How the invention factory at Quirky almost imagined its way out of business28
In February of this year, the staff of the New York startup Quirky gathered at the company’s headquarters on the West Side of Manhattan. Hundreds of community members also tuned in to a live stream of the event. Normally, these Town Hall meetings were a celebration of the company’s growth, a chance to highlight exciting new products and discuss upcoming partnerships. But this evening would be different. This was a reckoning.
Quirky’s tagline is "making invention accessible." It lets anyone submit an idea, vote on which products should be built, and contribute suggestions for how to tweak the final product. It then handles a lot of the design, manufacturing, and retail distribution, as well as some online sales.
The mission of helping small-time inventors succeed has always resonated well with the press. "It’s easy to think things are going well," said founder and CEO Ben Kaufman. He flashed a slide of some glowing coverage on the screen behind him, followed by slides of the growth in the number of products it was creating and the revenue it was generating. "But this isn’t the full story," he concluded, before turning to the bad news.
While Quirky’s overall revenue was growing, its losses were mounting as well. And that’s because the business model at Quirky was, for many of its more ambitious products, fundamentally broken. Kaufman highlighted a number of stranger inventions that the company had created: a set of wheels to turn any object into a remote control car and a bathroom mirror that eliminates the fog from shower steam. The company had spent over $800,000 developing the products, but neither one ever made it to store shelves.
These were not anomalies. Kaufman pointed to the Beat Booster, a wireless speaker and universal charging station that Quirky spent $388,000 to develop. At the time it had sold fewer than 30 units. And even when products did sell well, the margins were so bad the company often lost money. Quirky had paid out more than $9 million to the inventors who submitted ideas for new products, but it had lost more than $150 million in the process. "Are these great ideas?" Kaufman asked. "Yes. Can Quirky do them justice, sell them, and scale them profitably? No."
The inspiration for Quirky came from Kaufman’s personal experience. In 2005 he decided he would make accessories for the iPod, dropped out of college, and got his parents to refinance their home. He used the cash to travel to China. It was an impulsive, rash, and brilliant bet: Kaufman founded Mophie, which boomed along with the popularity of the iPod and iPhone, making best-selling cases, battery packs, and arm bands. By the age of 20, Kaufman was a star entrepreneur, the top pick on Inc’s 30 under 30 list. In 2007 he sold Mophie, and two years later he founded Quirky with the stated goal of helping lots of people enjoy the same success he had creating new products.
For a while, things seemed to be going very well. One employee The Verge spoke with recalls entering Quirky's offices for the first time: "It’s a magical place, kind of like walking into Willy Wonka’s factory. Everyone seems to be living the startup dream." The company began by building simple products and had a hit with Pivot Power, a flexible outlet that earned over $1.5 million for its inventor and the community members who contributed.
Over the next five years, the company raised $175 million from blue chip investors like RRE, Andreessen Horowitz, and Kleiner Perkins. In 2014 it opened a new customer support center in Schenectady, New York, and a micro-factory in San Francisco. It announced a partnership with GE and spun out an entirely new company, Wink, to focus on creating connected devices for the smart home.
As time went on, Quirky moved into making more ambitious electronic hardware. The company’s premier product in 2014 was the Aros, an air conditioner it built with GE that customers control through the Wink app. Quirky partnered with Uber and bought a small fleet of ice cream trucks to deliver them to customers with a flourish. Kaufman, billing himself as the world’s least important CEO (a title he still uses on LinkedIn) began appearing on billboards and nationally televised commercials.
From the outside, Quirky looked successful
At that point Quirky was launching three new products each week. Its merchandise sold everywhere from from Target, to Walgreens, to the Museum of Modern Art. The company seemed poised to become the next great consumer brand across categories as diverse as electronics, pet toys, and cookware. But while Quirky appeared more successful than ever, in reality the company’s finances were rapidly deteriorating.
Many of the more experienced product people Kaufman hired tried to point this out, but he didn’t heed their advice. Take the Egg Minder, a smart tray connected to an app that would alert you when you were about to run out of eggs or when some were close to going bad. It was a fun idea — the device was even featured on The Tonight Show — but from the beginning it made little economic sense.
A former staffer we spoke with recalled the process of "pre-val," where the staff went over submissions before starting to design and engineer them. "It came up on the board and everyone had a few laughs about it, but the serious consensus in the room was that this was not a viable product. At the price point it would cost to make, we can’t make enough money or sell enough volume," they said. "A lot of good business and technical rational went into that. Ben comes in and says, ‘We’re doing this.’ So we did, and it did not work out well for the company." In many ways Kaufman was still that crazy kid, going with his gut.
Even when products did make sense, Kaufman was often overly aggressive about how many they could sell, say former employees. After returns, the company ended up with a glut of unsold inventory it was later forced to liquidate at pennies on the dollar.
To make matters worse, many of the products did not live up to the elegant design, spiffy packaging, and glossy commercials that were used to sell them. Take a look through the reviews on Amazon for Aros and you will find many withering one-star rants about its many problems. The Verge's Chris Ziegler had a similar experience with his first Aros (and the second one that replaced the unit he sent back.) It was extremely loud, often didn’t connect to the Wi-Fi remote, and was shipped with very bright front panel lights never turned off, making it tough to sleep in the same room.
"We needed to test the product before we ship it!" said one former employee, speaking not about Aros specifically, but the design and engineering process at Quirky in general. Kaufman often wanted to skip that phase in order to move faster. "He doesn’t want to listen to those realities. He wanted to run the company based on the fantasy he thinks it should run on."
Quirky had just above $50 million in the bank in February of 2014 and was burning through an average of $5.8 million a month. The company wanted to raise new funding, but wasn’t getting traction with investors. Finally, in September of 2014, it brought in a new CFO, Ed Kremer, who had been working as the VP of finance at Beats. Kremer knew the company had to make drastic changes, and fast, or it would be out of cash. So starting in October, the company instituted a series of deep cutbacks.
A series of deep cutbacks
Between October of 2014 and this February's Town Hall when Kaufman publicly disclosed Quirky’s woes, the company let go more than a third of its staff. It ceased production on the majority of products it had in development, even those into which it had sunk hundreds of thousands of dollars. And, according to employees, it stopped paying its bills for a number of services.
So where does Quirky go from here? I met with Kaufman recently at the company’s headquarters in New York. He was humble and emotional, obviously pained by the changes of the last 18 months. "It hasn’t been easy," he said. "This company is my life."
Quirky has a plan to turn things around. First, it’s drastically reducing the number of categories in which it will produce its own products. Instead of a dozen different verticals, it will now operate in just three: the connected home products it makes with GE, the new line of Poppy appliances that work with Amazon Dash, and electronics like Pivot Power that have been very successful.
Second, the company is shifting to focus more on helping to create products for other companies, and less on creating products itself. The initiative, Powered by Quirky, started with GE last year. Since then it has signed on audio company Harman and toy giant Mattel.
Quirky’s community will still submit ideas, and the company will help shepherd the best ones to a point where they can be produced. But the working capital to actually design, develop, manufacture, and market will be spent by these corporate giants, not Quirky. "It’s a total flip, the exact reverse. The old model was we pay for everything and then give a royalty" says Kaufman. "The new model is, partner pays for everything and they give us a royalty, some of which we give to the community."
To help handle and acquire these new partners, Quirky recently acquired Undercurrent, an organizational design consultant. Kaufman says some of the cuts made to staff were to make room for this new headcount. "These guys are account managers, they have the skills to tend to the kind of relationships we’re trying to build with big brands," says Kaufman. "We were a product company, so this is new ground for us."
Letting corporate giants tap Quirky's community of inventors
Helping giant corporations to innovate is decidedly less inspiring than enabling unknown inventors. But Quirky insists that community members will get the same rewards and recognition, even if Mattel or Harman is the one paying to produce the product. As it signs on these brands, inventors will get a bigger platform for their ideas.
Of course, to work in the long run, the company will have to show it can pick the ideas that will be winners for whomever is selling them. That may be tougher now that rewards to the community have also been cut back, halved from 10 to five percent in February. "I think this is a natural evolution, as the scale of the opportunity on the platform grows." says Kaufman, also claiming the number of new ideas submitted continues to rise. "Five percent of the hundred million dollars in revenue that we will do is more than 10 percent of the revenue we did two years ago."
Kaufman admits that he made some mistakes. "To be blunt, we overbought in some categories," he told me. For a while, he says, "the company lacked a strong financial leader." Before Kremer, the company would pay community member rewards when items were sold to a retailer like Target, but didn’t get any of that money back if the goods were returned. They will now hold back 15 percent each quarter to account for that. "We overpaid the community by $1.9 million."
He says that it’s true the company has a few payments due, but contends that it never stopped paying entirely or defaulted on any debts. He wrote in an email that "each of these issues are unique (dispute on services rendered, etc). We have been paying people consistently through this period of change."
"The company lacked a strong financial leader."
Interviews with employees past and present often cut both ways. They would praise Kaufman’s dedication and energy, but also blame the financial woes on his lack of attention to detail and inability to accept advice. "The bottom line is always with Ben," said one former employee. "He is incredibly inspiring, intelligent, and tireless in running that company, but everyone is under his thumb."
Kaufman says he has heard the criticism and is working to change. "I have indeed learned that the 'Ben projects' don't always go as planned." Still, he wants to keep a bit of the wild ambition that sparked Mophie, and that he believes drives Quirky to embrace a community of inventors. "Do I throw my personal opinions around every now and then and encourage the company, its investors, and all around to swing big? Yes. Has that always worked for us? No." His new CFO and new business model, Kaufman hopes, have "given me the guardrails I need to be able to be myself without always betting the farm."