The Problem with Pebble

In general, it’s pretty cool to see Kickstarter taking off for more innovative products like Pebble, the e-ink watch that does basically everything and can also tell you the time.   Kickstarter’s real potential is to serve as a very solid market-testing device – when it’s used as a pre-commitment mechanism for purchase, it provides a really innovative way to self-finance ambitious projects.  However, I think that this model is really far better suited to software products than to physical ones like Pebble, and I worry that this niche has the potential to be a real disaster for both founders and backers.  Here’s why.

Pebble has a great product team behind it…it lacks the industrial infrastructure that’s commonly associated with, you know, manufacturing products.   The 10 million dollars spent on the watch so far is really an investment that the team will be able to find suppliers, deal with the contract issues, get prototypes produced on the suppliers’ equipment, and generally very quickly develop and scale up a supply chain and distribution operation.  They have $10 million dollars to make the watch economical at a per-unit sale price of somewhere between $115 and $100 (depending on which backers selected what proportion of options). And if they can’t make it economical, well…

Let’s just review the options if the $10M investment doesn’t pay off – let’s say there’s an issue with finding the right suppliers, or assembling the watches, or that the watches end up having a $120 per-unit cost.  Okay, so Pebble is in the hole in a pretty big way.  Option 1, most realistic, is that they either find backing from an equity partner or via a loan.  This financing will probably be on ruinous terms, because the alternative is Option 2: Losses are assumed by the Pebble team.  They either have to ship the watches and take the hit to their own personal bank accounts, or figure out a way to return $10M to their backers and completely trash their own professional reputation.  The downside risks are fairly large.

Digging through the Pebble website a bit, I see they got into the project with a manufacturer lined up that hopefully can accommodate the requirements, but that doesn’t necessarily have to be the case.  A lot of people are not viewing Kickstarter pages like this with an eye to their own downside risk, and won’t worry about whether or not the product team is capable of fulfilling the order. It’s only a matter of time before something like Pebble blows up in a huge way, as it is practically guaranteed to happen even if everyone has the best of intentions.

Also: scams are real.

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