Hardware Talks

David Austin on the Risky Business of Manufacturing

What to think about when you think about hardware

As General Manager of PCH Startup Programs, there isn’t much David Austin hasn’t seen. He stopped by Highway1 to give a talk about the actual business of manufacturing and the things every hardware startup should consider, supplemented with data and examples from his many experiences advising countless hardware companies. We had a brief chat afterward about the risks startups face when trying to make things.

HWY1: Are there trends in the risks hardware startups have faced since hardware started to become a thing?
DA: Certainly:

  • The prototyping phase is less risky than it used to be. Now we have 3D printing, Arduino, Raspberry Pi — all kinds of tools geared toward quick iteration. That’s major.
  • Crowdfunding’s risk profile has changed. Nowadays, people are creating the hope for a product much earlier than they ever used to be able to; it used to be that you wouldn’t see a hardware product until it was on shelves at Best Buy or Target — you didn’t find out about it during its prototype days. The risk that’s gone up is this expectation that I can put money into a crowdfunding campaign and get a product; that’s gone through a big change. We’ve gone from being amazed and excited to becoming extremely disappointed by products being really late, poorly made, or never shipping at all. That’s the primary risk: people are really excited by new hardware, but they also aren’t trusting that it’s actually going to come into existence.

 

Are there places where you think risks may eventually appear that they’re not right now?
I think there are more and more companies on the channel side trying to get earlier, small-run kinds of products onto their shelves — even Target and Best Buy have startup programs where they’re trying to bring in earlier product. I think what’s going to be challenging for these smaller companies is managing cash flow and working capital: are they going to be able to work with these kinds of channel partners? There are risks in the form of returns and special terms they might have built into their agreements: for example, the retailer might decide their product isn’t moving, so they reduce the price to get it off the shelves — that might then set a price in the market too low for the startup to be able to afford to manufacture it anymore. So I think broader access is a double-edged sword: early access to products that aren’t necessarily ready for scale is really cool, but could be potentially devastating to startups trying to maintain their cash flow.

Are we moving toward a time where we see smaller production runs of more diverse products?
I think there is a trend heading toward more small-run factory capability worldwide, but it’s a slow trend — there aren’t suddenly going to be factories all over the world tomorrow that can create small runs of products. In other countries, the US included, there’s a lot of interest in bringing more manufacturing back locally, but it’s going to be heavily dependent on the politics and investment within each country, so we’ll see. I’m hopeful, because I think that’s what’s necessary to make things work. If we don’t do that, we’re going to be stuck in our current state: out of the total number of hardware products trying to get created, only a small percentage ever succeed in getting to manufacturing, and even then, they still have problems because of the smaller scale involved.

Having seen hundreds of hardware startups in your day, what are the three biggest risks you see them stumbling on?
I think the highest risks are:

  • Managing working capital and cash flow. You need to be appropriately funded to do a hardware startup.
  • Not managing the cost structure correctly. This is about the margin stack of the product’s bill of materials, cost of goods sold, any channel partners, distribution, shipping, etc. You have to make sure the cost structure determines a price point that actually supports the business. It’s a very different beast in the land of software, where the cost of distribution is close to zero and you can change things very quickly; hardware doesn’t have that flexibility.
  • The third is just getting investment. It’s still a challenge in the hardware space, because the number of investors investing in atoms is less. We’re seeing more investors starting to do hardware who haven’t done it before, but it’s another double-edged sword: they’re still learning the tradeoffs, and coming up with rational investment theses that work with hardware is challenging.

 

Speaking of margin stack, is the bill of materials the hardest thing to determine?
No, but getting it right and getting the right components is definitely a challenge, and there are people who specialize in just doing that; it’s a lot of what your core hardware team should be focused on. Other things to watch are the margin on manufacturing, shipping, and packaging. I’ve seen many companies who have a really great product and do the most fancy package design in the world because they want to make an impression on the shelf, and then it ends up costing more than the product itself.

What’s the biggest mistake a hardware company can make?
Having enough runway to truly survive the development process is a big one for a hardware team. In software, you can run super lean and cut down costs and still be able to deploy product and get revenue coming in. In hardware, you can’t do that as much: you have to be able to support the hardware, and you have to have support for the manufacturing. Some companies think they can do things to run leaner, but are actually just slowly killing themselves. In a software startup, sometimes you can make that work, with the idea that you can reach an inflection point where revenue starts coming in and you make up for it. In hardware that’s much harder because of the margin structures involved.

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