LUMO Body Tech (“LUMO”), a start-up company founded in 2011, announced yesterday that it closed a $5 million Series A round led by Madrona Venture Group. The company is known for its first product, the LUMOback (a waistband that tracks posture and movement of the person wearing it). In a time when entrepreneurs face much difficulty securing seed capital, this start-up has succeeded with only one product to its name. So what’s its secret?
Market Validation and Proof of Concept Centers
Market validation means that a product or business idea has been tested in the real world and the results show that there is a market for the product or idea. Donation based sites, like Kickstarter, are great for market validation because the gist is that a product or idea backed by a substantial amount of people conveys that there is a population ready to spend money on it. Generally, market validation should be done before introducing a good or service to test out (1) whether there is any popularity or following, and (2) who makes up the target market. Once an entrepreneur knows these two facts the product or idea can be focused toward the target audience or revised to increase popularity. This information can also be used as leverage when raising capital because potential investors know that there’s already a place in the markets for the product or idea.
In January of this year, the Economics & Statistics Administration, part of the United States Department of Commerce, released a report on The Competitiveness and Innovative Capacity of the United States that analyzes the stagnant U.S. business climate and proposes solutions aimed at stimulating entrepreneurial growth. Within the report is the discussion of “Proof of Concept” Centers, established to help entrepreneurs overcome obstacles they face when working to raise early-stage funds to develop their ideas. Before entrepreneurs hit the market, they must “prove the concepts” of their innovations. The initiative uses the collaborative efforts of academia and the government to accelerate the development of emerging technologies. Proof of Concept Centers are essentially the government’s way of stimulating technological innovation while at the same time requiring entrepreneurs to validate their concepts. With crowdfunding, entrepreneurs have a built-in market validation system of their own in addition to the opportunity to obtain the funding necessary to take their product or idea to the next level.
Donation Based v. Equity Based
LUMO cleverly campaigned on Kickstarter to raise funds to develop the LUMOback. In doing so, the product was validated by the market, making the company more appealing for a venture round of funding. The backers from the Kickstarter campaign cashed in on this success not by receiving a return on their investment, but by instead receiving the product from one of the first production runs. Supporting a project because you believe in it and want it to enter the market can now include a potential financial return. When you look at the dollar amount of LUMO’s raise, which translates into a higher business valuation, only getting the product doesn’t really seem so exciting any more. Under the old regime you would get this $100 product with a successful raise; under the new regime, you get $100’s worth of stock that’s increasing in value all while still supporting the project!
This is one of the major points and benefits of Equity Based Crowdfunding. When you invest in a company like LUMO, in addition to supporting its product, you get to reap the rewards of the its success. So in LUMO’s case, your stock value would jump up from what you originally paid to invest and you’d still get to see the product created (and maybe even receive the product, depending on how the company structures its raise).
Some people fear losing all of their money in an investment. This fear is based on the misconception that there is nothing one can do to reduce investment risks. However, market validation and feedback reduces risk. Equity Based Crowdfunding will provide even stronger market validation than donation based crowdfunding. People investing in a company, despite the risks, because they believe so much in the concept demonstrates that they not only want to be a customer, but also to put their money into the company. The bottom line is that in Equity Based Crowdfunding you’re not simply donating your money without the chance of making a profit; you’re validating the concept, supporting a product or service that you want to have, and becoming a shareholder who may potentially earn a return on your investment.
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