Fitbit buys Pebble from bank, in warning to Crowdfunding fans

News report: Fitbit is buying Pebble for $34-40 million

That Pebble is being sold for “less than [its] debt” serves as a poignant reminder that Crowdfunding is no pollyanna.  Folks who invest for a living understand that: some ideas work and others don’t, and that’s part of the venture world.  What’s interesting — even scary — about Pebble is that the business plan DID appear to work from an investment standpoint.  Despite that apparent success, the company still wound up technically bankrupt and was sold for an amount which was reportedly equal to its bank debt.

I’ve always been concerned about the risks that any form of Crowdfunding poses to retail investors (see prior posts “The perils of pushing Crowdfunding” May 29-12, “Speaking of investor naiveté….” Aug. 21-12 and ” “Significant deficiencies” in exempt market should cool Crowdfunding hype” June 1-13), and Pebble may serve as a Poster Child for both the success and failure of the funding model.  I appreciate that Kickstarter isn’t the same thing as AngelList, but I’m not sure that changes anything.

That a Crowdfunded pitch could raise US$1 million in just 24 hours caught the MSM’s attention in 2012.  The follow-on coverage and lobbying from a variety of corners served, in my view, to encourage Regulators to update (aka loosen) their rules around how early-stage capital gets formed.

The media coverage accepted the notion that a consumer product was the perfect concept to take directly to the investing masses.  If you could raise $10M from 85,000 different people in a matter of days, those same 85,000 were lined-up to buy the product once it was launched (the same theory would work on an AngelList deal).  There’s no doubt that Pebble presented a fabulous opportunity for word-of-mouth marketing: the product was attractive, demand was pent-up, and the associated buzz drew the attention of traditional venture capital firms.  This momentum flowed into a $15M round led by the august Charles River Ventures in May 2013.  Even more Kickstarter pre-order capital flowed in soon thereafter, which made sense given the external validation from well known VCs.

So far, so good.

Having survived the challenges of building a supply chain from scratch, along came the competition.  Pebble’s management team seemed to keep things together even as Apple launched its own smartwatch, and the company was able to raise another round of capital from VCs and Silicon Valley Bank in the months that followed.

It isn’t unusual that the business didn’t reach a critical mass quickly enough, or at least failed to achieve the all-important cash flow breakeven point, prior to hitting the wall.  It happens every day in the innovation economy.

But this isn’t a normal situation.

In Pebble you had a management team that had raised the majority of its capital from passive, if engaged, consumers [investors].  I’m no sociologist, but that fact must change the dynamic around the boardroom table as compared to your traditional VC deal where the entrepreneur contributed the idea but the VCs brought the lion’s share of the funding.  Did Pebble’s unusual circumstance have an impact when acquisition offers came in over the transom?

Your average Crowdfunder’s pain comes not from the handing over of Pebble’s customer base to Fitbit, but from the news that Pebble reportedly turned down an offer for $740 million from Citizen Watches last year.  At that price, if this were an AngelList deal, one would think that every investor would have earned a handsome return on their capital — something that experienced Angel investors would acknowledge isn’t a regular occurrence for anyone funding companies in the pre-product stage of their lifecycle.

That the opposite wound up happening is “life in River City” as a former boss of mine would say.

There are plenty of examples of VC-backed companies that have pushed away acquisition offers and wound up being sold for 25% or less of that same offer just three years later.  The VC funding and governance model certainly doesn’t guarantee that Boards will make “the right” decision in every M&A circumstance.  It’s not an exact science.

That said, you have to wonder, in this new world of funding models, which “independent” Board members are representing your average Kickstarter consumer / investor rather than serving as advisors to management.  It’s not as though sites like Kickstarter are actively canvassing for names to represent investors on these stories.  That’s a key peril of this new fundraising approach, whether be for pure equity via AngelList or what I’ll call “emotional equity” via Kickstarter.

When you remove an investment bank from the capital-raising equation, there’s no experienced I-Banker telling the CEO to appoint a couple of truly independent Directors to the Board following the close of, say, a $25 million Crowdfunded raise.  If a mid-stage company raised capital from a pension plan or growth capital fund such as ours, an institutional-level of monitoring or oversight is going to accompany that cheque.

In the case of a crowd-funded deal, one has to wonder  if the rejection of the US$740M Citizen acquisition proposal fact was at all driven by the nature of the capital pool that created the company in the first place.

In hindsight, which is a swear word for many investors, it appears that Pebble was always going to lose its independence.  The only question was whether that would be from a position of strength or weakness.  For these types of deals, had some Independent Directors successfully advocated for a tidy profit on their investment — despite the fact that their favourite watch would wind up as a Citizen product sku — Crowdfunding would have a huge victory under its belt.

Instead, this nascent movement is left with nothing more than a black eye and a tale to tell.

MRM