How Swytch used ‘crowdshopping’ to scale without VC money

The pandemic era taught many of us that bikes are a great way to get around cities. Doubly so if they are e-bikes, replete with batteries to help reduce the amount of sweat required to get somewhere. Swytch Technology, a startup that builds e-bike conversion kits, isn’t targeting your average cyclist in the United States or Europe, however. Instead, the U.K.-based startup offers regular bike riders a way to turn their existing bike into something with a little more oomph.

Swytch’s conversion kit is one of the lightest and smallest on the market, similar in size to a large smartphone and weighing just 1.5 pounds. It recharges in one hour, provides 10 miles of range and can easily be fitted onto bikes by anyone who “knows how to use an Allen key and has put together a piece of Ikea furniture,” co-founder and CEO Oliver Montague told TechCrunch+.

Oh, and if you preorder, it only costs around $500.

Swytch launched in 2017 via an Indiegogo campaign, during which time Montague learned about the benefits of crowdfunding when launching a new product.

Crowdfunding eventually gave way to crowdshopping, which involves having customers pay a deposit on a kit to be delivered at a future date. This, Montague says, has helped Swytch scale quickly for a small company without major VC funding by eliminating the need to hold onto too much inventory. Instead, Swytch uses the money from deposits to fund production on an almost a la carte basis.

To date, Swytch has shipped over 70,000 kits globally. There’s a waitlist of over 1.5 million customers who have registered interest in the next release; Swytch recently had to close preorders because it is sold out until May and is busy fulfilling over 5,000 orders per month to customers today. Its next batch of stock will be available for delivery in June, and preorders will reopen next month.

The company isn’t sitting still. Swytch is moving onto its next phase of growth, which might involve new product offerings and partnerships. So we sat down with Montague to discuss the pitfalls of VC funding, why keeping stock on hand opens you up to risk and how Swytch scaled so quickly without raising much equity.

(Editor’s note: The following interview, part of an ongoing series with founders who are building transportation companies, has been edited for length and clarity.)

Swytch has been able to scale quite rapidly without relying on much, or any, venture capital funding. You say it’s because of your “crowdshopping” model. Can you explain how that’s different from crowdfunding?

Crowdfunding is when lots of people get together and get big discounts to support a new product that will be delivered in the future. Maybe. And that’s the big thing about crowdfunding: the big “maybe” at the end. Lots of crowdfunding projects never deliver anything. Or they deliver something, but it doesn’t work. Or it works, but there’s no customer service, and the company folds a year later.

The difference with the crowdshopping model that Swytch is pioneering is we have a huge customer service team, we have a proven product, we have experience and a huge manufacturing team. So the “maybe” isn’t there. You will definitely receive it, it will definitely work, and you’ll definitely get customer support. We’ve been in the business for five years, and we have 70,000 customers, so there’s credibility and trust [around how we do business].

We’ve had a relatively small amount of equity funding, and a lot of our growth has been fueled by the fact that a lot of our customers are willing to pay a deposit and wait about three months for delivery. To be honest, it’s very similar to how Tesla scaled so fast and dealt with their demand. They also have quite a long history of taking preorders for their next generation of their car, and then that cash flow helped to finance mass production. And what we do is a little bit similar to that.

So with the crowdshopping model, as opposed to taking investor money by the tens of millions and putting that into stock and then being able to fulfill orders a lot faster, our customers are essentially part-funding our scale and growth, and in return we’re giving them the trade price, which is the payoff.

You’ve sold about 70,000 units so far. What kind of market penetration is that?

In the USA, we’re about 1.5% of the entire e-bike market; that’s by volume. In the U.K., we’re about 10%, so we’re fulfilling a big portion of the entire e-bike market in those countries. Most other companies are doing [similar numbers] with hundreds of millions of dollars behind them.

We’re in an instant everything economy, where people expect to have their products delivered within a day or two. What are the benefits of doing the crowdshopping model?

By doing preorders, we make sure that every product we manufacture has got a customer waiting for it, so we don’t take on any stock risk. Made.com is a great example of a company that started doing preorders, moved away from preorders, and then ended up collapsing because it had too much stock risk. And this is something I learned early on as an entrepreneur, even before Swytch: It doesn’t matter how successful you are, it only takes one stock mess up to wipe out all of the profits that you’ve made.

The journey of a company is typically, you make some money, you put it into stock. You make some more money, and you put it into stock. At any given time, all the money you’ve ever made is invested in your stock. So if you order the wrong stock, something goes wrong or you’ve discounted too heavily, that can bring your business down.

Are you against raising VC money then?

Our preorder model has definitely allowed us to avoid being reliant on VC injections. If we did take one in the future, which is very possible, I would want it to be linked to an opportunity to grow and achieve dominance. I think a lot of companies these days are just hooked on the idea that if you merely throw money, you’ll just achieve dominance. But that isn’t the case. I think you have to have the right opportunity.

A lot of our competitors like VanMoof and Cowboy are injecting a lot of VC money without a particularly excellent plan, in my opinion. Like with VanMoof’s recent financial hiccups — it’s crazy to me that they’re losing almost as much money as they take in as revenue — a €78 million loss on a €83 million turnover is insane. And that’s just because they’ve tried to grow way too fast with way too much VC money.

“I don’t want Swytch to be someone’s failed experiment.” Oliver Montague

Yes, and it often seems that the kind of scale everyone thinks you need to achieve in order to become profitable is just as easily becoming a potential downfall.

Absolutely. I think it obviously depends on which VC you get into bed with, but generally speaking, if you take $10 million from a VC, that might seem like a lot to you, but it’s not a lot to them. You’re just one of their gambles. It can often be a part of their business model. They take 100 gambles and they hammer every single one to go big or go home. I don’t want Swytch to be someone’s failed experiment. So if we take VC money, it will be on our terms.

What do your terms look like?

For example, we are very early in talks with big retailers in the USA, with thousands of stores that sell hardware products, some of which are cycling products. If that were to progress to any kind of serious deal, they would want to pay us eight weeks after they sell one of our kits. They would want us to have stock on hand and sign all kinds of contracts.

An interesting perspective is in the USA we’re selling about 20,000 units a year. We did almost 15,000 unit actuals in the last 12 months, and we’re forecasting 20,000 or more this year. If we wanted to sell that from stock, the working capital cost of that would be upward of $6 million. And that’s just simply money we don’t have lying around to have ready stock. So if a company like Best Buy were to want to stock Swytch kits, then we think a VC would be quite excited to fund that.

Why is the working capital so much higher when you have stock on hand?

If you want to sell one product in three months time, it’s not that you just invest in one product now. The multiplier is always 10x because to be able to sell one product every month, you need to have one in the store, one in the warehouse, one on the ship on the way to the USA, and one just about to come out of the factory. Then another one where the parts are being ordered in from. So for every one that you have right at the end of your supply chain, you always have to invest the cash in five total.

Then you have to think, “OK, which one do people want?” There’s different wheel sizes for bikes in different configurations and colors and battery sizes. So you then at least double it just to make sure that you always have the one that people want to buy. Companies that do sell from stock at the scale that we do ultimately need tens of millions of dollars to finance that.

It seems like you might come to a point soon where you do need to keep stock on hand. Where do you expect to see Swytch in a year’s time?

The simple answer to that is just a little bit more scale; we just need to scale by like another 33%. That will take us from net losing money — because we’re sustainable and generating revenue, but after R&D and going from a team of 30 to a team of 70 within a year, we’re still losing money — to profits. What we’re currently doing is about 33,000 units. If we can just get that up worldwide to 40,000 to 45,000 units, which is our forecast for this year, that will take us to being a company that’s truly sustainable in that we’ve got the right product, we’ve got the right people, and we’ve got enough sales to keep the lights on permanently.

That’ll be a major achievement because that would within seven years, we’ve gone from nothing to over $20 million revenue and making a net profit. That, then, gives us a platform where we can just make all of our dreams come true and go through all of our products that we have in the pipeline, of which we have many. The reason we haven’t launched any of them is because whilst we’re still growing so fast with the conversion kit, it would be really risky to put that on hold and focus on new shiny products that may or may not succeed.