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Frictionless capitalism heats up with crowdfunding



by: JON HOUSE - Crowd Supply's Josh Lifton in the company's NW Portland warehouse with some of their funded products.Crowdfunding is a perfect fit for Portland. All those cash-poor young creatives who want to make the perfect coffee pot, bike part, or robot can just tap into their friends of friends and family and watch an idea soar.

Crowdfunding relies on the general public discovering an appealing idea online and making many small pledges of capital. Sites such as Kickstarter and Indiegogo wrote the book on what Bill Gates used to call “frictionless capitalism.” The Veronica Mars movie project raised $5.7 million on Kickstarter to make a feature film of the cancelled TV show.

Indiegogo had the biggest crowdfunding campaign of all time with pledges of nearly $12 million for the Ubuntu Edge smart phone that doubled as a full-on desktop computer. The project fell short of its $32 million goal and remains unrealized.

While these mega-sites have plenty of Portland campaigns, local sites such as Crowd Supply are filling a boutique niche.

Entrepreneur Lou Doctor (Velotech.com, Golfclubs.com) launched Crowd Supply (CrowdSupply.com) 14 months ago as a high-touch crowd funder. It releases capital quickly and offers order fulfillment from its Pearl District warehouse. Other services, paid for a la carte, include sales and marketing, such as the essential video. The company takes a 5 percent cut of the pledged money. Crowd Supply’s hipster hits include a synthesizer the size of a credit card and the Novena laptop. With its FPGA (field programmable gate array) the Novena aimed at tech tinkerers who like to hack their hardware and can be used for things such as bitcoin mining. (see Novena Warning sidebar 2)

by: JON HOUSE - Josh Lifton of Crowd Supply shows off one of their funded products, a mini synthesizer that is as big as an old cassette tape.“Software is fairly easy to prototype,” says Crowd Supply cofounder and CEO Joshua Lifton, explaining why they built a platform for developing physical, manufactured products as opposed to software or movies/art events. “But you need an initial large capital investment to get a hardware project off the ground.”

What the average funded project gets is “Market validation - making sure people want your product,” as opposed to huge sales.

The CEO estimates half the projects on Crowd Supply get funding. Also, 50 percent of the total projects are Portland-based.

“Portland is fairly talented — more than any city I know,” says Lifton. “Every other person has a campaign, or knows some one who has one.” Other Portland hits included the Handful sports bra and the Portland Press, which turns a mason jar into a French press.

He meets a lot of people who might be software developers or engineers by day. They see 3D printers and web services can be useful for protoyping, and suddenly, making hardware seems as easy as doing software.

“You don’t have to leave your desk and there’s a lot of subtlety to getting something finished.”

He believes his company will benefit from changes in the way physical goods are made.

“We’re seeing that acceleration in the manufacturing production space, and a real interest in including the crowd: making open source hardware.” Hence the open source laptop.

On a national scale, crowd funding is changing radically.

“We are seeing approximately 2,900 start-ups and operating companies that are ‘crowd funding for equity/generally soliciting’ under Title II of the JOBS Act,” says Jackie Bass, Marketing manager at Crowdnetic. The company gathers metrics on crowd funding sites. New big names include AngelList, EquityNet, CrowdFunder and PatchofLand. (See sidebar)

Getting the money is just the first step — Lifton has often seen a product take over the creator’s living room, someone with no love of packing and shipping.

“We typically get the expert in the technical aspects of a device, say, brewing perfect oolong tea, but they have no idea about marketing basics, or how to set the pricing. We’ve done that hundreds of times, and the processes can be transferred.”

Sometimes campaigns that reach their funding targets don’t always manage to create a product.

Crowd Supply does preorders and sales. For fulfillment it quotes customers a price per package, depending on the size and complexity of the packaging, and adds freight costs and the international surcharge.

“Now people are realizing it takes a lot more work than throwing up a website to collect a significant amount of money,” says Lifton.

Crowd Supply counsels people to do their market research before starting, and to connect with their network. They also encourage them to pick the right length of pledge time.

“If the difference between 30 days and 45 is doing nothing for two weeks, do 30,” says Lifton. Incidentally, he has his own campaign on the site, the Stenosaurus Next-Generation Open Stenotype ergonomic keyboard, for stenographers and, he hopes, people who pound code.

“In 10 years, the term crowdfunding will go away and this will be the way things are done. Across all new products, 90 percent fail. Imagine the efficiencies that could be gained by finding out beforehand which ones will work? It levels the playing field. You don’t have to be Samsung or Apple any more to come up with next mobile device.”

Dan Tiegs is a Portland veteran of the apparel and outdoor industry. He founded WILD Outdoor Apparel (wildoutdoorapparel.com), which makes technical outdoor wear that is fit for the slopes and the bar.

“In the US, people are used to $99 jackets they throw away every season, so a $500 one has to be awesome — something that doesn’t go out of style or fall apart,” he says.

He has launched three WILD jackets through Crowd Supply. They met their funding goals of $10,000, $5,000 and $15,000 respectively.

“None of them were runaway successes, that’s not really the point,” says Tiegs. “If you don’t hit the goal you don’t get a nickel. The strategy for any crowd funding is to set the goal low enough that you will achieve it.”

The process for WILD was mostly a publicity campaign. “If you hit your goal half way through you hype it up, ‘We hit our goal!’”

His factory is in Newberg. “If I take in $15,000 in pledges and spend it all on making 100 jackets, I have to sell them all.” Pledgers are incentivized: for $295 they get a jacket that would cost $500 on the street.

Crowd Supply differentiates itself by selling the successful products front and center on its own web site — but the product has to be really successful. Otherwise, the creator has to hold the inventory and race around fulfilling orders.

Tiegs says Crowd Supply, at only a year old, does not seem to have enough people coming to its site to drive sales. In comparison, TheClymb.com, which successfully sells steeply-discounted outdoor gear, has a mailing list of four million customers.

He also points out that technology products do well with early adopters, whereas apparel is still difficult to sell online because of sense factors such as color and fit.

Tiegs knows people with huge networks will do better than others.

“As we’ve seen on Kickstarter, once you get a critical mass it augments your place in line, pushes you up the pecking order and that’s when things blow up. Remember though, 20 percent of Kickstarters get zero dollars.”

He reminds himself that 10 years ago an entrepreneur in his position needed a lot of capital to get anything started in apparel. Samples cost thousands of dollars and there was an 18-24 month lag between spending money and getting paid.

“The beauty of crowd funding is selling futures orders direct to the consumer. They allow me to use their capital interest free for four months, and they get a deal on a jacket. That’s brilliant. That is a great thing for the small the business.”

As the only sales outlet however, a crowdfunding website can be tough. “There’s an appetite in Japan and China for boutique, Made-in-America products, so we’re working on traditional deals with distributors,” says Tiegs, who just returned from a Portland Development Commission trade trip to Japan.

Tiegs suspects consumers may be getting bored of crowdfunding, with so many sites and so many products. “And there’s the sense that it’s somehow a charity. It’s not charity, it’s business.”

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