The rise of crowdfunding: Why bike companies are turning to public money

The recent collapse of Brim Brothers has highlighted the risks associated with backing projects on crowdfunding sites such as Kickstarter or Indiegogo. As always, there are no guarantees that a backer will get what’s been promised. Nevertheless, crowdfunding continues to be a popular way for companies to launch new products, with Kickstarter alone currently hosting almost 400 cycling-related campaigns. (CyclingTips currently is currently promoting a Kickstarter campaign for the film Thereabouts 3: Discovering Colombia, here.) The concept of tapping the public for seed money was once the sole domain of nascent startups that were unable (or unwilling) to secure funding through more traditional means, but now, even well-established companies such as Silca, Light&Motion, and Knog are crashing the crowdfunding party. CyclingTips U.S. technical editor James Huang takes a look at what’s behind this growing industry trend.

The lure of public cash

It isn’t hard to see why crowdfunding has become so popular. On one side of the coin, campaign backers can not only potentially score a good deal on something cool, but they’re also usually the first ones to get their hands on a hot new product. As an added bonus, people who contribute to a crowdfunding campaign often develop a sense of ownership in a venture that could, one day, make it big. Imagine if the original Apple iPod had been launched on Kickstarter and you bought into the idea fifteen years ago; wouldn’t it be cool to say you helped get that going?

On the other side, the companies who are trying to launch a new product get to appeal directly to potential buyers, instead of pitching the idea to larger investors. The total amount raised could very well end up being the same, but the crowdfunding route doesn’t carry with it the usual strings that go along with venture capital money. Perhaps more importantly, it’s far easier to convince a lot of people to chip in a little bit at a time for an unproven idea than it is to convince a few people to write a handful of very big checks.

“It’s great to access required capital for a project without debt or equity,” said Nick Slone of Spurcycle, a small California company whose artisan bicycle bells were launched in late 2013 after a wildly popular campaign on Kickstarter. “Some companies turn to crowdfunding as the only option, unable to get a bank loan or attract interest from investors. Certainly it would have been unlikely that we could have secured $300,000 from these sources. Even if we could have assembled a dozen investors and been fine giving up some equity, would we have wanted more owners complicating future decisions? Probably not.”

For those not familiar, here are the basics of crowdsourcing projects, as explained by Kickstarter: A project is a finite work with a clear goal that you’d like to bring to life. The funding goal is the amount of money that a creator needs to complete their project. Funding on Kickstarter is all-or-nothing; no one will be charged for a pledge towards a project unless it reaches its funding goal. This way, creators always have the budget they scoped out before moving forward. A creator is the person or team behind the project idea, working to bring it to life. Backers are folks who pledge money to join creators in bringing projects to life. Rewards are a creator’s chance to share a piece of their project with their backer community. Typically, these are one-of-a-kind experiences, limited editions, or copies of the creative work being produced.

“Traditionally, there were only three ways that a company could get money: through profits, from the bank, or from investors,” added Silca owner Josh Poertner, who recently ran a similarly successful Kickstarter campaign for a new tool design. “So profits are a heck of a start, but they also fund your payroll, rent, insurance, inventory, future growth, etc., and after that, you are inherently limiting the scope of projects you can take on. For smaller companies, it’s all a matter of triage: Do we spend $40,000 to open a mold tool to forge this, or do we CNC it at three times the part cost? Do we add another project for this year, or hire another employee?

“For a lot of entrepreneurs, the bank is where the startup capital already comes from, so even if you have good cash flows and profitability, you owe them a lot already, have a second or third mortgage on the house, and also have credit card debts, and that’s just to do what you are already doing. Investors are fantastic, but adding investment dilutes your ownership of the company. And of course, all of this capital being raised is generally for a new and untested idea that will require significant investment not only to get to market, but then to sell, distribute, and advertise so people know it exists. As an entrepreneur, you end up in a situation where you are guessing about a guess based on a dream.”

On the surface, then, crowdfunding is, indeed, all about the money — but even successfully funded campaigns often have to seek additional investment to get a product off the ground. From the outside, the amounts sought by some crowdfunding campaigns seem like more than enough, but development costs can significantly exceed those figures.

“For us, even after launching Fly6 and successfully selling it to the market, we didn’t cover our costs,” said Cycliq CEO Andrew Hagen, who debuted the innovative Fly6 rear-facing video camera and LED flasher in 2014, and then followed up with the Fly12 front-facing system in 2015. “Getting all the Fly12 units out there also cost more than we raised on Kickstarter. Now that we have set up distribution and are scaling, we can cover our tracks.

“I think with any startup that is in production, cash flow will always be an issue. Minimum order and production quantities never match demand exactly, so you initially always have to overproduce; you need to produce first, sell later. At least with crowdfunding, you get a little bit of cash up front, which only helps. I think from memory, we had spent between $400k-$450k before we did the first production run of Fly6, so you can see the $266k we got from Kickstarter does not even cover that.”

Money is only part of the equation

Regardless of whether sites such as Kickstarter and Indiegogo can provide enough money to get a company off the ground, the benefits of crowdfunding extend beyond just startup cash. By design, those campaigns create an instant and direct communication network between the company and its customer base — something even the biggest bike companies in the world don’t usually have. For example, Trek, Specialized, and Giant know which retailers and distributors they’ve shipped bikes to, but they don’t usually know much about the end users who purchased them later on. Crowdfunded companies, on the other hand, know exactly who their backers are, how to reach them, and, hopefully, what they want and need.

“New product development is more expensive than consumers realize,” said Jake VanderZanden of Otto Design Works, who successfully funded a clever new lock design on Kickstarter last month called OttoLock. “It is far more than ideation. Moving a product through prototyping, testing, design for manufacturing, market research, and tooling build is only 25-30% of the expense, too. Commercialization and creating a sustainable business is where the real investment is made. Why spend all this money and miss on the market side? It is simply too much financial risk not to engage the user community in the process to confirm need, price point, size of market, and barriers to purchase. This is where crowdfunding is most beneficial, and why I chose to get answers to these customer and market questions to mitigate the risk before any traditional investment. I view it as a form of piloting or testing with a lemonade stand before full blown launch, but there is a pay-to-play component to do it right.”

“Crowdfunding is not only a way to raise funding for new product, but also a way to test the market reaction at the initial stage,” said Denise Wu of SpeedX, whose Leopard “smart aero road bike” made waves after raising more than $2.3M on Kickstarter. “It helps collect the customer feedback from early adopters to optimize the product and strategy better before getting into the mass market. Our backers are our partners — they are really supportive and share the same vision we have. They are actually involved in the whole process.”

“My experience with Kickstarter has been wonderful,” said Brian Davis, who launched Fix-It Sticks on Kickstarter in 2013. “I can come up with ideas in my garage, find vendors to make it, then go pre-sell the item so I don’t drown in inventory or make a terrible bet about the market not liking my idea. It’s very scalable for my supply to meet whatever demand I find out there. I love Kickstarters as a market research vehicle. For example, when I first released the Weatherneck on Kickstarter, it did okay, but the feedback was good from backers. They identified problems I knew about and a few I didn’t, so based on that I decided not to invest in larger production or pay for packaging design. I waited and re-designed it.”

For the most interesting and innovative campaigns, there’s also the tremendous benefit of free publicity from media outlets that are constantly on the lookout for easy content — something larger and well-established companies want just as much as startups. And never mind if a company seeking crowdfunding is hawking an outlandish product; as far as the internet goes, the wackier, the better.

SpeedX received coverage on roughly thirty different media outlets, Fly6 was featured in about twenty articles, and Knog’s low-profile Oi bike bell was covered in at least two dozen publications. The mix of coverage also spanned both cycling and non-cycling publications, which translated into a far greater reach than what cycling products usually get. And best of all, that publicity was essentially free.

“We decided to launch Oi on Kickstarter purely because we felt that it was a great marketing tool,” Knog CEO Hugo Davidson openly admitted. “Over the month we ran the campaign, we reached millions of people, had our video watched over 350,000 times, and had over 21,000 backers from 92 countries order over 37,000 bells. This obviously generated huge interest in the bike industry, with dealers and with riders. The industry is changing rapidly and we felt that the Oi was a great product to promote on Kickstarter because it sat outside the normal product categories that we worked in. The money raised is obviously a bonus, but we were more interested in generating interest by using Kickstarter as a way of evaluating the success of the product and getting as much awareness as possible.”

“The additional publicity and the existing pool of backers makes it a great way for a small company to launch a product,” said Stephen Ahnert of Redshift Sports, who successfully launched a novel convertible time trial/triathlon cockpit setup and, later, a shock-absorbing road stem on Kickstarter. “Kickstarter is where we started the company, and for us, it still makes a huge difference in our ability to develop and launch a new product.”

Like Knog, Light&Motion is another well-established brand that recently decided to try its hand at crowdfunding — specifically, a modular LED companion light for GoPro cameras called Sidekick. Neither company perhaps needed to go this route as much as a lesser-known company with fewer resources, but the side benefits of crowdfunding more than justified the venture.

“Crowdfunding is not a safer way to go,” said Light & Motion’s marketing director, Faridoon Noori. “The success rate on Kickstarter is only 36%. So it is a risk for a brand to launch a product on such platforms. I must say that only well-established brands have a higher chance of successfully delivering products without disappointing their backers. And the financial support makes it a lot easier for small companies like us to get innovative products in the hands of many consumers in a short period of time.

“We had a remarkable experience launching the Sidekick on Kickstarter. One of the core values of our business is integrity. Involving our customers throughout the product life cycle establishes trust and connection in a way that’s far more effective than launching products through traditional methods and marketing campaigns. If we come up with a product that we believe is perfect for the crowdfunding community, we may consider doing another campaign.”

Going back to the well

Given all of this, then, it’s no surprise at all that many of the companies who got their foot in the door via Kickstarter and/or Indiegogo have run additional campaigns for follow-up products, or are at least considering it.

Davis ran a second Kickstarter campaign for an updated version of his Fix-It Sticks multi-tool, and also funded his jersey-pocket-friendly Backbottle there. Just a few days ago, he debuted the campaign for the updated version of a modular balaclava he designed for cold-weather riding called WeatherNeck.

Likewise, Cycliq just announced its third Kickstarter campaign for a machined aluminum combo handlebar mount for its Fly12 front-facing camera and Garmin computers called Duo, and Knog currently has a campaign running for a modular mobile power solution called PWR.

That said, not everyone who has enjoyed success through crowdfunding is interested in going back for round two or three.

“When Kickstarter launched, it was squarely aimed at helping get businesses off the ground and turning great ideas into great products,” said Irene McAleese, co-founder and CMO of See.Sense, who ran two successful campaigns for smart LED flashers on Kickstarter. “It was a way of bootstrapping companies, and it worked. It was cool to have a project on there, and press was mostly receptive to the idea.

“For our second campaign, we thought we had it nailed,” she continued. “But the world had moved and it was no longer as cool to have a project on Kickstarter. We had to work harder on the angles and to get the coverage. Despite this, we had a good number of supportive customers and our community helped us achieve 934 backers and £80,231 [about $100,000] in pledges. What was really interesting is that we had around ten pledges within two minutes of launch — not even enough time to watch the three-minute pitch video.”

“The significant success of our 2013 Kickstarter project was very helpful in getting us started and helpful to this day by lifting our SEO,” said Slone of Spurcycle. “We’re less likely to keep using the platform, though. We’re no longer trying to put ourselves on the map, so our efforts have shifted to smaller projects, which are often times optimization rather than invention. Such things aren’t worth crowdfunding, because the cost can be handled internally and the ‘wow factor’ required to win backers just isn’t there. We have a big enough business to demand our attention every day with a myriad of challenges, but not one big enough that we can task a marketing department to manage a new Kickstarter project for us.”

Crowdfunding isn’t going away any time soon

Kickstarter debuted in 2009, and Indiegogo just prior, in 2008. Since then, crowdfunding has only expanded in popularity, and the concept is unlikely to die down in the near future. How much further the platforms will continue to evolve remains to be seen, as well as how much more sophisticated the campaigns will become to match. Either way, consumers should keep in mind that backing a project is not the same as buying a finished product; there are no guarantees that a successfully funded campaign will bear fruit. Brim Brothers may be the highest-profile cycling-related crowdfunded project to go bust, but it certainly won’t be the last.