex Maleki told CRN.

"These enthusiasts are already providing us with valuable feedback on product features and priorities, and they also give us a critical-mass of user community that we can use to jump-start the New Matter store," Maleki said. "Without a community of users, 3-D designers have no motivation to engage with our platform and develop designs for our store. Without the designers, the experience will be lacking for the users."

Maleki said there were a "handful of nuanced reasons" why New Matter chose Indiegogo over Kickstarter, but the main one was the assistance it received from the Indiegogo customer support team prior to the fundraising campaign's launch.

The company's MOD-t 3-D printer is being presold on the New Matter website for $279, with an estimated ship date of May 2015.

"The contributors to our crowdfunding campaign give this online community the first nudge it needs to build momentum and continue growing," Maleki said.

PUBLISHED AUG. 14, 2014