Hardware entrepreneurs & fees from crowdfunding platforms

Photo Courtesy of TomLP7 Flickr PhotoStream

Photo Courtesy of TomLP7 Flickr PhotoStream

//Note: In an earlier conversation, Scott Miller, Dragon Innovation’s chief executive officer, had told me that their new site charged a prep fee of 2,000 dollars. When I connected with him later, he told me that it had been miscommunication and that the prep fee charge is 5,000 dollars//

Last week, I wrote about Dragon Innovation’s new crowdfunding site.

The site, which charges a prep fee of $5,000 for an assortment of services prior to a crowdfunding campaign, has drawn a mixed reaction from entrepreneurs and competitors. While the latter derided the Boston-based firm’s move as a “marketing” gimmick, entrepreneurs were curious about returns on the initial investment for prep fee.

“They are charging $5,000 for service that we provide for free because we don’t have that huge overhead,” says Greg Fisher, founder of the Berkeley Sourcing Group, a Berkeley-based manufacturing services firm. “The Dragon Innovation guys are very good marketing guys but they have very little going in China (the site of Dragon’s manufacturing facilities).”

Fisher’s firm works with a different pricing model for hardware entrepreneurs. They charge on a cost per piece rolled into their initial estimates. Thus, the bigger an entrepreneur’s production run, the greater BSG’s earnings. In contrast, Dragon Innovation charges an upfront fee for each consulting phase.

The Reasoning Behind Dragon’s Crowdfunding Fee
Context is necessary to understand the value proposition for Dragon’s crowdfunding prep fee.

As venture capitalists hesitate to invest in hardware startups, entrepreneurs in this space are increasingly turning to crowdfunding platforms to finance their projects. Because they work on a commission basis, crowdfunding platforms have added incentives to make campaigns succeed.

A successful campaign, however, is where the rubber hits the road for most hardware startups. Production begins and their estimates, which were factored into the crowdfunding campaign goal, are tested. Unlike an artiste’s crowdfunding campaign (whose delivery depends on his or her vision and productivity), a hardware entrepreneur’s campaign’s delivery model is dependent on multiple stakeholders from their contract manufacturing personnel to suppliers. If the entrepreneurs overcommit or forecast incorrectly, they might run into delivery problems (as noted smartwatch maker Pebble recently did).

Thirty-three-year Carlos Herrera, founder of PintoFeed and Dragon Innovation client, told me that his consultant at Indiegogo, a popular crowdfunding platform, was simply interested in taking credit for a successful campaign. She asked him to set a low funding threshold without much knowledge of his product or manufacturing costs. “She wanted me to overachieve my goal,” he says.

Naturally, the Dragon prep fee is a “no-brainer” for Herrera, who says he was really naive about manufacturing before his first venture.

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