6 Things You Learn After Crowdfunding $2.3 Million For a Hardware Startup
**This article first appeared on Medium in March. It appears here in an updated form with permission from the author.**
The road to delivery is a long one and still not over for Kapsul, the inventors of a ground-breaking air conditioner that launched with $2.3 million pledged online from backers in 2016.
The Philadelphia-based hardware startup is now negotiating final details to get their product made in China, finally delivered to backers, and eventually onto retail shelves. This spring, the Noria team is also spending time here in Boston, with the Techstars Boston accelerator program helping to push the company forward.
Kurt Swanson, CEO and a founding engineer of Kapsul, started taking apart air conditioners more than five years ago. Then with a small team of talented engineers, they spent their spare time designing and making a prototype of the W5 air conditioner that they later launched on Kickstarter. Kurt says without their backers, the Kapsul team would never have gotten this revolutionary air conditioner into the manufacturing stage.
During the accelerator program here at Techstars Boston I asked Kurt, what did you learn after the crowdfunding campaigns? From what you learned, what would be useful for others to know?
What follows, in Kurt’s own words, is advice that he would give anyone considering crowdfunding for home appliance (or to his past self, if he could go back in time!)
Kurt: What you should know about crowdfunding a hardware product
Make sure you have the right manufacturing partner. In the case of appliances like air conditioners, you need a big, vertically integrated strategic manufacturing partner. This partner should have whatever special abilities you need for testing the product. But don’t put all your eggs in one basket. Until you have the contract, you need to have a plan B for manufacturing. A billion-dollar manufacturer has significant negotiating power. We hit our first roadblock around October [in 2016], when we were working with our first manufacturer in China. They talked about their process and we discovered that, given our level of customization, it would take 9 months just for the manufacturer to make our design. [The team originally estimated less than 6 months, based on typical manufacturing timelines.] …At that point, we had a great working relationship. But while we were negotiating, the manufacturer went through some big changes and our deal fell through. I was in China, January to March [in 2017] trying to get this deal done. The loss was a big blow. At that point, we had to find a completely new partner, which we did. Our current manufacturing partner is aligned with us strategically. They love our product. They’ve devoted substantial time and energy to getting us ready for manufacturing and are excited about our access to the US market.
Plan for more design iterations and technical problems than you think you need. I thought we would need three generations and it would take three weeks between those iterations. We needed eight designs to reach our target, and it was more like 6–8 weeks between them. We were experienced with iteration, design, getting it all 3D printed, and testing our work. But then we had to wait for access to specialized test equipment we could never afford to own. That equipment is in high demand and the wait-list can be months. We worked nights and weekend, but we were still stuck waiting. These big companies, they had several of these test chambers. You can spend months, just testing. We just didn’t have that access. But we needed to run these tests to meet regulatory requirements. It was a major challenge until we had a strong partner. You have to spend months overseas embedded with your partners. Even then, it could still take longer than you hope.
Be ready for the risks and challenges. I think it’s great that everyone talks about how hard it is to build a company and a brand, but people underestimate how hard it is in hardware. You can have a great design that people love, innovate in a category that desperately needs it and solve every pain point users experience with your product. But even when you’ve done all that, you still have the toughest part of the process in front of you. So few people do it because it is so hard. But you can’t give up on your backers. I was so terrified and anxious in the beginning, because I knew that no matter what the challenges were, I was going to see this through. I was not going to give up and the weight of that was what terrified me the most. Yet, even when I was Face-timing my wife from an airport in China, I knew it was worth it. [Kurt’s wife, also Kapsul's patent attorney, went into labor and delivered their baby while he was abroad. They are still married.]
Set your estimated schedule and expectations for uncertainty. Engineers are notoriously bad at this, but somehow I thought we could be better. There were so many examples that I should have explained better to our backers as we worked through this process. There’s some arrogance involved in taking on a project this big, but you can’t be too confident about your timeline, because you never know what’s going to happen. Ambition and underestimating — it’s a trap a lot of people fall into and now I can understand why. We thought we were faster and better. We’d done this before. We had lots of products in market that we’d designed on time and in budget for clients. I thought we could do this the same way because we were a battle-hardened team. But previously, we’d always worked on incremental projects and had slam dunks… but when you’re not fixing one or two things, you’re designing a whole product from scratch, that’s where you can get into trouble. Being an “overnight success” can take years of anonymous toil. [Interesting fact: their W5 air conditioner has 8 patents pending and 38 custom-designed parts]
Be cautious of the implications of your pledges. We had options for three and four air conditioner units. We thought few would take them. But then we had people pledge for four and that’s a rent or mortgage payment for some people. I didn’t want this to be a financial hardship for anyone and that’s a lot of money for people to have tied up in air conditioners. Especially if you have delays. We did learn some people are thinking of using Kapsul almost like “central air” though. That got us thinking about different control schemes and putting functionality into our app to control multiple units in a coordinated fashion. You have to anticipate these trade-offs.
Know what the larger investment community is looking for. We talked to large investors and angels initially, but they’d ask us about traction. We had 1,000 emails, that was it. We felt that we needed to take this to Kickstarter because the investment community would never put up $1 million or more without knowing if anyone wanted it. Crowd-funding is really useful, but as we learned, it’s not enough. We should have started talking with big investors right after the crowdfunding ended. We waited too long to start that. Working with a venture firm helps to establish your supply chain, manufacturing partners, distribution, and logistics necessary to succeed. It’s an important gate to get through: if the funding sources think your product is ready, then you’re close. If you want it to be a business afterwards, there’s a lot more than just running a good Kickstarter.
Hardware products with design, manufacturing and shipping are notoriously difficult to fund and deliver on time. I hope Kurt’s thoughts here, a retrospective look at some of the challenges they’ve faced, are useful for future crowdfunding campaigns, curious backers, and the hardware startup community.
**This article first appeared on Medium in March. It appears here in an updated form with permission from the author, Shannon McFarland**