Thursday, 5 March 2009

Introducing the Open Source Hardware Central Bank

This blog post started with a cross-country driving trip, Zen and the Art of Open Source Hardware, and culminated with discussions during and especially after Justin's Open Source Economic Council (OSEC?). The list of people I interviewed and talked to about this is too long to list individually, so instead I'm going to throw credits to everyone who's been kind enough to help on a wiki soon. This coming weekend, Justin, Andrew, and I will be "launching" the Open Source Central Bank. This is the first in a series of blog posts describing it, and next week I'm headed up to MIT and Harvard to talk to some economists and business professors about how it will work. I'm excited!

Why does Open Source Hardware need a bank?

Because Open Source Hardware is different from Open Source Software. Software can be made with time, but hardware needs time and money. The same kind of "openness" principles from the Open Source Software "time economy" transition nicely to the Open Source Hardware-based "time economy," but they seem to get muddled in the OSHW "money economy." Need proof? Just try to answer any of these questions: who makes money from it, who funds it, why do they fund it, and who's helping to make it sustainable for the community? Open Source Hardware lacks a way for individuals to come together, make a cool project, and get something out of it - without taking a second and third mortgage on their houses!

Right now, the status quo, emerging trend for OSHW DIY'ers has been: build something, put up a bunch of money to build a few of them, if people like it, scale it up, raise money, realize you might lose all that money, charge a margin on top of it to cover your potential losses, start a small company to resell more, cross your fingers, maybe get lucky or maybe not. Setting up each little company takes an infrastructure investment like incorporation legal fees, Paypal transaction costs, and website hosting fees to name a few. For every small hardware project, there's a potential to have to pay upwards of 40-50% of the initial cost of the project again in just infrastructure fees - that's prohibitive and ridiculous for little guys like me.

I initially built the Illuminato with financial help from some friends, but mostly from a former mentor of mine who sponsored the project by helping to get scaling costs for the inventory. That worked the first time, but I've been stuck with a decision of how to fund it. If I only build 25 at a time, the cost will be around $50 apiece, which is just wrong. So I've been sitting here trying to figure out whether to take out a loan, pass the hat amongst friends, try to pitch it to a VC, or try something else? This is the OSHW "money problem" - how do you fund Open Source Hardware?

A vision for Open Source Hardware

Looking at Open Source Software, it's a thriving ecosystems of communities, projects, and contributors. There are a few companies, but they mostly offer "paid-for" services like consulting, tech support, or custom code/build-to-order functionality. I'd like the same for Open Source Hardware. I'd like the money problem to go away for small contributors like me and others. And I'd like to help guys like Chris and Mike and Mark and David and Jake build more cool stuff because it's fun.

I happen to believe that success for Open Source Hardware is not a distributed, highly-fragmented ecosystem with hundreds or thousands of individual companies, each structured around a single project. That seems wrong, and the transaction and infrastructure costs alone make that hard to stomach, let alone the time it takes to set all that up. I also don't believe that Open Source Hardware should ever be venture-backed. This is a controversial topic to some people. But speaking for myself (and quite a few others, apparently!), if I'm contributing my hard-earned time and money to projects and giving them away for the community benefit, I want to know, like Mark and Justin have taught me, that the community is reaping as close to 100% of the benefits. I don't believe in middle-men or intermediates just for the sake of it, or in speculators profiting off of my spare time. I get enough of that during my day job, so I want to eliminate that from my "spare time!"

Principles for the Open Source Hardware Bank

Justin, Andrew, and I have put together what we'd consider a beginner's set of principles for the Open Source Hardware, which the bank will operate under. Naturally, these are also on the wiki. These principles are described in terms of what we think Open Source Hardware needs to succeed:

A mechanism to:
  • Reduce margins and share costs for the community
  • Minimize the risk and opportunity cost of unsold inventory
  • Provide incentives for Open Source projects to move to production without risks
  • Allow the building and distribution of low-quantity, non-scalable products (e.g. niche applications that are potentially non-VC fundable, since "bad business idea" isn't the same as "bad hardware idea")
  • Give rewards and profits back as close as possible to those who contributed

A platform that:
  • Minimizes economic transaction costs to high-paid non-laborer economic types
  • Reduces barriers to contribution
  • Rewards innovation and encourages new ideas
  • Encourages project-level (not necessarily company-level) competition

People who:
  • Participate because they are getting as much or more out as they put in
  • Do it not just to make money and profit off of others for free
  • Have rare, valuable skills who volunteer their talents for recognition or fun
  • Are willing to build a more sustainable hardware innovation system
  • Are willing to teach others for the gratification of helping others learn new skills

What's the main issue the Bank is trying to solve?

Open Source Hardware has two main financial problems that the Open Source Bank will try to alleviate (in addition to a number of other tool-based problems, but others in the community are working on those thank goodness): "Throwaway Costs" and the "Quantity Monopoly." As if the current economy weren't bad enough already, both of these problems seriously hurt DIY'ers and potential Open Source builders who want to participate in the growing Open Source Hardware community.

Throwaway Costs - building physical hardware takes revisions. Early revisions have things wrong, like misplaced traces, wrongly sized solder pads, or just bad luck. In the OSS software world, when things go wrong, you just fix the code, hit compile again, and the only thing it really "costs" is your time finding and fixing the error. But in the OSHW hardware world, errors mean broken, non-functioning junk PCB's that cost money to make. And that means lost money. Who pays for this? Guys in college, or guys who just lost all their money in their houses can't afford to build 2, 4, or 6 revisions of hardware before it works!

The Quantity Monopoly - this is a term I'm giving to the fact that large companies, especially PCB houses and component suppliers, offer volume pricing discounts. Normally this is a good thing, but only if you're building 10,000's of finished products. In the DIY OSHW world, we're talking about building 1's to 10's to 25's at a time, and so the community gets burned every time by paying "quantity tax" to large suppliers. The has the side effect of pricing individual DIY builders out of many potential hardware developments, simply because they don't get cheap enough until you make 1,000's. It's a quantity monopoly, because there's only 1 quantity number that anyone wants to build: 100,000 of anything. This is a difficult topic, and in my interviews and conversations, I've found many people on both sides of the fence about this - some for, some against. The bottom line is: if stuff were cheaper, Chris, David, Mark, Mike, Omar, Justin, and I'd all personally be able to build and share more, so anything prohibiting this is what I'll call "bad."

The Solution: how the Bank will work

The Open Source Hardware Bank will work to eliminate the scaling and quantity pricing problem for OSHW projects by funding the build of 2x the quantity of any Open Source Hardware product. That means, if a project has found a way to find 10 potential buyers, the bank will put down the money needed to fund 10 more, for a total of 20 products. If a project has found 25 community members to buy in, the bank will fund another 25, to bring the total quantity down to 50. This should reduce the unit costs by around 10-30% of any hardware project, and in the case of the Illuminato, it'll reduce costs by almost 40%!

In return, anyone who pitches in money to the bank will get a modest and sustainable return on their investment, somewhere between 5-10%. Normally, this wouldn't be a huge amount, but given what I've learned about the "real" economy recently, 30-50% return on investment may never have really existed in the first place, let alone represented "sustainable growth." This money gets paid back and cashed out when the rest of the inventory is bought as a check that Justin, Andrew, or I write and sign personally.

So Andrew, Justin, and I will see to it that the Open Source Hardware Bank does not default, and each of us will guarantee every investment. Maybe you could call it AJMIC (instead of FDIC insured)! No one is trying to become a millionaire (without lots of hard work), a high paid investment banker (ugh), or Alan Greenspan (was he ever right about anything?). We're just trying to build a sustainable little financial institution to help Open Source Hardware DIY'ers. Consequently, we're also human and realize the limits of spare time, so no one's rushing out to build 50 projects, just 1 or 2 or 3 at a time will be perfectly fine, thank you!

The Open Source Hardware Bank is "Open Source"

The bank is funding Open Source Hardware, but it is also trying to be a step in the direction of Open Source Finance. As a result, the bank is also going to be "Open Source." It will run on a wiki, everything will be transparent, and it is open to anyone who'd like to join in any of the following roles:

Open Source Banker - these will be rotating positions, and Andrew, Justin, and I will do it first until it gets unsustainable and we need help (hint hint Mark and John)

Open Source Hardware Investor - by buying anywhere between $1,000 and $5,000 Open Source hardware T-bills

Open Source Economic Council - attending bi-monthly Open Source meetings (OSEC) in NYC and Boston to vote on what the bank will fund

If you're interested, or just think Justin, Andrew, and I are totally nuts, just send me an email! :) inthebitz at gmail... and in the meantime, every ridiculously crazy project needs a respectable logo, so here's one for the Open Source Bank:

Naturally, the text around the logo reads "Open Source Hardware" in ASCII, there's wreath of resistors representing overcoming resistance (buh dump chhhhh), and a course a fancy set of circuitry in the middle, and a hexadecimal base 16 set of stars around the center...

Here goes nothing!!!


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