Quirky was founded in 2009 in New York City with a mission to systematize the process of innovation, and recently filed for Chapter 11 bankruptcy (October 2015), abruptly laying off its work force of nearly 400 employees. Although various defects in its business model ultimately proved that it was an ineffective company, an analysis of its business and operating model over the past few years shows that such a conclusion is rather simplistic.
Quirky’s business model incentivized the public to create a massive pipeline of innovative products solving everyday problems (received thousands of new product submissions per week), and use the power of crowdsourcing to refine the designs of promising products and filter out the less promising concepts. Quirky paid for this pipeline of crowd-sourced innovation by pledging future royalty rights to users that submitted and contributed to product designs. Quirky then selected the most popular product ideas from its website and tasked an internal team to manufacture and distribute the products to nationwide retailers. As revenue was generated, Quirky then paid its community a percentage of sales based on the level of their contribution. This business model had many apparent advantages in terms of value creation and value capture. In terms of value creation, their R&D process was essentially automated. With no upfront expenditures, Quirky received a steady pipeline of product ideas, that were filtered based on community popularity, with the underlying belief that popularity during the R&D process would translate to sales popularity (assuming contributors are also end consumers or at least representative of end consumers). This de-risked Quirky’s later decision to further develop products with proven momentum. In terms of value capture, the fact that Quirky was developing proprietary products prevented competitors from offering similar products and incentivized retailers to carry its new, ‘pre-proven’ products.
Quirky’s operating model had two parts. First, its online platform provided a 2-sided marketplace for contributors of new product designs and consumers of end products (500,000 active users). Quirky facilitated the conversion of new product designs into end products with its team of engineers, designers, marketers, and merchandisers. This model of specialization initially seemed brilliant: the people that buy products tell you what they want to buy, and the people with the skills to create products execute and give the consumers what they demand. In order to grow its operations, Quirky received $185M in funding from top venture capital firms (Andreesen Horowitz, Kleiner Perkins Caufield & Byers), and secured partnerships to crowdsource innovation for General Electric, Amazon, Mattel, Harman, and PepsiCo. From the outside, Quirky looked like it could soon become a household name.
Why it Failed
So where did it go so wrong?
There were two major flaws that became apparent throughout Quirky’s six-year sprint. First, the business model was based on the flawed assumption that crowd-sourced innovation inherently yields products that will be in high demand by end-users (thus de-risking production for Quirky). In reality, Quirky’s model was truly “2-sided”: the contributors were not representative of end-users, and thus were not reliable bellwethers of what end-users (predominantly shoppers at large retailers) would ultimately buy. This was partially due to the incentive system in place that rewarded contributors through royalty payments. For individual contributors, the bar for ‘success’ (e.g., making a few thousand bucks as a hobby) was much lower than the bar Quirky required to maintain a profitable company. As a result, the ideas being submitted were usually novelty items / trinkets (bendable power strip, water fountain for pets, fogless mirror, etc.) that you would more likely see in SkyMall, rather than in the portfolio of a Fortune 500 company.
The operational model was ineffective in correcting for this flaw in the business model. Given the low quality of contributed product ideas, Quirky should have refined both the top and bottom of the product funnel. At the top of the funnel, Quirky should have set guidelines as to characteristics it looks for in successful products (industry, market size, target product cost, etc.) to focus user submissions and thus increase the quality of product ideas. Towards the bottom of the funnel, Quirky should have taken a more active role in screening ideas and receiving end-user (and/or retailer) feedback to get a better idea of which products would likely be in high demand. This would have prevented Quirky from regularly spending $1M developing products that resulted in very little revenue.