There is an article that’s doing the rounds on Medium: “How Zano Raised Millions on Kickstarter and Left Most Backers with Nothing“.
It’s a long read, but I’ll get back to that. First, some background.
Here is the campaign:
And who wouldn’t want a nano drone, right? According to the campaign, here are the list of specs one could expect to enjoy:
“Echo sounding sonar” and “IR obstacle avoidance” – spicy stuff.
How the campaign fared:
Hashtag chronically overfunded…
So let’s talk about what happened after this:
- The Torquing Group were still
designingworking out the kinks of their design.
- The ZANO couldn’t actually fly, the wifi didn’t actually work, and all those features did not add up to a 55 gram piece of machinery (further complicating the “can’t fly” part).
- The promo video that they displayed to the world was, shall we say, “artfully edited”. Which isn’t a problem, exactly – but it did suggest that they were closer to achieving their goal than might otherwise have been the case*.
*It also apparently violated some Kickstarter rules. Sort of. I mean, where does one draw the line between “slightly touched-up fact in good lighting on a great hair day” and “fact that was photoshopped into fantasy fiction”?
- I guess it’s possible that all of this could have been worked out had they not been fixated on their Kickstarter deadlines – and more importantly, had they not had to scale their production plans by over 2,000% (which is what happens when you’re 20 times overfunded).
- But there were also some bizarre Paypal rules that made for some poor decision making. You see, not only did the Torquing crowd raise money on Kickstarter – they also allowed pre-orders online. Only, Paypal doesn’t release money for pre-orders until the orders are shipped – meaning that debt had to be raised to cover the production cost of even more units until the pre-ordered zanos had started to ship.
- And the Torquing team apparently decided that the Kickstarter funds would be that debt, and so they used the Kickstarter money to fund the pre-orders in order to release the Paypal money to fund the Kickstarter orders.
- Which did not go down well with the Kickstarter punters.
- Especially because it didn’t work out.
So the ZANO project failed and is now in liquidation. And Kickstarter hired a journalist to go and write a very long article about why it failed.
Permit me to save you an hour of your time.
The ZANO project failed because most projects fail.
Yes, we can isolate out things that went wrong in a kind of truistic sense:
- Companies that grow too quickly can collapse in on themselves.
- Companies often struggle to take a small prototype design and put it into mass production.
- Companies fail when their management team are bad managers.
- Companies fail when their designs don’t work.
- Companies can be too ambitious with their delivery deadlines.
- Companies that buy too much stock tend to run out of cash.
- *the list continues*
And admittedly, the Torquing group managed to have all of those problems.
But that is still mostly irrelevant, because all start-ups have to negotiate their way through most of those issues. A start-up turns into a legitimate business by:
- Growing as quickly as possible;
- Scaling an original idea into something with broader appeal (and larger revenue streams);
- Dealing with tight deadlines and fixing design weaknesses.
- Taking risks on working capital and running a tight cash flow.
- Working out who can and who can’t manage the business well, and shifting the organisational structure around that into something that’s feasible.
- *the list continues*
And very few start-ups succeed because, for most business plans, one or more of those problems will be insurmountable.
This is traditionally why Venture Capital funding is generally reserved for specialist funds – funds that raise their capital from rich investors who expect the fund to lose money on most of the funded projects – but who hope that one or two of the funded projects will become real businesses with value far in excess of their original investment.
And as we move from traditional “managerial capitalism” to the “crowd-based capitalism” of the sharing economy, the crowd had best expect to lose a lot of money.
Because that’s just reality.
No matter how good the lighting is, and whatever the hair day.
Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.