Crowdfunding for Manufacturing: A Double-Edged Sword for Product Design Startups

January 15, 2013

crowdfunding

Crowdfunding is one of the hottest trending topics in product design and manufacturing innovation.

Websites like Kickstarter and Indiegogo allow startup design entrepreneurs to raise money through donations or pre-sale of their products, even before an actual product exists, and without having to sell equity in their company.

The advantages of crowdfunding for manufacturing are multiple. Designers can test the markets and gauge interest in a product before committing to large scale production. Further, the integration of crowdfunding with internet marketing and social media allows a design and manufacturing company to combine broad-scale marketing campaigns with the early stages of business development.

But there is a dark side to crowdfunded manufacturing projects. Raising capital for a new, innovative product is only one challenge for design entrepreneurs, and a successful crowdfunding campaign can introduce additional challenges to startup companies. Here are a few examples:

The Cat is Out of the Bag. Once you’ve announced your new product idea online, the world of copycats may rear its head to clone your innovation. Unless you have intellectual property protection for your design, you may find yourself racing the clock to beat copycat competitors. To compete effectively in the market, you’ll need additional strategic advantages – not just funding for the manufacture and distribution of your product.

Unexpected Manufacturing Problems. Product designers with limited manufacturing experience may encounter headaches that transform crowdfunding success into disaster. A beautifully sketched design or homemade prototype is just the first step – substantial investment in producibility, vender selection, methods and process, tooling, and quality control is also required to ensure that you can produce a quality product on schedule. Shortcuts can result in delayed or halted manufacturing that may transform your previously enamored pre-sale customers into an angry social media mob that won’t hesitate to disparage your business online.

Scaling Problems for Highly Successful Pre-sales. If your crowdfunding project far exceeds expectations, you may swiftly find yourself a victim of your own success. The vendors you selected for production may be unable to meet a dramatically larger production demand, or production of such a scale may require a much longer period of time than you promised to pre-sale buyers. Meanwhile, if you negotiate with new manufacturers to deliver a larger scale production, it may be far more expensive than you planned because they will be able to see the results of your crowdfunding campaign and your pre-sale price points online, allowing them to drive up production price and kill your profit margin.

When all of the factors are considered, crowdfunding to finance manufacturing presents an enormous opportunity for product design startups, along with an entirely new set of challenges. The lowered barriers to entry are seductive, but also dangerous. In the end, increased access to capital and marketing channels are still no substitute for the talent and experience that have always driven successful product design and manufacturing.

Disclaimer: This article is not legal advice and does not create an attorney client relationship. To reach the attorney responsible for this article please contact James Blake, The Blake Law Firm PLLC, 9442 N. Capital of Texas Hwy, Arboretum Plaza One Ste 500-181, Austin, Texas 78759. (512) 651-3930.

Photo courtesy of Nick Ares, aresaburn Flickr

 

Topics: Featured, Legal, Content Type

James Blake

The Blake Law Firm, PLLC.

James Blake is a growth-oriented business attorney who strives to be a creative business partner, to identify value-add opportunities, and to crystallize the relationships, structures, and processes that will drive your commercial success. James Blake practices law in Texas and Hawaii, and has protected the interests of businesses across a broad range of industries, including technology, construction, service and retail, food and beverage, franchisors and franchisees, product manufacturers, and investors. His work experience encompasses commercial transactions, litigation, and advising business operations in the U.S., Africa, and Asia. James was an editor of Law Review at the University of Hawaii and conducted international commercial law research for the Institute of Asian Pacific Business Law. He served as the Official Reporter for the 2008 IAPBL China Enterprise Bankruptcy Law Symposium held in Hong Kong, and in the same year worked at a large firm in Singapore. James currently advises clients in international business and investment issues in addition serving his client’s legal and business needs in Hawaii and Texas. Currently based in Austin, Texas, James is an avid writer and enjoys speaking at business-law seminars in addition to his legal practice. In his spare time, James enjoys sculling and kayaking on Ladybird Lake, outdoor photography, and supporting visual and performing arts.
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