Pando

A guide to the obstacle-filled road from Kickstarter to Best Buy shelf

By Sean Lewin, Guest Contributor , written on March 13, 2015

From The News Desk

[Editor’s note: This is a guest post by Sean Lewin, sales director for Pressy. The post went through Pando’s usual editorial process and Mr. Lewin was not paid for his work.]

Crowdfunding may seem like an easy button for getting hardware projects off the ground, but the reality is, even a highly-successful campaign is only the beginning of a long road toward building a sustainable business. The good news is consumer hardware startups are in vogue. IoT is a major product category and wearables finally seem to be going mainstream.

Launching with a Kickstarter or similar campaign is about more than just funding. These mainstream crowdfunding platforms have had a major impact on pre-launch marketing and demand generation; enhanced exposure which often boosts subsequent venture funding. Securing initial funding also helps many hardware entrepreneurs to stand out among the increasingly crowded ecosystem, and can be key to bridging a successful crowdfunding campaign into a lasting business.

Oculus Rift and Pebble are the poster children of Kickstarter. Each pre-sold in the millions and both brands are now household names. Oculus has the distinction of earning investors the greatest return for a crowdfunding-launched product – a 20-fold payout upon the company’s sale to Facebook.

The supporting hardware ecosystem continues to blossom with the maturation of crowdfunding, including several well-known hardware accelerators like Walk. According to Flybridge’s Matt Witheiler, 500 hardware startups managed to raise more than $100,000 on Kickstarter, combining to bring in $503 million. Not surprisingly, VC firms have stormed into the sector.

But, even with the massive influx of capital flowing into consumer hardware, the list of crowdfunded products that make it onto your local retailer’s shelves is surprisingly short. According to Bill Peters, a buyer at ThinkGeek, where most of these endeavors fall short is on the business operations end of things. This is why a successful Kickstarter campaign does not guarantee a startup’s long-term success and mass distribution.

“Kickstarter creators lack a foster parent, the creators are extraordinary at their craft and less so with building the business around it,” Peters says.

Retail Gymnastics

There are a plethora of ways for companies to reach consumers. Ideally, companies would prefer to sell directly to the consumer at full-price, cutting out both retailers and distributors. The difference between selling direct and selling through a distributor can be as much as two-thirds of the retail price of a product, margins that the manufacturers understandably prefer to keep. But, despite companies’ preference for selling online, ecommerce accounts for a surprisingly small piece of the retail pie today, with only 5.8% of all retail spending in the US occurring online in 2013.

Even Internet-native brands like Warby Parker are opening retail stores to bolster their online brands and to better reach consumers. Tristan Walker, the founder of Walker & Co, the popular health and beauty brand for people of color, has explored the idea of opening retail stores in the near future in an a16z podcast in September. Similarly, Bonobos now sells through Nordstrom, which is one of its investors, JustFab opened its first retail store in Los Angeles last year, and many other digital-first brands are following suit.

Challenges in Breaking into Retail

It’s great to say that you want to enter retail, but actually doing so is no easy task. Retail shelf space is gold. Unlike online retail, there is finite space in each store, and each square foot is expected to turn a certain profit. Retailers will almost always test a new vendor on their website first. Only if a product is selling like hot cakes will they risk committing store space for that product.

Also, to sell a product in-store, retailers require certain margins. For consumer electronic accessories, for example, it's usually 50 margin points — a very high figure compared with any other electronics category. Tablets for example, have 15 points of margin.

“Retailers love selling accessories. Selling four iPhone cases can equal the profit of selling a 60-inch TV,” says Jeff Pouliot, Business Development Manager at US distributor and Apple Store supplier Navarre.

Even if these margin characteristics exist, retail contract terms are often draconian. For example, when a vendor sells into Apple retail, Apple has the right to return the goods even after taking delivery. This can be a precarious financial situation for manufacturers who lack predictability into their results.

Distributor Factors

Even with commerce slowly shifting online, the wholesale buying process remains draconian, and heavily dependent on relationships. That means that manufacturers looking to sell on Fancy, Touch Of Modern, or Houzz need to navigate many of the same obstacles they would in the offline world, with the only difference being no restrictions on shelf space.

And offline, the disconnect between nascent hardware startups and large retailers can be significant. Retailers don’t like working with companies that offer only a few SKUs, and distrust companies with limited funding that may not be able to satisfy demand and maintain satisfactory product quality assurances.

Good distributors can be one way to bridge this gap, but it’s a service that comes at a cost. Distributors provide two key services to retailers: First, they provide logistics so retailers get the product to their doors without dealing with the hassle of importing products and managing centralized inventory. Second, retailers often use distributors, like banks. A retailer can buy a product on attractive payment terms such as net/120 or even consignment. This means that retailers can avoid placing this inventory on their books, and instead pay distributors only after making the sale. For a giant distributors, these terms are acceptable, but for a startup looking to go directly, they are the things of cashflow and operational nightmares.

Take for example, Rogers, a Canadian telecom provider with over 2000 retail outlets. If the company discovers a product they like, they won’t contract directly. Rather, they will tell the vendor to supply their authorized distributor, who will be left to deal with the nuisances of on-boarding an inexperienced company and distributing the product to each store within their chain.

Scoreboard: Crowdfunded Products Making the Shelf

Of ten crowdfunded technology projects raising at least $1 million, eight are currently selling in retail stores. There appears to be a direct correlation between the crossing this psychological line of $1 million in pre-sales and beating the long odds to penetrate traditional retail. Notably, most of these companies also raised VC after their crowdfunding success, contributing to their growth.
Company Product Crowdfunding $$ In retail?
Pebble Smartwatch 10M Yes
Oculus Virtual Reality headset 2.4M Yes
Formlabs 3D printer 2.9M Yes
Misfit Health tracker 0.8M Yes
Ouya Gaming console 8.5M Yes
Canary Home security hub 1.9M Not shipped yet
SmartThings Internet connected home 1.2M Yes
Bucaneer 3D printer 1.4M Bankrupt...
PowerUp iPhone powered paper plane 1.2M Yes
Lifx Connected light bulb 1.3M Yes
The results of ten randomly chosen smaller technology crowdfunding projects, which raised between $100,000 and $500,000 tells a far different story. Only 40 percent of these companies have succeeded in getting retail distribution to date. And, perhaps not surprisingly, these mid-sized successes, have fared much better even than those companies raising smaller amounts.
Company Product Crowdfunding $$ In retail?
Thermodo Smartphone thermometer $336,000 online
Lumu iPhone light meter $244,000 online, few photo stores
ATOMS Express Toys Connected toy blocks $123,000 online
myID Key Secure USB $473,000 Funding dried up. not delivered..
Transparent Speaker Chic transparent speaker $169,000 online, museums
Romo robot friendly robot $170,000 in brookstone
Loop pay Credit card case for phones $123,000 in 200 Staples stores
Plantlink Garden moisture sensor $96,000 company closed
Blink1 Mac notification blinker $132,000 online
miggo DSLR camera case $80,000 In many retail stores

The Operators’ People

Getting new products into retail is not a challenge that’s new to the Kickstarter-era. It has always existed as long as there were fledgling products looking to break into the limited capacity world of retail sales. What is  new, perhaps, is the proliferation of service providers specifically geared toward assisting crowdfunded product creators to reach mass market.

A few distributors stand out for actively assisting product makers before they’re ready to go to market. The Grommet, for example, offers a combined approach to distribution with an internet platform that helps creators get from e-commerce sales to brick and mortar sales. They resemble Quirky — a product invention company that cracked the big-box retail code with a Home Depot and Amazon distribution deal.

ThinkGeek a super-specialized distributor for unique geeky products also stands out for helping product creators. The company actively assists small creators make their product retail-ready and promotes them on its website. Newegg offers similar benefits.

“Our buyers spend 50% of their time discovering cool products at the long tail of the internet subcultures,” Peter says. “At other distributors, it's usually less that 20%,” says Thinkgeek's Peters. “If we like a product, we help the company with marketing, packaging design in the early stages,” says Newegg Director of International Sales Steve Weller. “Then, we introduce them to our distributors so they can set up their own distribution operation and start accepting orders from Newegg.”

PCH, the company behind the aforementioned Highway1 accelerator, recently completed the purchase of Fab.com, and the company’s accompanying customer distribution list. Add this to the compay’s existing Shoplocket.com channel and it becomes clear that the company views distribution as a key service that it can offer to hardware entrepreneurs.

The road from startup mode to retail shelves remains a bumpy one. But hopefully, as more startups bridge the gap between launching online and selling into retail channels, retail distribution will continue adapt to the realities of 21st-century product building.

Ship Away

Launching a successful product with crowdfunding is only the opening shot in the long game of attaining profitability in multi-channel retail outlets. Recent history shows that the highest-profile crowdfunded technology products seem to reach retail at a better than average clip, while smaller products typically have a harder time. Those who find success in this journey have a number of attributes in common, including stellar distribution foundations in traditional retail channels, strong branding and, obviously, an extraordinary product.

Hopefully, with 2015 being the sixth year since Kickstarter launched to the world and crowdfunding went mainstream, this will be the year where the abyss of retail will finally become more accessible and the best products, regardless of the size of their creators, will make it onto retail shelves.

[Editor’s note: This is a guest post by Sean Lewin, sales director for Pressy. The post went through Pando’s usual editorial process and Mr. Lewin was not paid for his work.]