How a quirky 28-year-old plowed through $150 million and almost destroyed his start-up
Initially, the company looked like it would be a big success.
Kaufman, now 28, grew his company to 300 employees and raised $185 million. Quirky created hit products, such as a power cord that could pivot, and the royalties made a few members of its inventor community hundreds of thousands of dollars.
But in the last six months, the New York City start-up has laid off more than 20% of its staff, burned through tens of millions of dollars, and discovered that its founding business model broke at scale. Last week, the company also had to do an expensive nationwide recall of its "Wink" connected-home products because of a completely avoidable error.
How did Quirky go from a super-hyped start-up to a business with burn of $150 million on net-losses of $120 million, desperately in need of a turnaround? Business Insider spoke with more than a dozen people intimately familiar with Quirky as well as CEO Ben Kaufman, who was open about his missteps.
"We're trying to build an invention machine on the internet - nothing like this has ever been built," he says. "There's gonna be a lot of twist and turns, and this will not be our last twist. But the resilience of this company will be the largest single thing to determine our fate."
A 20-year-old with a $5 million business
Kaufman has always been an inventor. In high school, he wanted to find a way to covertly listen to his iPod in class. He invented the "Song Sling," an iPod case with headphones that looked like a lanyard. In order to mass-produce his invention he convinced his parents to refinance their home and then flew to China, where he burned through $185,000 and quickly realized how hard it was to commercialize an idea.
But he didn't give up. He called the fledgling company Mophie after his two golden retrievers, Molly and Sophie.
Kaufman started college at Champlain in Vermont, but dropped out during his freshman year out to focus on Mophie full time after he raised $1.5 million from investors at only the age of 19. His investors then hired a more experienced CEO to run Mophie, and the company began making a range of iPod accessories and cases alongside the Song Sling. At age 20, Kaufman was first on Inc. Magazine's 2007 30 Under 30 list. At that point, Mophie was on track to generate $5 million in revenue.
But investors felt antsy. They saw Kaufman's attention wander from "iPod condoms," as he called them, to a new business idea that would become Quirky.
He ran with his new business idea, software that could make developing products a social experience. Kaufman incorporated a new company, Kluster, the same day the Mophie acquisition was finalized.
Kluster's core concept was difficult to grasp. Kaufman wound up with a pile of debt while trying to get Kluster off the ground. With investors' blessings and an agreement to pay it all back, he's since used more than $300,000 of Quirky's money to pay off his debts.
The following is from a 2014 shareholders' note, but the amount owed has since been reduced by more than two-thirds ($ amount in 000's):
Quirky was born to turn napkin sketches into real products. The company gives anyone the chance of becoming a bona-fide inventor by submitting an idea to its website. Ideas get reviewed and voted on by Quirky's staff and the community, and popular products get selected for manufacturing. Quirky takes over the design, manufacturing, marketing, and retailing of those products. Community members who help bring the product to life are given a cut of the sales.
"Get sh-t done"
Quirky raised a $10 million Series A round of financing in 2010 to get going and a $16 million Series B the following year.
In the early days, Kaufman wanted a way to start printing prototypes. He and his team shut down Broadway between Houston and Bleeker and hired a crane to get a very large, expensive 3D printer - affectionately dubbed "Bertha" - into the office through a window.
"He's not afraid to take risks," Brian Kerr, an early designer who witnessed the crane spectacle, told Business Insider. "It had to get done, and he would find a way to make it happen. Nothing's going to stop the guy."six core values alongside "impatience," "futurist," "agile," "selfless," and "embrace conflict."
"We were anti-everything-established," one early former employee, who asked not to be named, told Business Insider. "We were going to do it all our own way."
Kaufman hated typical corporate structure. The company embraced a "suits go away" attitude (Kaufman himself wears a plain black t-shirt every day), an irreverent way of communicating with customers and the community, and a fun, casual work environment where, as one employee put it, you'd be "dodging Nerf bullets as chaos unfolded."
Kaufman also believed in transparency and insisted that all-hands meetings be live streamed so outsiders could tune in - even when hard topics like layoffs were discussed.
Quirky's first real breakthrough came in 2010 with a bendable outlet called Pivot Power, an idea submitted by a college student named Jake Zien. Pivot Power is Quirky's best-selling product by far; it has raked in more than $2 million for Zien and other community members who influenced its design.
Until mid-2013, Quirky gave its inventors a hefty 30% cut of every sale on its website, and 10% on sales from other retailers, which made the thin margins of a manufacturing company even thinner. Quirky's goal was to keep 40% margins, but didn't always hit that. In July 2013, it dropped the cut from direct sales down to 10%.
Quirky products started popping up in major stores like Target, Staples, Sears, Wal-Mart, and Bed Bath & Beyond. Inventions branched into an ever-growing list of categories, like pets, home, toys, office, and fitness. In 2013, the company struck a deal with General Electric. GE would share thousands of patents with Quirky inventors, and the two companies spun-off an Internet of Things business called Wink.
Need for speed
After raising a $68 million Series C in 2012, the company decided to move even faster. It scheduled three virtual product launches per week, which its community would then tweak and comment on. The company once brought an egg-yolk separator from a concept to store shelves in less than thirty days.
"You have to make it work, because you don't have an option for it not to," Kaufman once said in an interview with Mashable about the company's self-imposed three-products-a-week time line. "You'll look like an idiot if you don't launch a product."
But Kaufman's commitment to moving at lightening speed was part of Quirky's problem. The company put too much emphasis on plucking ideas from the community quickly and not enough on assessing demand or whether products could be built efficiently.
"Ben didn't want to pay attention to any product development fundamentals," one former Quirky designer says. "He wanted to bounce around on the moon. But we're still in f---ing gravity!"
Three designers that we spoke to said they felt rushed, with little to no resources for quality assurance.
"There was a lot of stuff that I designed at Quirky that I would never put in my portfolio," one former designer said. "The process just wasn't there. It was like baking a cake and taking it out of the oven mid-way. And we're going to sell it anyway."
Kaufman says the high-pressure environment and speed didn't have significant issues on product quality for the first four years of business. However, product reviews on Quirky's site suggest customers were frustrated by even simple products, which they say broke quickly or never worked, and one customer told Business Insider that of the 50-or-so products they ordered from Quirky, most were disappointing, including those without software.
Kaufman does admit that a lack of tools for quality assurance testing on software became a more serious problem when Quirky's products grew more complex. Several designers say that teams expressed their concerns to Kaufman, but the young CEO refused to slow down.
More than ever, Quirky's fast-to-market mentality negatively impacted product quality - its smart air conditioner received terrible reviews and the firmware on its hubs needed a major update after units hit shelves. Disappointment is ripe in forum posts about various software products and Gizmodo ran an extremely harsh review of the Wink system earlier this year. Former customer service representatives told Business Insider it was a painful time to work Quirky's phones.
"There were mistakes that easily could have been prevented," said one former employee. "An overarching theme at Quirky is the showmanship of it. It was very P.T. Barnum-esque, focusing on being 'The Greatest Show on Earth' instead of on attention to detail."
Going too far
Kaufman's own quirkiness caused his company to both take off and struggle.
"Ben is Quirky, and Quirky is Ben," one former employee says.
"His passion knows no limits and is completely infectious," Quirky investor Chris Sacca told Business Insider in an email. "Whether in meetings with Fortune 500 CEOs, or on the manufacturing lines in the US and abroad, Ben is completely magnetic."
As one Quirky community member puts it, "I'm pretty sure he could sell ice to Eskimos or BBQ ribs to ladies wearing white gloves."
More than half a dozen former employees we talked to agree he's personable, but can teeter on unprofessional, peppering company announcements with expletives and casual jabs at coworkers.
That style doesn't appeal to everyone. Six former employees, several of whom were laid off, agree that Kaufman can come off as a bully and creates a frat-esque culture where it's very clear whom his favorites are. If you don't laugh at Kaufman's sometimes-outrageous jokes, for example, you might feel like an outsider.
A former employee describes Kaufman as "ruthlessly flippant" and detailed a disturbing example. One day in 2012, a source says he saw Kaufman creeping between rows of desks. This person says Kaufman snuck up behind a few employees' backs, made a gun symbol with his hands, and pretended to shoot them. Soon after, the source says those people were fired. Another former Quirky employee corroborated the story. Kaufman staunchly denies it.
"When we're in an unfortunate situation where we need to cut people for financial reasons we take that super seriously," he says.
Kaufman has a high 80% approval score based on 39 ratings on the job-review site Glassdoor, where employees have encouraged him to "keep up the hustle" and complimented his down-to-earth management style. But a recurring complaint is that Kaufman needs a boss.
Three former employees told Business Insider that while Kaufman hires smart people, he does not take full advantage of their talent or advice. He is impulsive and often set in his ways, even when his decisions don't make financial sense for Quirky or seemed like passion projects.
For example, Kaufman demanded the production of a smart egg tray even though a team of engineers and designers insisted it didn't make economic sense. In another instance, Kaufman splurged on a $200 facial-recognition scanner for a conference room. Last year, he approved 500 art books with ideas submitted to Quirky by prison inmates to be printed for investors and community members as Christmas gifts, even though the company was hemorrhaging money. He admits the company bought too much inventory on some products, causing $25 million of its losses last year.
"If I ever go too far, it's because of the passion I have for this place, and the love I have for this place, and the community," Kaufman tells Business Insider. "I want this thing to be so perfect and so great. And, yeah, often I may take it too far, but it comes from a place of love, you know?"
Since the company's founding, Quirky inventors have made $9 million, while the company has burned more than $150 million.
By February 2014, Quirky only had about $50 million left in the bank and it was burning through $5.8 million a month, Kaufman confirmed to The Verge. In September, it hired a new CFO who went into "fix-it mode" and implemented a series of cost-cutting measures, including three rounds of lay-offs in November, December, and February.
"We got a CFO in here who knew what the hell he was doing, and he told us a harsher reality than anyone else would tell us," Kaufman says.
Kaufman aired Quirky's troubles to remaining employees and community members during a live-streamed town hall meeting earlier this year.
"But that's not the full story of what's going on at Quirky," he continued. "Tonight won't be a rainbows and butterflies town meeting."
Kaufman told employees the company wasn't making money. He announced its new direction: Quirky would stop making so many products. It would shut down its ecommerce site. A new initiative, called Powered By Quirky, would align the start-up with major brands and help those corporations figure out new products to launch.
"Quirky had quality issues and they had sales issues, and they're not trying to hide it," Marc Rumaner, an enthusiastic Quirky inventor who has made more than $45,000 through the site, says. "This change is something they absolutely needed to do. Whether it will be the right move or not, I think time will tell. I'm hoping this new path will be positive - I'm hoping it's a bright future."
So far, Quirky is working with headphone company Harman, toy maker Mattel, and Amazon's Dash product.
Inventors would be given a smaller cut of revenue per sale moving forward, between 1.5% and 5%, but will ideally see many more sales. The key will be whether or not Quirky can nail down enough partners to give its community a wide range of categories to invent in, and if those partners can find blockbuster product ideas through Quirky's platform.
Kaufman told Business Insider that other partnerships are getting locked down, the agreements come with quotas around how many products partners pick, and that he plans to raise a new round of financing over the next few months.
Will investors give Kaufman another shot?
Norwest Ventures partner and Quirky board member Josh Goldman declined to tell Business Insider if he planned to participate in the next round of funding, but pointed out that his firm supported the company at every single opportunity for fund-raising. He says he strongly believes in Kaufman and the next phase of Quirky.
Kaufman, of course, is confident in Quirky's future too.
"I'm ambitious as hell. The company is ambitious as hell," he says. "The goal is to create this invention platform that understands the pulse of the universe and delivers products as a result. It's a machine-learning, data science project that will exist for hundreds of years."
Even some of Kaufman's critics believe he will win.
"It's a company that will never die," one largely critical former employee told Business Insider.
"I feel like no matter what happens, Ben will always find a way to survive."
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