#1 is OK if and only if your customers are made aware of what they are getting into. They should know that what they are buying is a "beta" product. Otherwise you are being disingenuous.
I almost forgot that they did this. Unfortunately this doesn't work with these kinds of "artisan" projects because the material/startup costs tend to be high, and actually come down as the product gets more popular due to economies of scale. That's why you have group buys, and companies like Kickstarter. You need the money up-front, and you need some early adopters who are willing to go in deep on it.
AFAICT it tends to be the opposite for software as long as you can ship an MVP really early: there's no need to chase bugs and run tech support if you're writing code that only 10 people will depend on. It's a big time sink, but these kinds of things tend to be labors of love in the first place.
