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Tag: crowdsourcing

Crowdfunding: Hardware Startups Beware

Hardware startups are one area I spend a fair amount of time with in my life as a VC, and while I love working with hardware companies, it should go without saying that hardware startups are incredibly difficult to do. They require knowhow across multiple disciplines — software, electrical engineering, industrial design, manufacturing, channel, etc. – and, as a result, have challenges and upfront capital needs that most software/web companies lack. This has led many angels and VCs to be wary of investments involving building hardware so its no small wonder, then, that many hardware entrepreneurs have turned to crowdfunding websites like Kickstarter and Indiegogo to try to raise funds for development.

While crowdfunding can be a great fit for certain projects, I think early stage hardware startups should beware. Yes, crowdfunding sites can generate upfront capital that can fund development, but unlike traditional equity/debt investments (like the kind an angel or VC or bank will give you), “crowdfunding capital” has a particularly onerous type of “string attached”: it’s a presale.

Obviously, the entrepreneurs trying to raise crowdfunding capital want to push their projects towards real sales – so why might a presale be a bad thing? For hardware companies:

  • Raw production costs are a major percentage of sales – so even if you raised $1 million, you probably are going to be able to keep max $500,000 after the cost of materials/manufacturing
  • These pre-sales are oftentimes discounted – so you are generating lower margins on each unit making these particularly painful sales to make
  • Except in a few instances, the number of presales tends to not be high enough to meaningfully change the cost of manufacturing (i.e. upfront tooling costs or supply procurement) – which further eats into the amount of capital you have left to deploy on development since you probably have to pay the low volume price
  • It means you need to keep to some level of deadline. There is a risk that you won’t make your own deadline and there’s also risk that the time pressure might lead to tradeoffs (leave out a certain feature or asset, run fewer tests, etc.) which could hurt your reputation since the public will be getting its first impressions of your company based on that initial launch.
  • It publicly commits you to a particular product even if you learn that your initial idea is wrong or needs tweaking.
  • It tips off the market and potential competition earlier since you likely are doing this at a point before your product is ready and need to provide a fair amount of detail to get supporters.

In the end this “capital” ends up being a very real “liability”, and is a big part of why serious hardware startups that do crowdfunding almost all go back to the traditional VC/Angel community – it is simply not practical to scale up a meaningful hardware business on crowdfunded capital alone.

That said, there are definitely cases where it makes sense for hardware companies to use crowdfunding – and they are cases where the above problems are irrelevant:

  • If your cost of production is tiny relative to the price (think pharmaceuticals, software, music, movie, etc. – trivial cost of production per unit sold)
  • If you’ve already completed the vast majority of development or managed to get capital from another source and are simply using crowdfunding to either gauge customer interest or raise publicity
  • If your intention is to raise money from a VC/angel using a crowdfunding success story (that you’re positive you will get) to show that a large market exists for your product
  • You couldn’t raise money from VCs period and have no other choice

In the first case, a very low cost of production means that more dollars raised can actually go into development, irrespective of volume of production and discounts. In the second case, the pre-sale becomes a good thing: a market signal or a heavily publicized pre-sale for a product which is/is almost done. The third is very risky – because I would maintain its nigh impossible to know if a crowdfunding attempt will “go viral” and even if it does, you are still left with the liability of these presales that you need to fulfill. The last is self-explanatory :-).

If you are an aspiring hardware entrepreneur, in almost all cases your best bet will be to go with traditional equity/debt financing first. Obviously, I am in part biased by my current choice of profession but while VCs and angels can be annoying to deal with and raise money from, the lack of the pre-sale liability and their potential for connecting you with potential hires and partners makes them a much better fit.

Got any questions? Disagree? I want to hear from you!

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Phylo

(Cross posted to Bench Press)

A few years ago, I blogged about an ingenious crowdsourced game called Fold.It. The concept was pretty simple:

    • Use human intuition to help solve complicated three-dimensional protein folding challenges which is oftentimes as effective but significantly faster & cheaper than computational algorithms
    • Pool together lots of human volunteers
    • Turn the whole experience into a game to get more volunteers to spend more time

The result was a nifty little game which contributed findings which have made it, to date, into a number of peer-reviewed publications (see PNAS paper here and Nature Structure & Molecular Biology paper here)!

Well some researchers at McGill University in Canada want to take a page out of this playbook with a game they built called Phylo (HT: MedGadget) to help deal with another challenging issue in bioinformatics: multiple sequence alignment. In a nutshell, to better understand DNA and how it impacts life, we need to see how stretches of DNA line up with one another. Now, computers are extremely good at taking care of this problem for short stretches of DNA and for “roughly” aligning longer stretches of DNA – but its fairly difficult and costly to do it accurately for long stretches using computer algorithms.

People, however, are curiously intuitive about patterns and shapes. So, the researchers turned the multiple sequence alignment problem into a puzzle game they’ve called Phylo (see image below) where the goal is to line up multiple colored blocks. Players tackle the individual puzzles (in a browser or even on their mobile phone) and the researchers aggregate all of this into improved sequence alignments which help them better understand the underlying genetics of disease.

And how has it been doing? According to the McGill University press release:

So far, it has been working very well. Since the game was launched in November 2010, the researchers have received more than 350,000 solutions to alignment sequence problems. “Phylo has contributed to improving our understanding of the regulation of 521 genes involved in a variety of diseases. It also confirms that difficult computational problems can be embedded in a casual game that can easily be played by people without any scientific training,” Waldispuhl said. “What we’re doing here is different from classical citizen science approaches. We aren’t substituting humans for computers or asking them to compete with the machines. They are working together. It’s a synergy of humans and machines that helps to solve one of the most fundamental biological problems.

With the new games and platforms, the researchers are hoping to encourage even more gamers to join the fun and contribute to a better understanding of genetically-based diseases at the same time.

Try it out – I have to admit I’m not especially good with puzzle games, so I haven’t been doing particularly well, but the researchers have done a pretty good job with the design of the game (esp. relative to many other academic-inspired gaming programs that I’ve seen) – and who knows, you might be a key contributor to the next big drug treatment!

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Grand Challenges

Over at Bench Press, my buddy Anthony posted about the American Association for the Advancement of Science’s collaboration with the White House and Expert Labs to help identify “which scientific and technological challenges should be the focus of policy initiatives in the coming years.” The collaboration is unique in that, to my knowledge, it is the first time (or at least one of the first times) the federal government has used social media/crowdsourcing to help shape science policy.

While my first reaction was “we’re so screwed that the White House is using Twitter/Facebook to figure out our future science policy!?”, I felt it would be fun to participate in my own little way via this blog post (even though the deadline for submission was technically April 15, I’m hoping the non-140-character-limited nature of this blog post carries some weight! :-)).

So, without further ado, here would be my list of ten things (all super-broad and super-idealistic, of course), in no particular order:

  • Enabling medical treatments to be tailored for an individual patient’s history, age, gender, and genetics
  • Safer, more precisely targeted treatments which don’t damage or affect cells they are not supposed to
  • New chemical, physical, or biological processes to more cheaply produce drugs and other chemicals
  • Advanced energy storage capable of at least an order of magnitude better energy density than existing Lithium ion batteries
  • Chemical, physical, or biological methods to capture carbon dioxide and handle the increasing amounts of pollution people are generating
  • An improved understanding of the complex systems which govern our world through new mathematical/computational techniques for approximating NP-complete problems and calculating/understanding non-linear partial differential equations
  • Petaflops-capable supercomputers which cost as much and consume as much energy as a laptop today
  • (Partially inspired by Star Trek) Intelligent natural language processing so that computers can actually understand and translate language
  • (Partially inspired by Star Trek) General-purpose scanning device capable of quickly detecting chemicals, sounds, and forms of radiation as well as performing simple tomography scans (via ultrasound and/or some other form of low-energy radiation scanning)
  • (Partially inspired by Star Trek) Near-light-speed space travel to explore beyond the solar system and allow humans to move beyond near Earth orbit

Picking ten was actually pretty difficult. There are clearly many other important scientific questions to be answered, but these were my ten. What would be on your list?

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