Crowdfunding electronic product development. By Peter Cowley, Camdata
Like many internet enabled technologies, crowdfunding is disrupting established models. Use of a loan based crowdfunding platforms is enabling SMEs to get relatively cheap, unsecured (although the directors may have to provide personal guarantees) loans, when they may not be able to obtain bank lending; individual lenders (the crowd) can receive around 6% to 9% annual interest on their cash (depending on the level of bad debt).
One such example, Funding Circle is challenging banks by lending capital from individuals to small businesses (SMEs), sharing the risk (each individual lends money through the platform to many companies, so one failure is not significant) and sharing the banks’ traditional margin with all parties, including the Funding Circle platform, who take a cut. Even the government is supporting and making money from it: http://bit.ly/1pc1K5T
But this article is about funding your new technology project.
If it is a consumer product (eg a new form of wearable technology) then Kickstarter and Indigogo offer the crowd a chance to be an early adopter, probably at a discount to the launch price. This is crowd product funding, which also tests market interest and gains product exposure.
The money (collected up front) is used for tooling, working capital and materials, which, of course, is a risk, as the founders may be unscrupulous; they may hit an insurmountable technical hitch and/or they may simply run out of money before delivering the product or service.
The Pebble Watch (which is my own first wearable computer) is the best-known Kickstarter project, raising $11M and, even so, was many months late.
Crowd equity funding is different – one invests in a team, a business idea and a market opportunity with your cash buying a stake in the business. A sort of online “Dragons’ Den”. However, all that one receives is a share certificate – just a piece of paper, with a promise (actually a dream for both parties) to give investors a return of many times the initial investment.
Sometimes, there may be a product gift for the shareholders, but that is unusual. And please bear in mind, the statistics show that out of ten startups, six or seven will fail or become “zombies”, two or three may have a small exit and one a larger exit, and that you will have to wait, maybe 6 or 7 years, for that exit.
Although now looking dated, NESTA produced a report which gives an annual “interest rate” of 22% for a portfolio of angel investments, although that figure was based on a number of assumptions and limited data.
There are various crowd equity funding sites and I contributed my views in an interview for an article in Investors Chronicle in February this year. My own favourite (in which I am early angel investor) is Cambridge-based Syndicate Room where the crowd invests alongside an angel (or angel group) who has performed the due diligence, negotiated the valuation and will act as an investor director to guide the founders and, hopefully, protect the investment.
So the big difference for the investor is:
- with crowd product funding, you have a good chance of getting an innovative product within 12 months.
- with crowd equity funding, you will get a piece of paper, which will much more than likely, be best used to light a bonfire, and if you do get a positive return, you will probably have to wait many years. However, do not be put off. With a portfolio approach of 10+ carefully chosen investments, the very good returns are possible.
And for the entrepreneur, crowd product funding is better for consumer products (and you won’t need to give away any equity), but crowd equity lending is better for business products.
Whether you fund your idea with crowd product, or crowd equity funding or your own resources, my company Camdata can help with your electronics and product design requirements. Formed in 1984, we are 30 years young, and have sold to many of the FTSE500, in a variety of sectors. Our design skills are RF, sensing, low power, product concept and design and low to medium volume manufacturing.
But, we do expect our invoices to be paid in cash, rather than product or equity!
About The Author
Peter Cowley is a Cambridge based entrepreneur (having founded a dozen technology and other companies), personal and corporate angel investor (with a portfolio of over 30 companies), charity chair/trustee, property developer, mentor and start-up non-executive director.
Get in touch with Peter:
Keep the conversation going on Twitter: @CambWireless
Want to find out more about Cambridge Wireless? Visit http://www.cambridgewireless.co.uk/