Online collaborative product development funding

Social product development is an emerging web based method of attracting funding and interest for new product ideas. Also referred to as crowd funding, social product development (SPD) allows individuals to ‘invest’ small amounts in return for some reward (usually a sample of the finished product).

For product developers, SPD provides seed-funding to pay for development, tooling etc. Almost as importantly it can also gauge interest, secure initial sales and help attract distribution deals.

The idea of crowd funding through social media and online communities was originally pioneered in the late 1990s by fringe artists looking to fund low-cost recordings, films or tours. Fans of a particular band or genre benefited by going to the concert, film etc and being publicly acknowledged (i.e. in album notes or on the artist’s website).

The shift to use this crowd funding model for product development was more recent and has been facilitated by web-based agencies such as KickStarter (US), Pozible (Australia) and CrowdCube (UK) with more sites still emerging. A notable KickStarter product success is the PadPivot, a portable and ingenious stand for iPad and other tablet devices. After setting a goal of US$10,000 in January 2011, the idea raised almost US$200,000 by mid-March, with about 5000 people pledging an average of US$40 each to support the product. For PadPivot’s inventors, this enabled them to complete the design, produce complex injection moulding tools and ship final manufacturing products by June the same year.

Why contribute?

The buzz of investing in an interesting product idea will never have the emotive pull of supporting an emerging band or artist. So if it’s not ‘social cred’ what’s in it for SPD investors?

On purely pragmatic terms, contributors receive rewards matching their contribution. For example a $5 contribution gets them acknowledged on a website, $15 gets a T-shirt and a $50 contribution earns the supporter one of the very first products produced by the venture.

Beyond these tangible rewards, SPD also taps into people’s altruistic side, as well as offering bragging rights to being a co-partner in the latest ‘must have’ product. Understanding who contributors are and what they want gives some clues to the types of products that are best suited to social product development.

Preparation

SPD is not risk or cost free. Before being ready to list onto a SPD site, a product developer (inventor, designer, entrepreneur etc.) needs to put in a fair amount of effort and investment themselves. This includes protecting the intellectual property (IP) of the idea, and then undertaking initial design development to a level that clearly demonstrates and communicates the idea.

Both of these steps should involve professionals; patent attorneys for IP protection and product designers for industrial design and product engineering. Each of these steps can involve some time and cost, and need to be co-ordinated. For example, CAD mechanical drawings produced by design engineers are needed for patent applications.

Lastly, a compelling presentation needs to be produced, ‘selling’ the idea to potential contributors. This presentation usually takes the form of a YouTube-type clip featuring CG (computer generated) animations of the product, and video of a prototype in-use as well as the developer describing the product background and business case.
Generally the better this preparation is done, the better it will do on SPD sites.

Going live

Most agencies operate along similar lines although details vary slightly between each of the different SPD sites.
To list a project, developers are required to submit a video description of the idea, and define their funding goal ($) and a rewards schedule based on tiered contributions from a couple of dollars through to larger amounts (sometimes up to a thousand dollars).

All going well, the project attracts enough interest to reach and surpass the set goal, and the funds, less the agency’s fees, are transferred to the developer. If a listed project doesn’t reach its goal within the timeframe, funds are returned to the contributors. This latter scenario ensures that the system only supports projects with sufficient funds to reach an objective.

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The pitfalls

For all the apparent benefits, SPD has at least as many pitfalls. For contributors, the obvious one is that they may be getting mixed up in a shonky deal, and the product never eventuates. There are, although admittedly few, cases of this occurring in the US. It is important to note that contributors have no share in the business they are ‘investing’ in, and effectively no tax position in relation to amounts contributed.
For developers, the biggest issue is the brazen exposure of their idea. This is a two-edged sword; publicity attracts interest and contributions, but also alerts potential competitors to the idea. Even with water-tight IP protection, competitors can use their stronger market position or potentially work around patents and designs if they get an advance preview of the idea.

Tips

Based on the above, we believe SPD could be a very useful model if the following can be achieved. Therefore BEFORE listing, potential social product developers should:
  • Already have plentiful supplies of entrepreneurial spirit (chutzpah). SPD is not for shrinking violets as you’ll need to sell your idea and yourself online to a whole wide world of backers.
  • Ensure the idea appeals to the kinds of people that trawl SPD sites. That is, quirky technology, lifestyle or homeware products are good. Worthy but obscure products are not. Alternatively, truly altruistic products, i.e. products that help third-world communities, could also do well.
  • Also ensure the product is of a value that suits being provided (given away) as a reward for contributions.
  • Have strong IP protection in place. IP protection, especially across multiple countries, requires good legal advice, which we all know is never cheap.
  • Get professional industrial design done on the idea to turn it into a feasible and desirable product. As a minimum the product idea needs to be represented by still CG images. Better yet are CG animations and a working prototype.

As getting to this point requires much of the design development to be done, developers should be prepared to have invested a significant amount before ‘putting it out there’ for remaining funds to pay for things like electronics design, tooling, packaging, marketing and initial production. Developers should also be ready to act quickly if the project reaches its funding goal so that they can beat any competitors to the market.

SPD isn’t for all and has some real drawbacks. It’s yet to be seen if it becomes a viable community-driven alternative to new product development, or ends up as an interesting curio of the web 2.0 age. But for the moment, it is emerging as an exciting and liberating alternative of bringing about new products and designs. And that can’t be a bad thing.

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