Pando

What went wrong at Quirky? Sources tell a cautionary startupland tale

By Dan Raile , written on August 5, 2015

From The Lessons from the Trenches Desk

Ben Kaufman founded Quirky in 2009, to “reinvent the invention of inventions.” On Friday afternoon, the company announced on its blog that Kaufman would be stepping away from the CEO role.

What transpired during the six years between is a cautionary tale fit for the Silicon era.

As of this writing, the lights are still on at Quirky. But with its financing depleted, its charismatic leader banished, a sizeable chunk of its workforce pink-slipped, and its mission statement whittled down to a nub, it's gone into cockroach mode. Of course, most startups fail. But the Quirky story is exceptional in both the quantity and quality of its failure.

Kaufman –in the role of the brash, anti-establishment founder/CEO who wears the same thing every day – seemed to be doing all the right things by the standards of the brash, anti-establishment conventional wisdom of Silicon Valley. No doubt this is what allowed him to burn through almost $185 million from blue chip Valley investors before giving up the ghost (of Steve Jobs).

If there are established rules in startupland, Kaufman seemed determined to follow them. As sources tell Pando, that was a big part of the problem. 

 

Rule #1: Listen to your gut

By all accounts, Kaufman was as obstinate as he was charismatic when it came to realizing his broad vision. Sources intimately familiar with the company’s books, who wish to remain anonymous, told Pando that Kaufman refused to acknowledge the company’s troubling financials until it was far too late. This may account for why the company went through CFOs almost as fast as it did VC money, seeing four come and go in about as many years before Ed Kremer took the position.

Kremer has now stepped into the vacated CEO role. Kaufman was advised that the deals he was making with big box retailers were disadvantageous. He knew that the company’s quality assurance procedures were insufficient, that the savings from manufacturing in China were wiped out by his practice of rush air-freighting the finished products stateside to meet inflexible and unrealistic deadlines. He knew it, but he didn’t want to. He had a vision.

The vision was all about speed. “Design cool shit faster,” was the company motto back in 2010. Kaufman’s dream was to accelerate the product development cycle so as to go from napkin sketch to retail shelf in a matter of days and weeks rather than the typical months or years.

 

Rule #2: Fresh, young eyes, surrounded by trusted advisors

Kaufman founded Quirky when he was just 22. He’d recently sold his previous company, Mophie, which produced a popular iPhone case, and embarked on a larger goal – to upend the way inventions reach the marketplace. Quirky crowdsourced its inventions (a pivoting powerstrip, the smart egg tray, a garbage bin that dispenses pet food…) from a community that this year reached the million-user mark. From that point it put its own capital towards bringing the best ideas rapidly to market, with community input along the way. It secured distribution deals with big retailers including Home Depot, Target and Bed Bath and Beyond, which put the Quirky products on the shelf. It all happened in record time.

Kaufman wasn’t alone in executing this vision. Kleiner Perkin’s Mary Meeker and partners from Andreessen Horowitz, Norwest Venture Partners, and RRE Ventures filled out the company board. Chris Sacca’s Lowercase Capital was an investor and the company lists Sacca as an advisor. Quirky also has a partnership with General Electric, and GE’s venture investment arm contributed to its funding.

One former employee familiar with past board meetings said that Kaufman was able to distract these notables from the troubling financials by ensuring they were buried deep within a 400 page report.

 

Rule #3: Raise money while you can; buy yourself more time

Quirky has raised (and mostly spent) $185 million to date, making it the 12th most-funded VC-backed startup in New York City, according to CB Insights.

Much of that went into its one-of-a-kind product development pipeline, but Quirky didn’t skimp on the extras. With its headquarters in Chelsea, its customer service center in Schenectady, SoHo offices for subsidiary Wink, and splashy new offices in San Francisco, sources told Pando the company had committed to $30 million in lease agreements over ten years.

When a new condo complex opened near its Manhattan headquarters, Quirky snapped up three apartments there, two of them penthouses. A hundred grand was spent to remodel the Chelsea office’s kitchen space, including taps for wine and beer. In April, Kaufman told viewers of one of his regular Q&A broadcasts that the office went through two kegs of each every week. Meanwhile, inventory amounting to some $30 million moldered in a warehouse. Another $8 to $10 million in inventory was made obsolete during a rebrand, which ushered in expensive new packaging a la Apple.

Then there were the international operations, requiring different versions of that same expensive packaging for different countries. All while the company bled money stateside and had a long way to go to prove its business model here.

One source told Pando that in 2014 the Quirky burn rate hit $10 million per month. That is a significantly larger number than the average New York Series A.

 

Rule #4: Fuck it, ship it. Then iterate

As the venture capital flowed, Quirky moved fast and sold broken things.

The company cut deals with the big box retailers which essentially allowed them to take Quirky inventory on consignment with full return. Of the $10 million in smart products shipped last fall, sources say, $9 million’s worth came back.

And then there were the product recalls and the customer-service nightmares, chalked up to a slim-to-none QA program. Quirky promised speed. It built its Aros line of smart air-conditioners (a collaboration with GE) from scratch in just 100 days.

One early Aros customer in Texas required two replacement units and hours of technician’s time (the technician sent from NY on Quirky’s dime) before getting the thing to work.  

 

Rule #5: Timing is everything

Quirky, and subsequently spun-out Wink, were both right on time. Quirky launched its crowdsourced inventing platform the month before Kickstarter debuted, and Wink – an internet of things/smart-home platform born in 2013 – was early to the party. Yet impeccable timing alone couldn’t save the company from itself.

 

The moral of the story

Aesop or Hans Christian Anderson have more to say on that than I do.

The Quirky story has yet to reach its end. Both the parent company and Wink are still hobbling along and they both have a modest brand, big-name partnerships, impressive user-bases and supportive “communities” to ease their hard-won pivots towards financial rectitude. The founding idea still holds charm, if not enough to separate VC firms from their LP's money.

Kaufman is still young, and bright and charismatic. Late last month, he made a somewhat sheepish appearance at Fortune’s Brainstorming Tech conference, in which he went part of the way towards owning up to his profligate spending, though stopping short he tried to pin the blame on the inflexible big box retailers who took Quirky for a ride. Still, it was a rare display of pathos for a brash young thing set on disrupting untold industries with the might of Sand Hill Road behind him.

In the age of the hagiography of Steve Jobs, the wisdom of crowds, and the profit-driven founder cults, we should hoist Kaufman on our shoulders and shout: Silicon Valley conventional wisdom ain’t always worth the paper it’s printed on.