Finance & Wealth

3 Lessons From Failed Startups With Highly Successful Crowdfunding Campaigns

By Serhat Pala | Apr 6, 2020
Serhat Pala | ACHNET

Avoid these three things to make sure your crowdfunded project doesn't fizzle after funding.

Recently Ossic, which made 3D audio headphones for virtual reality applications, closed its doors for good. The company had gotten off to a fabulous start having reportedly crowdfunded $3.2 million, but ultimately had to shut down.

Ossic's experience is one of many highly successful crowdfunding campaigns that were flooded with money from eager backers, but eventually crashed after their campaigns were done.

On one hand, I do admire them for at least being half successful. My own experience with crowdfunding on Kickstarter ended with my project -- an app that connected dog owners to dog-related businesses in their respective areas -- not getting funded. (Although we were actually more interested in attracting users to the app than raising funds, per se.)

In researching some of these high profile crowdfunded flameouts, I've come to learn the following three things about why even if campaigns are successful, they still might fail.

1. Not having outside funding and business experience may hamper the project.

Crowdfunding can sometimes raise a lot of money for a startup. It's also a gauge for angel or corporate investors to determine which projects are worth backing. Even if your project raises a lot of money initially from the public, it still may not get off the ground if it doesn't also attract corporate investors.

It's not just money that business savvy investors can bring to the table. They can also provide guidance and mentorship for young startups with inexperienced teams. Mini-drone startup Torquing Group definitely could have used some guidance. While they raised £2.3 million ($3.5 million) on Kickstarter -- the site's most successful European campaign -- they burned through that funding quickly and wracked up another £1 million in debt.

According to an extensively researched article commissioned by Kickstarter itself, the team behind the mini-drone--called the Zano--over-promised and under-delivered. Without any true business experience or guidance of how to nurture a project to fruition, they bit off more than they could chew and flamed out spectacularly.

2. Promising technology that doesn't exist yet is a recipe for disaster.

It's fun to speculate about the technology of the future and people who are adept with it can even build themselves a prototype that will do some amazing things. However, promising to bring that technology to the masses within a set timeframe is a whole other ordeal.

Not to pick on the Zano, but this is exactly what happened with the palm-sized drone. These were supposed to be drones that would fly autonomously, following you around, avoiding obstacles all on their own (with assistance from an app). They were supposed to hover around you and snap selfies and be able to follow you and shoot video while you rode your bike down a mountain.

All of that sounds amazing and we'll probably have mini drones that can do that one day, but we don't have them now. Torquing Group promised all this and tried its best to deliver, but when you promise technology that doesn't exist yet, it's hard to deliver on that promise under the pressure of self-imposed deadlines.

Similarly, Central Standard Timing, which promised backers the thinnest watch in the world, couldn't deliver on their intended product either. The technology to build a credit card-thin watch that lasts for a month on a single charge also does not exist yet. Designing and prototyping is not the same as manufacturing and startups that don't realize this are bound to find themselves in trouble.

3. Not planning for the full cost of a project will put it in danger.

As anyone who has scaled up a business can tell you, it's not as simple as getting more orders and then making more stuff and then repeating that cycle. It's a delicate balancing act that can stymie cash flow if it's not done correctly.

Even in the realm of crowdfunding, where companies are essentially handed millions of dollars if they can find enough willing backers, you may not be fully prepared for how much your project will ultimately cost.

That seems to have been the problem with Ossic. Even though the company started with $3.2 million from crowdfunding--plus third-party funding that reportedly almost equaled the crowdfunded amount--it still couldn't make things work.

To me, that says Ossic's leadership didn't fully anticipate how much it would cost to bring the product to market. Being in a young industry like virtual reality probably exacerbated the young company's expenses, too.

When crowdfunding for a project, it's crucial for you to realize you're not in the "concept marketing" business, but in an actual business. Marketing is important, but you still must have substance and the actual delivery of your product or service to succeed.

This article originally appeared here.