Shunned by investors, gadget makers hit Kickstarter

@CNNMoneyTech June 4, 2012: 2:53 PM ET

NEW YORK (CNNMoney) -- When entrepreneur Julia Hu presented her prototype of a vibrating wristband alarm clock to a group Silicon Valley tech heavyweights, their responses ranged from skepticism to outright disbelief.

"That was a charmingly quirky presentation, but I'm not sure," said Sean Parker, a serial entrepreneur and partner at venture capital firm Founders Fund. "I mean, is this a company?"

Hu's pitch, made at TechCrunch Disrupt 2010, didn't dazzle any of the investors on the panel. Almost laughing, Parker added: "I just have a hard time believing you're serious."

Hu was serious. She dropped out of MIT's MBA program focus on her invention, working with sleep specialists and top engineers to build it. Nine months later, Hu had a retail-ready product called Lark and a deal with Apple (AAPL, Fortune 500) to carry Lark in its stores. Most recently, Lark partnered with the National Sleep Foundation and hit the shelves of Best Buy (BBY, Fortune 500) stores around the country.

It's a success story the tech industry's venture capitalists are missing out on. None were willing to back Lark. Parker's dismissive attitude toward an entrepreneur pitching a new device isn't unique: In Silicon Valley, hardware is a tough sell.

"I heard tons of 'no's,'" Hu says of her initial attempts at fundraising. "The biggest challenge for a hardware company is, unlike a software company, it takes so much more money and time to validate a hypothesis. In terms of an investment decision, it's just a very different one."

SV Angel partner David Lee puts it bluntly: Venture capitalists are "allergic to hardware."

"Lower startup costs, faster growth, low cost of failure -- those are elements that aren't available in a hardware type of business," Lee says.

Shunned by investors, a growing number of gadget makers have latched on to a new funding channel: Kickstarter.

Fast forward to TechCrunch Disrupt 2012, held in New York last month. A trio of entrepreneurs pitched gTar, an iPhone-powered guitar that promises to teach anyone how to play.

"You guys have sold four guitars while you've been standing on stage," Union Square Ventures' Fred Wilson said enthusiastically after their pitch.

Wilson was using his iPad to check the company's stats on Kickstarter. The campaign went live an hour before gTar took the stage for their demo. By the time they began speaking, they'd already raised $10,000. By midnight, they hit their $100,000 funding goal.

Idan Beck, the engineer behind gTar, had been working on the product for three years. Launching on Kickstarter lets him gauge the demand for his invention.

"With something like Kickstarter, we know exactly how many units we need to build," Beck says. "The day that the campaign closes, we can go and build them."

Design and technology companies represent just 5% of the projects posted on Kickstarter, but they dominate the greatest-hits list. Four of the site's top 10 biggest fundraisers are hardware ventures, including a beautifully designed iPhone dock, an iPod-linked wristwatch and a sleek Bluetooth speaker system.

The latest and flashiest, Pebble, may permanently change how hardware upstarts view Kickstarter. The smartphone-integrated watch blew through Kickstarter's old records, raising more than $10 million in its month-long campaign.

It's another project venture capitalists shunned. Pebble creator Eric Migicovsky posted on Kickstarter after almost a dozen investors turned down his pitch.

Aspiring entrepreneurs are taking note. Ben Cohen, who recently designed an aluminum bike light that turns on and off on by itself, skipped the investor pitches and went straight to Kickstarter for cash.

"It's difficult to be a hardware startup and find VCs, especially if you don't know who your customers are," Cohen says.

He found out fast. His Blinksteady light raised more than $82,000, enough to cover its upfront production-line costs.

That's the biggest hurdle hardware ventures face: the sunk costs of molds, machines, materials and other manufacturing essentials.

Lark's Hu loves that about Kickstarter. "You can basically generate a very large pre-order list, and you can use that money to fuel your first inventory, which had never been really done before," she says.

Incident, the company behind gTar, is taking a blended Kickstarter-and-investors approach. It hasn't done a traditional venture capital round, but it raised $750,000 in seed cash from a collection of angel investors.

That money helped the company fund development of its prototypes and get its supply chain running. Their Kickstarter proceeds will fund their first round of devices.

"Now we just have to worry about how many units we have to pay for and get out the door," Beck says.

Kickstarter has a few extra benefits traditional financiers can't match. Enthusiastic customers make great product testers -- and some will even pay for the privilege. Both Blinksteady and gTar offered slightly pricier "beta tester" packages featuring pre-production units.

With enough money already pledged to get Blinksteady launched, Cohen and his team plan to reinvest the leftovers into ramping up their light production.

"We're becoming our own venture capitalists," he says.  To top of page

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