#DigitalSkeptic: CES Crowd-Designed Sound Sends Private Equity to a Dirt Nap

LAS VEGAS (TheStreet) -- Gavin Fish figures he's landed The Big Consumer Tech Lebowski when it comes to raising money.

"Our customers are smarter than we are," yelled the vice president of sales and marketing for LH Labs over cerveza, chips and blaring Jimmy Buffett music at this Mexican joint on the Vegas Strip. "And we figured out a way for them to tell us what products to design."

Fish was in town with about a half-dozen of his Sacramento, Calif.-based staff, celebrating one of the most fascinating and unlikely success stories from the just-wrapped 2014 International Consumer Electronics Show.

See, LH Labs is the fast-growing, hip new unit of established high-end audio component maker Light Harmonic. If you're a hopeless audio snob (as I am), life is simply not worth living unless one's headphones are pure awesomeness. That level of audio love often requires something called a digital audio converter -- or "DAC," rhymes with Jack. DACs turn gritty digital output from PCs and lux audio equipment into a luscious signal that better headphones (say, a Sennheiser Hd 850 or a Grado HP-2, can replicate perfectly. Light Harmonic DACs are as good as any model there is. And if you have to ask what it costs, well, you know ...

"Our top-end model runs $32,000," Fish said. "If I can figure out how to sell even 10 of those a year, that's huge. We work in a limited market."

Until now.

Fish and his team of Web marketers and interactive product designers have, quite literally, reinvented this high-end audio maker into a solid middle-market digital peripheral provider. And they did it all by themselves, overnight and without the aid of a bank, pricey private equity or any investors at all.

"What we realized was, we sit in the middle of a very passionate group of audio geeks," Fish said. "So we took advantage of new tools to communicate with them. And in the process, almost by accident raised north of $1.2 million."

Most remarkably, only part of that money was raised in a way investors might know. The $299 Geek Pulse DAC that is Light Harmonics' hot new product was funded on the by-now-standard Indiegogo social fundraising platform. But he did not spend a fortune walking the traditional crowdfunding line of designing a specific product, creating complex marketing video and running a sophisticated social media campaign, all in the hope of driving enough buzz to raise enough money during the roughly one-month window of the campaign.

Instead, LH Labs used social fundraising as way to host a meaningful, two-way conversation with potential customers about a potential product. "We were entirely open about the process," Fish said. As he told it, if customers wanted new features, his team would go design it, present his revised designs back on Indiegogo and make it clear at each step along the way that each new feature would cost that much extra to add.

The tools Fish used to "crowd design" the Geek Pulse could not have been simpler. Basically, he created a simple online video and an active collaborative space that engaged potential users about specifics they wanted in a device. And over the course of the campaign, LH Labs modified, redesigned and added features to the product many, many times.

"The crowd designing of the Geek Pulse is really what made the difference," Fish said. "Without that, this would, at most, have been a $50,000 campaign."

Crowdfunding = social marketing 2.0
Investors should realize that not only Geek Pulse, but Indiegogo's management, are very much behind the notion that social fundraising is as much a marketing and product design tool as it is a capital formation tool.

"We are going to make a case study for them to show that social funding rounds are not this high-stakes gamble where you are dead after 48 hours if you don't get the buzz out," said Slava Rubin, CEO at Indiegogo. "I am absolutely convinced that this is like social media in 2004. Everybody thought it sucked until they figured out that its the only way to sell."

Rubin is also brash about what the all-in-one fundraising/marketing model LH Labs pioneered will do to the financial services and private equity communities. "It will be like everything in digital, there will be a hollowing out," he said. For small to medium projects, platforms such as Indiegogo will do most of the work. And really big innovations such as pharma will still need traditional capital, he explained. But the vast middle ground of venture investors will be under intense pressure to provide more value, take more risk and generally do more for less.

In other words think what blogging did to newspapers.

Already, LH Labs has slashed its cost of capital: Indiegogo took all of 5% of cool $1.17 million raised to date -- a fraction of the double-digit equity stakes traditional early-stage investors expect. All of which gives Fish nothing but glee.

"Whoever wants to invest will have to be smarter than our customers," he said. "And that won't be easy."

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.