So.. You Want to Launch a Consumer Hardware Startup?
Back in ’97, after ten years of software development in enterprise software, I switched to consumer and never looked back. It was incredibly satisfying to hold the results of my work in my hand, and see real people derive a benefit of what I built. Today, I no longer do engineering work, but I am still active in the consumer industry as a corporate technology scout and angel investor, reviewing a ton of pitch decks. Here are some key lessons I learned about the consumer tech business:
It’s All About the Brand
As VP of Engineering for Broderbund’s best-selling CD-ROM product, The Print Shop,I was part of a team that toiled to deliver innovative new features on an annual schedule. At the time, it really bugged me to see the company spend the same amount of effort on creating the packaging as on delivering the bits on the shiny disk. There were endless meetings to discuss the weight of the cardboard and the branding and images on the box cover. I now realize that, in the consumer business, this work is as important as the engineering. Retail ruled at the time, and at most retail outlets, purchasing decisions were made in the moment. The prospective customer would pick up the box, give it a quick shake, and try to figure out whether it seemed worth $89. At that moment, the weight of the cardboard (and the physical manual inside that nobody ended up reading) was the critical factor!
When I review consumer startup pitch decks today, I quickly assess whether the company possesses the necessary branding know-how to sell to consumers. Are the slides beautifully designed with a consistent branding identity and messaging, or are they a jumble of technology features listed in default PowerPoint bullet formats?
In the same vein, I look at the composition of the founding team. Everyone knows that not having any engineers on the team is a red flag for an early stage startup – the same should apply to branding and marketing talent. A consumer tech startup that consists of solely engineers is in as much trouble as a startup consisting only of marketing and bus-dev people. Diversity in backgrounds is key in the early days – and it keeps expenses low.
What’s Your Viral Secret?
The distribution strategy for today’s seed stage consumer startups usually involves direct (online) sales. A fear years ago I worked as COO for Lumoback, an early stage startup in the wearable space. One of our key challenges was to scale sales by 5x-10x year over year. The first part (selling 5,000 units) was relatively easy. Actually, that has become general wisdom in the hardware startup world these days - on Kickstarter, you can sell 5,000 units of practically anything. The next, more impressive step, is scaling to 50,000 or 250,000 units sold. And that is HARD. Our weekly sales closely tracked the amount of PR we would receive for a given week – when we were featured in the Wall Street Journal Personal Technology section, sales sky-rocketed – a few days later, they would return to normal background levels. It was really hard to sustain higher sales without the media coverage. Our product was challenged in a key aspect in this regard – it had low virality.
When I review pitch decks today, I look for that viral hook that entices current customers to find more customers for the company. With a viral hook, you only need PR for the initial customers, then sales will grow on an exponential curve as your product gets recommended to friends and friends-of-friends. The best viral hook in history was the telephone. Think about it, once you invested in installing a telephone in your house, you were very motivated to convince your close friends and family to get one as well! At Lumoback, we struggled to find a good hook. Our product focused on helping people manage their back posture and people generally don’t like to talk about their back problems. Without virality, sales are a direct function of PR and promotional activity and that is hard and expensive work.
Beware the Operations Trap
As VP Engineering at Broderbund, my job seemed hard, but I realize now that I had it easy. All I had to do is to corral engineering teams located on several continents to deliver regular software updates. In a hardware startup, software is only a fraction the total job! You need to do mechanical design, manufacturing process control, hardware component design, physical product testing, certification, etc.
On top of that are the inventory issues. Let’s say your product suddenly becomes the runaway hit of this year’s holiday season. If it’s a software product (say, Angry Birds), no problem. The only worry here is that you might have a slightly higher web hosting bill for the month. You might also want to staff up your support department a bit more. But in general, the added downloads turn into instant profit and you are an instant hero!
If you’re selling hardware, a surprise run-away hit presents a problem, since you already made the decision six months ago on what you will be building and selling at the end of this year (your manufacturing order). EVERYONE is mad at you (CEO, investors, customers) for underestimating demand. The other side of this coin could happen also, of course. You could be too optimistic and order too much inventory. Well, everyone will also be mad at you for that as the company is stuck with $M’s in inventory that will soon become outdated.
This is the downside of running a hardware business – there is a lot of plate-spinning involved, and there are ALWAYS plates that are wobbling and about to shatter to the floor. If you’re not careful, this process will consume everyone in your small team, leading you to ignore the more creative aspects of building your business. Isolate some of your team members to continue to chase down new business development opportunities and add new, valuable software features, while everyone else is in “production hell”.
Raise Smaller Rounds
Let’s face it, your startup is probably not going to become the next Facebook or Google. The most likely successful outcome of your hard work is not an IPO but an acquisition. Often this is a win/win scenario – a startup can jump up to a scale of distribution it had not imagined achieving for years, and an established consumer brand can add a new, innovative product to its solution offerings.
The best way to ensure that everyone is happy with an acquisition offer is to keep fund raising rounds as low as possible and to operate the company in as lean a manner as possible. This may run counter to the conventional “land grab” wisdom you might hear around Palo Alto. It goes something like this: You have an innovative new idea that doesn’t take a lot of IP (Intellectual Property) to implement, therefore you need to prevent copycat market entrants. Think pet food delivery or bike sharing. You are in a land grab situation, and thus you need to expand operations and brand recognition quickly. You will need to spend money “like it’s 1999” in order to protect your market position.
But most consumer hardware startups have IP that can be protected, and they’re usually also focused in a “niche” that provide effective barriers to entry. At Lumoback, our niche focus was back posture management. We did not have initial competition and with each unit sold, we learned more about how it is used in the field – widening the gulf of understanding between ourselves and others that would consider market entry. We also applied for broad patents covering our technology as a secondary defensive measure.
So in many cases, you can avoid those expensive media buys and instead slowly build brand equity by delighting customers and getting viral recommendations and sales. This is hard and tedious work. Consumers are fickle and hard to please and it is difficult to keep your brand top-of-mind in the media. Your team’s initial excitement about introducing a brand-new product concept to an enthusiastic set of early adopters soon wears off – and it turns into the doldrum, day-to-day routine of supporting the growing customer base, continuously brainstorming new PR opportunities, planning and resolving an endless list of manufacturing issues, and making time to develop that Android version or follow-up product you have been promising. Welcome to the post seed stage hardware startup slog!
It turns out that there are companies that actually thrive in slogs like this - large corporates! Their organizational model supports steady operational execution and incremental product improvements. So when you’ve reached the slog stage, it might be a good time to sell your company – after all, you probably already have a new revolutionary product idea in mind – just no time to work on it right now.
Beware, your investors may not be as excited as you are about that acquisition. While the cash produced by your share of equity may be a “life changing” event for you, investors may expect a larger return on an investment or even want to hold out for an eventual IPO. They know the odds are long in achieving it, but across a large portfolio those odds improve. Earlier stage investors tend to be happy with reasonable acquisition offers while later stage investors (that committed larger rounds of money) may try to stop an acquisition. Taking less money up front generates more options in the back end.
Don’t Believe the Negative Hype
“Hardware is hard,” is a popular quote heard at Silicon Valley networking events. But don’t let this stop you from starting your dream company. Maybe a better quote is, “Hardware is harder”. Yes, it’s harder than building a software app, but it’s not insurmountable. Today, an effective support structure exists to enable a diverse founding team of 2-4 entrepreneurs to deliver a consumer price point hardware product within 12 months from start to finish with only seed stage (<$1M) investment capital required.
And besides, hardware is the only place you can still make money if you want to be in the consumer business. “Back in the day”, I worked in an evergreen consumer software business selling successive versions of The PrintShop to delighted consumers for $89 a copy. Today, consumers run their software applications for free on the web or buy smartphone apps at very low price points ($1-$5).
In the hardware world, consumer gadgets still sell well in the range of $49 - $249. If you want to start a consumer business without selling your soul to the advertisers, consumer hardware is the place.
See my previous blog posts:
- Jan 4, 2018 So.. You Want to Launch a Consumer Hardware Startup? Jan 4, 2018
- Sep 30, 2015 Silicon Valley Is Not the Solution to Your Problem Sep 30, 2015
- Aug 11, 2015 The Multi-Dimensional Startup Aug 11, 2015
- Feb 6, 2015 Wearables: What's next? Feb 6, 2015
- Oct 15, 2014 Startup Burn Rate: Simmer or Meteor? Oct 15, 2014
- Aug 27, 2014 5 Surprises About Internet of Things Aug 27, 2014
- Jun 19, 2014 How to Talk to Corporates Jun 19, 2014
- Apr 30, 2014 How to Talk to Startups Apr 30, 2014
- Mar 11, 2014 Avoid the Corporate Disease Mar 11, 2014
- Feb 11, 2014 The Corporate Disease Feb 11, 2014
- Jan 28, 2014 Founders vs. Owners Jan 28, 2014
- Jan 10, 2014 CES at the Fringe Jan 10, 2014
- Jan 3, 2014 Silicon Valley Lite Jan 3, 2014