All of the blood, sweat and tears of entrepreneurship.
Every Thursday night Quirky ‘s Manhattan headquarters turns into a television studio. On a recent April evening the airy Chelsea loft is host to a buzzing mix of beer-sipping twentysomethings, businessmen in dark suits and a dozen 10-year-olds from the Concord, N.H. Young Inventors Club. Facing the audience, at the center of a Last Supperish array of panelists, stands Ben Kaufman, Quirky’s CEO, dressed in his signature black T-shirt and jeans. “Ladies and gentlemen,” he booms, “welcome to Quirky product evaluation!”
“Eval,” as they call it, is the centerpiece of Quirky’s freewheeling brand of capitalist democracy. Tonight Kaufman, 26, runs through 15 ideas submitted by the company’s 405,000-member online community of would-be inventors. Among the items: a coin-counting, app-connected piggy bank; a plastic overlay to turn a staircase into a slide; and a device to extract Popsicle-shaped chunks of watermelon. After a few minutes of debate the room votes. A simple majority kicks off a process: Quirky will design, manufacture and sell the product. Inventors, along with community members who contribute to a product’s design and branding, get a small cut of sales.
This is what industrial production looks like, American Idol–style. Quirky’s crowdsourcing process has already created such hits as Pivot Power (a flexible power strip that bends to fit large three-prong plugs in each outlet) and Crates (modular plastic milk crates used as shelving), as well as bombs like Silo (a dry-food container that pours premeasured amounts) and Travelstacks (mini-storage units that attach to car cupholders). Most of its items are kitchen gadgets, electronics accessories and home organizers.
Venture capitalists love the model. Since launching in June 2009 Quirky has raised $91 million, including a $68 million kick from Andreessen Horowitz at a reported $150 million-plus valuation last September. Last year Quirky launched 121 new products, selling 2.3 million units through retailers likeTarget TGT +1.51%, Bed Bath & Beyond BBBY +0.62% and Best Buy BBY +3.86%. The company had revenue of $18 million in 2012, and, while it lost money, Kaufman insists that profits will be there whenever it chooses to rein in investment. Sales this year will reach $50 million, he predicts, without a hint of modesty, with “a huge chance of us crushing the s–t out of that number.”
That’s contingent, though, on Quirky solving its distribution problem. While retailers sell 95% of its inventory, the company’s idea machine is starting to churn out far more stuff than the pipeline can handle. “There’s no store big enough in the world,” says Kaufman, “that’s going to be able to launch three products a week.” So Quirky is moving quickly–and expensively–to build its own branded stores.
It’s an audacious move for someone who in school would’ve been voted least likely to succeed … at anything. With jet-black hair and a teddy-bear build, he grew up in Melville, N.Y., a terrible high school student (GPA: 1.7) who once scored a 4 out of 100 on a chemistry test.
But his cerebral cortex wasn’t dead. Struggling to listen to his iPod without tipping off his math teacher, Kaufman designed a hollow lanyard to conceal the headphone wires up to his neck. He demanded backing from his parents to mass-produce his furtive product. “They realized there was nothing they could do to stop me,” he recalls. “They knew I would’ve been calling up my dad’s friends asking for money if they didn’t give it to me.”
His mother, Mindy, a retail strategist, forced him to create a detailed business plan for the lanyard headphone startup, which he named mophie, a portmanteau based on the names of the family dogs. In return for $185,000, his parents took 90% of the equity, allowing Ben to regain ownership after he repaid the loan. “I’ve raised $100 million since then,” he says, “and that was the hardest money I ever got.”
A week before high school graduation he flew to China to meet with manufacturers, knowing nothing about production, packaging, merchandising, logistics or sales. His parents’ cash disappeared “on the backstreets of Shenzhen,” as the headphones went through five redesigns. Back in the States he expanded into iPod cases, having persuaded Vermont angel investors to invest $500,000. After winning a Best in Show award at MacWorld in 2006 for designs of iPod cases that were half-baked, mophie raised $1.5 million from a Vermont venture fund.
But Kaufman lost control of his company. Investors, smelling promise, hired an experienced CEO, and the 20-year-old founder left. Mophie, meanwhile, now based in Kalamazoo, Mich., sold $150 million in iPhone and iPad accessories last year.
The experience wasn’t a total loss: Kaufman took enough money out of the company to sow the seeds of Quirky. For a year and a half a team consisting of Kaufman and three others worked out of his apartment in Manhattan’s East Village, slogging through the details of building an online community for devising new products. They launched Web pages for contributors to pitch ideas, tested feedback tools, devised voting systems and selection criteria, and established rules for divvying up credit among the community.
Here’s how it works. Once a product is out of the chute, Quirky sells it to retail partners at wholesale. Ten cents of every revenue dollar is held as a royalty for those who contributed to a product’s creation. The inventor gets 42% of royalties; the community that tweaked designs, voted on names and responded to market research surveys splits the rest. For sales from Quirky’s online store, the group divvies up a more generous portion: 30% of sales. Quirky, meanwhile, makes a 20% to 60% margin on each item sold to retailers, as well as a $10 fee from those who submit ideas.
Today the company employs 140 people, split among design, branding, engineering and sales teams. The offices hold $2 million worth of 3-D printing and prototyping equipment. Twenty employees in Hong Kong oversee manufacturing in China. Inventory sits there in company warehouses, as well as in Ontario, Calif. and Allentown, Pa. Each week the Quirky crew combs through 3,000 idea submissions, settling on 15 to discuss at Eval.
But does the world really need another smartphone-connected pet food dispenser or mousetrap? Scott Weiss, a partner at Andreessen Horowitz and Quirky board member, thinks Kaufman’s could easily be a $1 billion company. “He’s disaggregating the entire process of invention,” says Weiss. “Could this be the next Procter & Gamble?”
But there’s a wide stretch between here and there, especially given the grand plans to open up stores, starting with three–likely in New York, Los Angeles and Oklahoma City–perhaps next year. (Quirky originally planned to open up stores this year. During the writing of this story, the company decided that timeline was too ambitious. ) Kaufman does seem a whiz at packaging: Each product carries the Quirky logo, as well as a photo and bio of the inventor. But retail? “I will have this figured out by July 4,” boasts Kaufman. He envisions a hands-on Sharper Image, where customers can either come in to pitch inventions or buy others. ”From the very beginning we said we wanted to be the best product machine in the world so we could be the best retailer in the world.”
Even in the best of circumstances, opening stores will drain capital and distract from the core business of making stuff; in the worst case it could end up another backstreets-of-Shenzhen-like disaster. “I don’t know whether it’s the smartest thing for them to do,” says Sucharita Mulpuru, a retail analyst for Forrester. “One of the scariest things about opening a physical store is that you get one shot. It’s very difficult to pivot or change.”
If that happens Kaufman risks repeating his mophie experience. While he refuses to discuss his equity stake, all that venture funding almost surely means he’s ceded absolute control.
Not that he seems concerned. Back at Eval the clear winner is the large plastic overlay that folds over a staircase to create a slide. The Young Inventors whoop with excitement. “This is an insurance killer,” warns Charlie Kwalwasser, Quirky’s general counsel. Kaufman sides with the 10-year-olds. “The kids don’t care about how much our insurance costs,” he declares to laughter, “nor should they!”
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This originally appeared here.