After CES, I wrote a post discussing what we look for when evaluating investments in consumer hardware products.
Since then, I’ve been involved in a series of conversations with investors, Founders, and partners of consumer hardware companies – both small, medium, and at scale.
As an increasing number of factors have brought down costs of starting these companies, there has been a growing meme around the how “easy” building a consumer hardware businesses has become – which any Founder of a scaling consumer hardware company would tell you in simply untrue. (You can see our opinion on it here and here.)
The biggest shift has occurred at the earliest stages of experimentation – specifically prototyping and initial launch (mainly on a crowdfunding site.) While still complicated, the infrastructure has improved that components are inexpensive enough to experiment in small numbers (and build small run working prototypes.)
The complexity immediately levels up once the company starts to focus on building and shipping product at scale. The core of this issue is two particular nuances to consumer hardware (and other physical product businesses)
1. Consumer hardware companies are running the equivalent of 5+ different companies in parallel from the beginning. (eCommerce, Hardware, Software, Manufacturing / Ops, and Sales could all have the responsibility of standalone businesses)
2. Its incredibly difficult to test products for all the edge scenarios that will happen once a product is in the real world. (Testing web apps is relatively easy because there are only so many variations on browser; testing desktop apps or browers plug-ins is hard because of the increase in variations; trying to test a products wifi across specific weather conditions for specific individual use case issues would be impossible)
Combine these two issues with excess funding too early, you may end up with a company running too fast doing too much and potentially unaware of an product issue that is unfixable or purchasing products to fill the channel that don’t move and eventually get sent back – either issue creating a situation where the company is in dire fiscal straits.
Some examples of issues Founders I’ve spoken to in the last few weeks:
1. First production run had wireless chip pointed the incorrect direction. Made product unusable for 50%+ of users
2. Company made large order based on purchase order. Purchase order changed and then cancelled due to product delay.
3. Ran Kickstarter project based on software concept without any code written. Actual end product not possible nor legal.
4. Chose packaging that looked great in retail, but exposed products shipped via UPS to damage
Across the ~15 consumer product companies, we’ve backed at True – some best practices that consistently show success:
1. Launch a beta product first and learn.
No matter how long you take to build the product – it will at least have edge case issues Launching in beta (to customers who opt in) will make them more forgiving (and give you time to make the product work)
2. Over test on hardware
Once manufacturing starts, its incredibly to make changes to product design. Test early, test often, and test hardware first. Once hardware is finalized – you can spend solely focused on testing software.
3. Spend money on package design
Packaging matters. Its the first interaction your customer has with the product. Especially once you hit the channel. Spend the money and make it awesome.
4. The channel is an amplifier (but only if your product works)
Retail stores can drive exceptional sales growth for consumer hardware businesses. Make sure you have enough gross margin to cut these deals (and make sure to structure the deals with reasonable payment terms) Related: in parallel, the company needs to invest in marketing to drive demand (and sell through the product)
5. Put people on the ground in your first stores
Hire part-time people and put them in the store to talk to customers, talk to cashiers, learn about product reception (and awareness) as well as answer questions for staff
6. Put at least one ops person with your manufacturing partner (at least part of the time)
Relationships matter in manufacturing and the related knowledge gain of working alongside the manufacturing partner will pay dividends as the company scales. Related: More valuable than cash or in kind services from your manufacturing partner is financing terms – especially in the earliest days of scaling. Raising equity to finance inventory before revenue growth is exceptionally expensive (when compared to long payment terms on receipt of product)
7. Raise the right amount of capital for your market size at the right time
Not every market is venture scale. Raise the right amount money for the size of the opportunity at a price that gives you optionality.
8. Hire traditional senior leaders in traditional roles
Manufacturing, Retail, Customer Support, and other traditional roles haven’t evolved much and the best folks come with great experience and industry knowledge. Hire for experience and the company will benefit from it.
In 2008, starting a consumer hardware business without deep pockets seemed crazy. 7 years later, there are 3+ accelerators focused solely on enabling new hardware companies with initial investments of $50k (with VCs getting increasingly active in the space)
Its a great time to start a hardware company, but lots of challenges exist on the way to scale. Raise the right amount of capital, leverage outside services in non-core areas, hire the best traditional talent in traditional roles (customer support, manufacturing) and de-risk along the way.