[Open Manufacturing] Open source hardware bank

[Marco Giustini]

Open Source Hardware Hackers Start P2P Bank

By Priya Ganapati (Wired - March 18, 2009)

Getting a business loan in this economy can be more difficult than
landing a reservation at French Laundry in Napa, California. Now try
selling the loan officer on an open source hardware project where the
blueprints will be given away.

Thatbs why the hardware hacking community is turning inwards to fund
its ideas. Two open source hardware enthusiasts, Justin Huynh and Matt
Stack, have started the Open Source Hardware Bank to fund hardware
projects such as the microcontroller board pictured above.

The fledgling bank is funding only open source hardware projects using
capital raised from other hardware geeks. Itbs like a community of
Facebook friends borrowing and lending among themselves b a
peer-to-peer bank.

"This speaks to the rise of the do-it-yourselfer, someone who is not
just a consumer but also a producer, inventor and investor," says
Huynh. "But someone also ought to be thinking about the money problem
when it comes to open source hardware and we are doing just that."

The open source concept has traditionally been applied to software,
but open source hardware is rapidly gaining ground. A fast-growing
community of inventors is publishing the specs for a wide range of
hardware, from CPUs and graphic cards to MP3 players and even a
laptop. The idea is to let anyone take the designs, build on them, and
profit from the work of the group b while contributing enhancements
back to the community at large.

But open source hardware requires more financial investment than open
source software. It isnbt as easy as downloading a few open source
programs on to your existing computer, explains Stack. "With open
source hardware you donbt get a finished product until you have put in
some money," he says. For instance, therebs the cost of the printed
circuit boards, the solder and the components.

"To build open source software you just need to set up a project on
Sourceforge," says Huynh. "But if you get open source hardware wrong,
it burns a hole in the wallet."

The Open Source Hardware Bank, which isnbt yet fully up and running as
a federally regulated lending institution, allows those interested in
open source hardware to make investments in specific projects, then
(hopefully) reap returns ranging from 5 percent to 15 percent from the
successful sale of the projects. For the creators, the bank offers
funding that could bring down the costs of their project and give them
the stimulus to try out new ideas.

"The way the bank works is the more you build, the cheaper it gets,"
says Stack, who in the true open source spirit first laid out the idea
on his blog.

So far nearly 70 people have signed up as lenders for the bank. Huynh
and Stack are managing the process through an Open Office Calc
spreadsheet and an open source statistics program called R. They soon
hope to bring it online through the Open Source Hardware Bank website
that lists some of the initial projects that have been funded.

Lenders are offered returns based on a rolling six-month average so
dud projects will be offset by sales of profitable ones. It takes just
a few deals to strike it big, Huynh and Stack say, and because it is a
community that is not just passionate but also knowledgeable, better
projects are likely to get funded.

The promise of returns is enough to get former investment banker
Andrew de Montille excited.

"I put money in the bank not because I consider it as a charitable
investment," says de Montille. "Rather, I am very confident that some
of the projects will do well enough to be profitable to the
investors."

De Montille wonbt disclose how much money hebs pumped into the bank
but says it is "somewhere in the five digits." And the returns the
bank offers is more than he can find anywhere else in this economy, he
says.

"It can be a market-leading investment at this point," says de
Montille. "Here the loans are being backed up by the actual product,
rather than the credit profile of someone."

The bank borrows a page from the playbook of peer-to-peer lending
sites such as Prosper and Zopa. Before the credit crunch squelched
their dreams, the two sites offered borrowers and lenders a way to
connect with each other instead of going to banks or other traditional
credit institutions.

"There werenbt people really speculating and profiteering off that
model," says Huynh. "It was more about the community getting together
and helping."

Huynh and Stack hope to bring a similar spirit to the Open Source Hardware Bank.

"Groups of people that have strong shared interest are really the
perfect place for peer-to-peer financing to work," says Scott Pitts,
former managing director of Zopa U.S. "As a group they are not out to
make a billion dollars, they just want to fund their passion and do it
in a sustainable way."

Huynh and Stack met at an event in New York and found a mutual
interest in open source hardware. Huynh, a pharmaceutical consultant
by day, is no open source hardware obsessive. But he has tinkered with
open source electronics enough to realize that therebs a need for more
community-funded projects.

Finding the money to chase pet projects is a challenge for hardware
geeks. The Open Source Hardware Bank hopes to help alleviate two main
financial problems for DIYers: throwaway costs that result from
repeated revisions to physical hardware during the design process, and
the inability to take advantage of volume discounts for raw materials.

For every project that comes to the bank, the community will provide
funds to build twice as many units as there are potential buyers. The
move would double the number of pieces created and could reduce
per-unit costs by around 10 percent to 30 percent.


A promising idea it may be, but in this case the geeks are likely to
face serious opposition from the financial regulators, says Paul
Kedrosky, angel investor and a senior fellow at the Kauffman
Foundation, which focuses on entrepreneurship and innovation. The Open
Source Hardware Bank founders donbt have to flip the pages of history
too much to see the fate of peer-to-peer lending ideas in the United
States, points out Kedrosky.

Last year, major community lending startup Prosper was forced to shut
down by the U.S. Securities and Exchange Commission for not
registering with regulators.

"If I put money into a project and am offered some kind of return on a
system-wide basis, that requires issuing a security," says Kedrosky.
"Which means the open source hardware guys will have to go through the
same kind of securities registration as Prosper was forced to."

Zopabs Pitts agrees that the Open Source Hardware Bank needs to figure
out how to navigate through the financial rules of the U.S. market.
"These guys do not have a regulatory strategy and they need one," he
says.

The SEC regulations around peer-to-peer lending SEC issue arenbt cut
and dry. Prosper, for instance, was in business for nearly three years
and made $178 million in loans before the SEC intervened. With the
open source hardware bank, says Pitts, all depends on the kind of
promises and the system that is built. Zopa did not have any SEC
related issues as it created a quasi-community lending model and used
credit unions as intermediaries.

Right now the Open Source Hardware bank is still navigating through
these issues, say Huynh and Stack. Both say they are still trying to
develop the idea and it is still far from its final shape. "One step
at a time," says Stack. On Wall Street, the blood bath of the banks is
likely to continue. But for the Open Source Hardware Bank, the doors
have just opened for business, they say.

Pitts says they could make it work. "They have done a good job of
articulating their goals and objectives so far," he says. "What they
need to do is to figure out a way to make it work."

For more, see Liquidware Antipasto, the open source hardware blog that
has details and updates on how the bank will work.

Updated: An earlier version of the story incorrectly referred to an
Excel spreadsheet being used by Justin Huynh and Matt Stack. They are
using an open source program, Calc, instead. We regret the error.

http://www.wired.com/gadgetlab/2009/03/open-source-har/

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