Tammie on Start-ups

Have you ever had an idea for a product that you thought could be improved, but you did not know how to get it off the ground? Or perhaps you were frustrated by certain things and thought of a product that would solve the issue?

For example: Why is there no flashlight on the iPhone to take pictures in the dark? Or wouldn’t it be cool if you could make your own yummy thick yoghurt at home? Introducing Quirky.com – a social platform for product development.

When Bruce Gilardi, an HBS serial entrepreneur from NY (MBA ’95), approached me about a yoghurt making product and social networking, I did not know what exactly to expect. “Yoghurt by You” was the product’s name and it was featured on Quirky.com. Bruce, the founder of another food-related start-up, Savoia Chocolate (www.savoiachocolate.com), had thought of an easy 5-step way to make really yummy, thick yoghurt at home. However, as he did not have time to think about a potential business, he never did anything with it until he came across Quirky.com.

Quirky in a few simple steps
Quirky is a social platform for product creation. Quirky aspires to create a brand-new product every few days.

Product Idea: Suppose you have a great product idea that has been bouncing around your head for weeks. You submit the product idea on their platform and the community votes on it and adds suggestions on how to improve it. If the product gets enough votes it goes on to the next stage of production.

Product Design: Quirky has industrial/graphic designers on their team who, with the help of the community, design the products. Again the community votes on the best product design, and the winning design goes to the next stage of production.

Branding: Quirky asks the community to help think of a name, tagline and logo for the product. Everyone can submit their ideas, and has 3 votes to cast on the best branding ideas. Once the winning design has been selected, the product goes into the next stage.

Pre-Sale: Based on the cost price of each product, Quirky decides what number of items, should be sold in pre-sale to go into production. If you reach your pre-sale targets, you are good to go! Quirky will manufacture your product and actively sell it to the community as well as to other retailers.

HBS Professor Karim Lakhani: “It is an interesting model that pushed all aspects of a firm’s task to distributed people from around the world. Then you basically rely on their judgment and expertise to give you ideas, refine the ideas, select the ideas as well as market the ideas.”

In order to keep the community involved quirky gives 30% of the revenue to the members who have influenced the product design phase the most. An algorithm keeps track of all the “influencers” for each of the products that go through the process. With “Yoghurt by You” for example the product idea was Bruce’s, the name was done by Hanna Cherry, the logo was done by Grant Petersen, the tagline “Get cultured” was submitted by Betsy Cohen (HBS MBA ’95), etc. For the influencers this is a fun process because you get a monetary reward for your work.

Bruce: “With Yoghurt by You’s tagline I was talking to one of my HBS classmates, Betsy Cohen, about it. She looked on the site and said: “You know I don’t like any of these taglines”, so I said ‘Well submit one of your own then’; and it got selected. Same thing happened to my brother in law’s logo submission. He complained that the ones out there looked awful and that if he had time he would throw something on there. So he put something up and it looks great. So I am very excited that that worked. The key thing about the yoghurt maker is that you can turn it upside down, and that it makes the yoghurt better. So the logo he created captures that it flips and looks like the product.”

Building the team
Quirky launched in June 2009 as Ben Kaufman’s third venture. He started venturing while in high school, and Quirky evolved from his previous two ventures (mophy.com and kluster.com). Within entrepreneurship, building a good team is one of the most deciding aspects of successful companies. Having people who you have worked with before is a real help in setting yourself up for success.

Ben: “We are currently with ~10 people. Four of us, mostly on the technology and ops side of things, came from the previous venture Kluster. I’ve hired mostly sales and design people. So far it has worked out good, but finding new people could be tough in the future.”

Revenue model
Although it seems like quirky takes on all the risk by producing these products on their own, they have thought of a way to reduce their risk and at least cover their cost. First of all, they get revenue through people who submit ideas. If you want to submit your idea, you have to pay $99 (check out The Harbus discount code below). This allows quirky to filter out serious proposals from the not serious ones and to get initial revenue. Secondly, they require each product to sell a certain number of items in the pre-sale before they go into production. This phase basically tests the market and minimizes their downside.

Ben: “We need to make sure that the product can sell. We test this through the pre-sale phase. The number needed on the pre-sale varies on [a] product-to-product basis. We drive this decision by looking at how much will it cost us of upfront capital in order to make the product viable. What we try to do with our pre-sale threshold is to match that amount to our capital expense to realize the product.

Thirty percent of our top line revenue is shared among all the influencers. So let’s say a product made $100,000 – $30,000 is split among the influencers. The average inventor on our site gets about 50% of the influence, so in this case the inventor would get $15,000. It is basically a perpetual royalty. We want the influencers to cash in as much as possible. Our community and its influence are very important to us.”

Professor Lakhani: “I have bought for example the holder for the Mac power supply. What was interesting about the product was that on the packaging of the product were all the people [influencers] that have contributed to product design. It was cool to see that much credit given to the community.”

Success
Since its launch in June, Quirky has introduced approximately 20 products in their web-shop. In addition to the various product launches and other products on pre-sale, Quirky has managed to attract a community of about 30,000 active members who submit ideas, review and vote for products and help shape the organization it is today.

Ben: “We are not trying to be Facebook. We are trying to be the best product design company in the world. So from this perspective for us it is not about the quantity of membership as much as it is about quality of members. We much rather prefer members interested in product design and making products better than members looking to discuss social issues on our site.”

Managing the start-up for growth
Quirky seems to have a good process defined so far, but as with any start-up growth also introduces new challenges.

Quirky can override any decision the community takes through voting. One of the issues in the future could be a conflict of interest between what the community wants and what quirky wants. HBS Professor Karim Lakhani, a member of Quirky and proud owner of some of their products looks at it differently: “The trade-off is between transparency and following the crowd. As long as you are transparent about the process, you will be fine. So you should communicate to the community that “We know that you want “X”, but we will do “Y” and here is why we are choosing this. By being transparent, the community backlash can be contained. Sometimes you might have private information that is not jived within the community, so you might want to make different decision. As long as you say ‘we have heard you, but we do not feel that way’ you most likely can contain it.

That is a skill that is not very common. Most organizations when they get this reaction from the outside world, they will shut down the windows and doors and lock themselves down. Versus these guys here, as well as Threadless, have learned to be open to the community and be fine with disagreement.”

At this moment Quirky is very widespread in terms of their product segments. They offer a wide range of products from a yoghurt making device Yoghurt by You, to a split stick USB, to an Apple PowerCurl for the power cord. One concern out there is that they are creating little niche products that only appeal to a small audience. In addition as they are not focused on a certain group of people it might be hard to market and create a community of knowledgeable users. Professor Lakhani argues: “The question for them is, are they going to be like Muji, a store which has small items that are nice to have but not necessary, or will they be focused on an area and go into depth. The genesis of the company used to be that they were [an] accessory company for the iPods. My sense is that there is a third option: They will generate a lot of ideas, and then the community and the demand from the community will be a signal for them to find a broader distribution for these products. I think they will become more of a product company where the initial front-end and even marketing will be done by them, but then they will create hits that could go on to a Wal-Mart or Target and so on. The front end store will be a beta store that will reduce the uncertainty in product development. The distribution will have to rely on other parties. In that sense you want diversity and variety.”

Start-ups are always trying to find the right business models and experiment. At this stage Quirky should learn how to run the community and manage the community. On the other side they also need to focus on the supply chain. Learning how to get stuff out of the supply chain rapidly will allow them to build their core competency. If they can have supply chain management and community management as their core competency they can become a very successful partner to a lot of distributors.

Open Innovation or Venture capital
Whether Quirky knows it or not they have applied the typical open innovation model to product design. By open innovation I mean to say that they are engaging the whole community in their “R&D”, their development phase. Other companies such as P&G, J&J and Innocentive have embraced open innovation, but in a more limited way or only on a part of product design. None of them so far have left the complete product design open to the communities. “The expensive part of running quirky was not in the initial phases. Initially we did not need much. The expensive part here is obviously running a product business. Carrying inventory, production, and operations is what the thought part of it is. However on the other hand the risk we are taking is far less than [that] any other product design company is taking [on]. We know if the product will be successful or not.”

You could look at quirky from another direction as well. Once the community has decided which product idea is good Quirky funds the production and sales of this new product. Could this be inspiration for a future venture capital model? Think about it, it seems so intuitive: we’ll just let the community decide on the success of a venture, and if there is potential, we’ll fund it!

Got inspired?
Got a product idea in mind already? Well, get going with it. Quirky is offering a $99 discount to the HBS community for submitting your product ideas. Use the promo code: HARBUS and the $99 submission fee will be waived.

If you don’t have a product idea in mind, but would like to rate other ideas or you got excited about making yoghurt at home, check out their website www.quirky,com/projects.

AUTHOR’S BIOGRAPHY
Tamara Obradov is an entrepreneur at heart who is involved in the HBS entrepreneurial community. In order to shine a light on the many ventures of HBS grads and the support of the HBS community towards entrepreneurs, she will bring you stories from HBS start-ups in a bi-weekly column. Should you have any ideas or suggestions on HBS entrepreneurs that we can learn from, do not hesitate to contact her [email protected]