Crowdfunding Pitfalls and Why Cash is King in Hardware

Posted by Rachel Zheng /March 26, 2015 / Advisors, Entrepreneurial Advice, FounderTalk, Hardware, Hot Topics

Julie-Uhrman_OuyaJulie Uhrman, Founder and CEO of Ouya, was previously the VP of Digital Distribution at IGN Entertainment and VP at GameFly. She shares the highs and lows of being a hardware entrepreneur – from  being one of the first big (and most scrutinized) Kickstarter campaigns to receiving $10M in funding from web-giant Alibaba at the beginning of this year.

Ouya was one of the first to raise a major round on Kickstarter – why did you decide to raise there?

We didn’t initially approach Kickstarter first, we thought Ouya was a great business for venture capitalists because it had all the things they look for. There was a 3-month period where we met with over 40 VCs and everyone said ‘no.’ We were still pretty confident that there was an opportunity in the marketplace.  I had been watching Kickstarter fairly closely, saw a number of game developers were successful, then Pebble watch was very successful. We realized that if we were going to make this company successful we would need the support of both gamers and the developer community. That’s why we decided to bring it to KickStarter, and we simply said, if you come, we will build it. And we will do this together.

The huge benefit of Kickstarter is that you have this audience that believes in you and will provide you feedback and ideas – that’s indispensable. Today you don’t  spend two years locked behind closed doors building a product – those days are gone. The new reality is that you rapidly prototype, then build community, support and get their feedback. That comes with multiple challenges – emotional challenges. Because you have to be okay sharing something that is potentially not fully-baked. You are going to get both positive and negative feedback. 

You have to have fortitude and conviction so that you get through the feedback and then follow your gut.  Tweet this

Early on bad feedback, how did you ensure that didn’t affect you and the team at that moment?

It absolutely did affect me and the team at that moment. It was painful and emotional. We sought out to deliver and excellent product and our initial product was OK. It was good but not good enough. We had chosen 9 months in advance to say, ‘we will ship come hell or high water.’

hardware cash is kingWe pushed every timeline to make sure we delivered on our promises and didn’t let our backers down. And we did. What happened was we realized, right before we launched, that we had some wifi bluetooth issues that could be solved both with hardware and software. There was a moment to decide, ‘do we push and miss our promises?’ – it wasn’t a catastrophic issue but it made the product good and not great. It was a hard decision that I still continue to wonder if it was the right one. We did fix it and did right by all of our users, but it was difficult and the result of our time pressure we put on ourselves.

What was emotional challenging about launching a Kickstarter campaign?

Well, it’s a long 30 days of no sleeping. First and foremost is wondering if you are going to hit your goal.

You are basically holding your breath until you hit your goal.  Tweet this

If you don’t hit your goal then it says there is something potentially off  about your idea, your vision or you did a poor job communicating it. So something you might be crazy passionate about, that made you quit your job,  doesn’t resonate with others.  Hitting your goal is validation but until you do it’s testing.

As soon as you meet your goal, then it’s like alright, now I can start building, start hiring, start communicating with my community. This is going to happen, people believe in me, I have the fund to make this happen. You don’t start building your company to wait for the campaign is over. You wait until you achieve your goal and you get going. But now you have huge responsibilities. If you only raised your money on venture capital, you only have to answer a couple people. But when you raise money from 56,000+ backers, you have to answer all those people.  That pressure weighs a lot more on you than just a single VC that knows 9 out of 10 are going to fail in the first place.

Most hardware entrepreneurs believe that big box partnerships are the holy grail. But in the early days they can waste a ton of your time and it’s no skin off their back. How do you prioritize those relationships – what’s the right time?

That’s the question I continue to ask myself. The biggest factor is knowing when you will get paid. We did launch with them on day one. It was a big opportunity and who knew if the retailers would be excited about our product six months from now. The positives are great exposure, ability to reach people faster and immediate legitimacy. It definitely adds complexity and time to your cash cycle. It’s a very tough call though. Most people would argue to start online and with Amazon and go from there. If you want to solve the challenges of logistics and cash that’s the way to go.

If I had to do this again, I don’t know if we’d go the same route. It’s a very tough call.

What are 2 biggest pieces of advice you would give to hardware entrepreneurs?

1. Cash is king. It’s really important to understand the life-cycle of cash. Tweet this

When do you need to purchase the components to build your product? When does your product get manufactured? How long does it take to get packaged? How long does it takes to get to U.S.? How long does it get to be sold on Amazon? When will you get the money? So, how long passes between when you start paying for components and when you can collect the money from your customers? Because if the timeline of 90 days is very different than the timeline of 120 days, and that will significantly impact your forecast. Getting the timeline right is more important than just knowing individual costs.

2. Don’t underprice your #hardware product. Tweet this

A lot of us feel that there is a sweet spot in the market where there is $99 or $199, I have seen it happen again and again – we even underpriced at first. But margins are so thin that if the smallest thing goes wrong, we would suffer. In fact, I see a ton of Kickstarter campaigns where they say ‘$99 today and $149 when it goes live’ versus the other way around. Price can always be brought down, it’s very difficult to bring it up. If you mark it too low, you can get into a lot of troubles.

The third thing is forecasting. Scale and grow slowly. If you take on venture investors or outside pressure, they want you to grow quickly. As a hardware product, scale is what makes things work. Resist that and grow slowly so you can understand your audience, sales cycle, what marketing channels work. And again, if you have a problem with your product, you can make changes without having too many bad products in the warehouse.

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