Essay duo_coffee_steeper_diagram

Published on January 28th, 2014 | by Dan Walsh

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Kickstarter Is The New Seismic Study

I recently met with Jake Miller to talk about his wildly successful Duo Coffee Steeper Kickstarter campaign. With over 2,700 backers and $193,000+ in funding, I knew he’d have some interesting insight when it comes to that whole “follow your dreams” advice. He took a pretty big leap when he went all in on the Duo, but he didn’t go blindly. Jake was awesome enough to write-up a whole essay on his risk assessment process for T&D.

Take it away Jake!

 

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Kickstarter is the New Seismic Study

There must be something about the soft hum of a Sonicare that sparks creativity. You’re brushing your teeth on a Sunday morning, somehow hungover from only two glasses of wine the night before, and suddenly — BOOM — an idea for a new product pops into your head. You’re excited. This new idea could change the world. But, how do you decide whether to give everything you’ve got (time, energy, money) to make that idea come to life? The inherent risk of launching a new product cannot be eliminated and the outcome is certainly uncertain. Well damn, this is scary. I was in that position about 8 months ago with Duo Coffee Steeper. Thinking about the outcome in terms of a decision tree has helped me to better understand the uncertainty and think through my alternatives.

Anyone familiar with basic quantitative analysis is familiar with Decision Tree Analysis… But for those who aren’t, this traditional example is as follows. A wealthy oil baroness has an option to drill on a piece of land. Should she drill? If she strikes oil the payout is $10 million. The drilling costs, regardless of whether or not she strikes oil, are $3 million and the probability of striking oil is 50%. However, our baroness can pay $1 million for a seismic study. The seismic study will tell her whether or not she will find oil on her parcel with 95% certainty. Should our baroness spend the $1 million on the study? With the information presented we can determine the right decision, the most profitable path up the tree (highest expected monetary value).

What does oil exploration have to do with crowdfunding you ask? Well, think of a crowdfunding campaign as a seismic study.

I have a product idea. If successful there is a healthy payout (although I doubt healthy enough to payoff my Stanford GSB debt). However, like with oil exploration, success is unknown. My “drilling costs” are $100,000 to manufacture at scale. Without any additional information would I spend $100,000 to launch Duo. Hell no. So, what else can I do to better predict success, increase my expected monetary value, and help me determine the best decision? You guessed it – crowdfunding. Just like blue is the new black (I think), Crowdfunding is the new seismic study. The results of a crowdfunding campaign are an indicator of future success without having to actually drill for oil. Or at least in my mind that makes sense.

In total, the initial product development, prototype construction, and video production ran me about $20,000 to start preselling on Kickstarter (ignoring my opportunity cost of actually getting a job – sorry Mom).  I paid $20,000 for my seismic study. Through Kickstarter I bought information that will help me better understand market demand and the probability of future outcomes.

Yes, there is still the chance for a false negative or false positive (just like the seismic study wasn’t 100% accurate), but one can account for this within the decision tree by adjusting the probabilities and goal amount.

Since we’ve had success on Kickstarter I feel pretty good about writing a check for $100,000 to manufacture at scale. But, if Kickstarter was a failure I’m out the $20,000 it took to develop and market the product. But I’d feel overjoyed about not writing that check for $100,000 and I’d move on to the next idea as fast as possible (I hear the oil industry in North Dakota is booming).

Two Things I want to leave you with:

1)   In my opinion, the real value to crowdfunding – isn’t raising money. Crowdfunding money is great, it’s a zero interest uncollateralized loan.  From now on when you hear the term crowdfunding you should think “crowdinforming” — the value is in the market feedback you get BEFORE you launch your product.  Crowdfunding helps you make better decisions and increases your expected monetary value.

2)   Set an aggressive goal. Unlike the seismic study, the level of certainty after a Kickstarter campaign is probably not  even close to 95%.  There is a lot of “noise” – an aggressive goal will get you out of the grey zone. If you reach your goal you’ll be fairly confident you have a real opportunity on your hands. An aggressive goal will help you avoid a false positive.

Best of luck to all of you.

- Jake Miller

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If you missed Jake’s Kickstarter campaign, but still want a Duo Coffee Stepper, check out his new site: DuoCoffeeSteeper.com

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One Response to Kickstarter Is The New Seismic Study

  1. Alex says:

    I’ve been thinking to try kickstarter to make a film but I am still doing my research so that I can be sure the outcome will be good.

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