On January 11th, 2013, Dave and Dave publicly negotiated an investment on national television on the set of the popular show, Shark Tank. The duo went to the show looking for $150,000 in funding to grow their business, which was built on a product they created call the Joulie, a coffee cooling / warming device.
During their pitch they mentioned that the previous year’s sales had been $575,000 – a figure that impressed the investors enough to elicit offers from all five, one of which the Joulies founders accepted for $150,000.
Though it wasn’t mentioned on the aired version of the Shark Tank episode, the founders’ story began on Kickstarter, where they ran a campaign attempting to raise $9,500 to pay for half the cost of tooling for production.
At the end of their 36-day campaign, the project closed with a total of $306,944 in pledges, which is roughly 53% of the $575,000 total annual revenue.
In this case, crowdfunding provided a mechanism by which to raise capital for at least the first production run, which proved demand and provided an enviable start to the product’s yearly sales, eventually allowing the creators to raise additional capital for growth on Shark Tank.
Crowdfunding platforms enjoy a very different sales model than the rest of the world, however. Typically, crowdfunding projects accumulate one large “batch” of product sales before producing, allowing the creator to place a large order of materials and meet manufacturer minimum order requirements. This alignment of sales and production eliminate the need to invest in and manage inventory up front, giving project creators a significant advantage by allowing them to produce and ship a single batch of orders once the sales period has closed.
However, once the crowdfunding campaign is over and the first batch of product is produced and delivered, project creators are thrust back into the traditional world, where sales happen one at a time but production may still need to be done in large batches.
Unless the crowdfunding project raises enough capital to fund multiple production batches, this misalignment of production and sales can cause major problems for creators who want to continue selling their product. In a standard model, capital for production runs must be acquired and spent before sales happen, so if the project only raised enough for one batch, the creators must turn to other sources for capital, as did the founders of Coffee Joulie. We call this period between shipment of the first batch and production of the second the “Post-Kickstarter Chasm”.
Aaron Puglisi, an Industrial Design student at Brigham Young University, spent a year perfecting his unique backpack design, which he called the Jet Pack, before launching on Kickstarter. The project was a fantastic success, capturing the attention of almost every major design blog on the internet and eventually closing with 329% of his goal at $56,045. Aaron had sourced a manufacturer in China who was willing to work with him, requiring minimum order quantities of 250 units per production run.
Though funds from his Kickstarter project would cover the cost of the first batch with excess capital left over, it didn’t produce enough profit to cover a second 250 unit batch from his manufacturer. Unless Aaron can find another source of capital, the Jet Pack will fall into the Cash Chasm and die there along with countless other projects who raised only enough capital to fund a single inaugural production batch.