How to Create a Killer Hardware Startup
Building a startup that designs, makes or sells hardware is a very specific beast - that´s why there are incubation programs focussing solely on hardware such as the Things incubator in Stockholm or communities such as the Hardware Club. On the upside, a piece of hardware gives you the opportunity to build a strong brand with loyal customers (think: iPhone users!). Also, if you are successful you have created a barrier of entry that makes it hard for any competitor to enter your space. However, there are specific challenges when you design, make or sell hardware.
Last summer, I talked to one of Swisscom Ventures´ portfolio company about their progress. They had started with the marketing for their product a couple of months ago and had gathered a nice volume in pre-orders. So I assumed they were ready to ship. When I got through to the CEO he told me that they are all in the office working day and night glueing their product by hand because the manufacturer hadn´t manage to make the piece of hardware waterproof!
So imagine these founders sitting in a room with thousands of pieces of their product, glue in their hands to make sure they can meet the sales targets they promised!
Why is a hardware startup special?
Building a startup that designs, makes or sells hardware is a very specific beast – that´s why there are incubation programs focussing solely on hardware such as the Things incubator in Stockholm or communities such as the Hardware Club.
On the upside, a piece of hardware gives you the opportunity to build a strong brand with loyal customers (think: iPhone users!). Also, if you are successful you have created a barrier of entry that makes it hard for any competitor to enter your space.
But why is it so hard to build a hardware company? You may think that there is easy access to Chinese factories that can build to your order. Sure, production is not such a big issue as it used to be in the early days of micro electronics. Oftentimes, you “only” need to combine components and wrap them into an elegant packaging – shouldn’t be that difficult?
This is more difficult in hardware than many founders think
I´d like point out a few things that set hardware startups apart form pure software or services startups:
- Working capital is more important for you because funding goes beyond personnel and marketing: You need stock to be able to sell. And this stock often needs to be financed before you sell a single piece. So you need “working capital” – and probably a lot of it! In a startup there is always the question of how you get the working capital. In an established business it may be much easier to get a bank loan. As a startup, you may need to use equity financing for this. But that´s an expensive form of financing because you´ll need to give away a part of your company.
- Also, the development process for hardware is different from a software or services cycle: In software, you can have an agile method to develop stuff iteratively. If something isn´t working, you may be able to fix it even after delivery with a patch or in a SaaS environment. The release cycle in hardware can´t be taken that lightly – what is produced is there, no upgrades possible. So don´t start with big volumes in the beginning
- Distribution and service is something to think about early on: Unlike software you have to actually go somewhere to get the hardware or have it shipped to you. Do you go through retailers or distributors? Will you setup your own webshop? How do you plan to handle the goods? And then there is after sales service: Who should the customers turn to if something isn´t working or if they want to return it?
How much money do you need?
As a rule of thumb you need to plan CHF 3-5m only to develop the HW product (=to get to production and have the distribution model in place). You think this is a lot? Well, you need pay for the molds even when you are using components, there´s a bit of testing involved even with “standard” components – and it always takes longer than you think!
The 4 biggest mistakes you can make
- Underestimating the capital requirements – it is very hard to find (new) investors with a half ready product.
- High return rates can kill any business – so stop delivery if your product isn´t working.
- Overestimating the margin: In a volume business you might hope for economies of scale. However, this also applies to your competitors and will drive prices down.
- Insufficient planning for the cost of packaging and shipping of the product.