Hardware Crowdfunding: Where The Venture Dollars Flow

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Editor’s note: Matt Witheiler is a General Partner at Flybridge Capital Partners. You can follow him on his blog.

$211,290. That was the magic number that the data suggested was the “success” threshold in hardware crowdfunding. The analysis also showed that people love 3D printers and that almost half the crowdfunded dollars went to 37 companies. That deep dive into 443 projects provided some insight into where consumers are spending their money (and time) in the hardware ecosystem but it felt like something was missing.

Crowdfunding dollars are only one source of capital for hardware startups. The other source, the one that gets even more attention, is venture capital. In the years since Kickstarter launched, venture investing in hardware has gone from non-existent to mainstream. CrunchBase data shows 115 companies tagged as Hardware + Software got funding in 2007 compared to 383 in 2013 – an increase of 233 percent.

While there has been some recent writing on how many crowdfunded hardware startups go on to raise venture money, the analysis of what categories of hardware companies raise money has yet to be done. In other words, it was impossible to answer the question “What parts of the hardware ecosystem do investors think are hot?”

Using the same data set as before (hardware projects raising $100,000 or more on crowdfunding sites as of late June 2014) and combining it with data from CrunchBase and Mattermark, I’m here with that answer.

Making It Rain

Of the 443 hardware projects analyzed, 94 have gone on to raise a total of $503.8 million from investors. Much like the crowdfunding data, the vast majority of these 94 companies ran their campaigns on Kickstarter: Just 17 companies, or 18 percent, of the total that raised money started on Indiegogo.

The category perspective provides a glimpse into where VCs are putting their money. The $503.8 million raised is broken out as follows:

Hardware crowdfunding venture

Comparing this to the previous map, there are a few things to note. Most obvious is the domination of the Entertainment category, which received $188 million in venture funding, or 37 percent of all venture dollars that went to crowdfunded companies.

Across the board, many of these venture dollars went into a few “winners.” Specifically, of the $503.7 million venture dollars that crowdfunded hardware projects brought in, nearly 40 percent went to four companies: Oculus, Gramofon, Misfit and FormLabs. Fourteen companies raised more than $10 million in funding post campaign, bringing in $335.8 million. In addition to the “big four,” these were: OUYA, Lifx, Loop, SmartThings, tado, Canary, Peloton Cycle, Emotiv, Pebble and Scanadu.

The set of 94 raised venture dollars from a number of investors. Almost everyone you would suspect is represented, but the most prolific may surprise you. That would be HAXLR8R, which invested in 10 of the companies, although only invested $25,000 each time.

Leverage

The dollar investment measure is one way to understand how VCs think of hardware. An alternative way of looking at just how excited VCs are about various categories is exploring the relationship between crowd dollars committed and venture dollars raised. I call this leverage.

I calculate leverage as: Venture Dollars Raised / Crowd Dollars Raised. Leverage of 1.0x means that for every dollar the crowd put in, VCs put in another dollar. The higher the number, the more dollars (i.e. interest) VCs had in the category. The lower the number, the more skeptical VCs were compared to the crowd.

Hardware crowdfunding venture

Now things get interesting. Remember, this measures investor interest relative to the crowd. As you can see, the wearable space, specifically wearables that are worn on clothing or attached to the body somehow, garnered way more love from investors than from the crowd: In the body wearable category, the crowd pre-ordered $3.5 million worth of product and investors later put in $37.6 million. From a leverage perspective, this even outpaced Gaming despite the fact that that category holds the largest venture bet from the crowdfunding cohort: the $91 million Oculus. In the 3D printing category, which consumers feverishly poured $25.6 million into across 50 projects, investors were much more tepid, choosing to deploy $26.5 million of capital across just five companies.

At a macro level, each crowdfunded dollar resulted in $2.71 of venture dollars invested and the Medical category faired best with $7.11 of venuture dollars per crowd dollar – although across a very small sample set of three companies. Next best is the wearable category mentioned above, where the sector had 4.76x leverage and 18 venture-funded projects.

What It Means

While investors are absolutely using crowdfunding success to vet hardware startups (the rate of investment across these $100k+ campaigns is orders of magnitude higher than the general startup investment rate) not all project categories are created equal. Your camera campaign is unlikely to be a home run with investors even if you hit it out of the park with the crowd. Conversely, even a mediocre outcome in an automation campaign may earn the attention of investors’ wallets. It just goes to show, investors want to back companies that not only deliver what people want today, but also represent a compelling vision for the future.

I’ve shared the source data in Google Docs. Feel free to dig in with your own analysis.

IMAGE BY Shutterstock USER Ismagilov