Building a startup around hardware is a daunting task, at least compared to creating an app, but is no less lucrative. If you're thinking about launching a hardware-based company, Travis Levell (Head of
Marketing, Shenzhen Valley Ventures), dives into the topic of hardware, outlining the biggest considerations founders must keep in mind before building a physical product.
As the startup saying goes “Hardware is hard."
Before I actually started helping hardware startups grow at SVV, I had only worked with software startups. I had heard the saying before and always shrugged it off thinking “I guess dealing with a physical product would be harder."
I didn’t even know that half of it.
As I started helping hardware founders look at their business from a marketing and business perspective, all I could remember thinking was “Holy moly, this really is hard."
But experiencing more adversity always makes you stronger. In fact, there are 7 fundamental things that ALL startups (software, hardware, or other) can learn from my hard time in hardware.
Here they are:
1. Validation is 10X more important than you think it is
Unlike in software where adding a feature to your product can take days to weeks, simply changing small features on hardware products can take months and carry huge cash expenses.
This really emphasizes the importance of creating a great MVP, and discovering precisely which features are needed in order to get customers to use your product, and doing no more and no less.
Remember, in practical application Minimum viable product translates to your startup team using the least amount of resources to create something that customers will still buy, or use (if your business is free applications.)
Sure, in software we can be a little bit lazier in this respect, because adding unnecessary features without doing the proper customer research doesn’t cost us $100’s of thousands more, but in hardware it does in the long run, and can even lead to the death of the company.
Having too many features leads to a more expensive manufacturing process, more expensive materials, a more complicated design, and at the end of the day, and more expensive product for the end customer. In many cases, hardware founders end up adding 10 features that are unnecessary, out pricing their customers, when in reality their target customer may have only wanted 3 of the features that the product has.
So it goes for all startups. Don’t be lazy during the customer development process, because it will have amplified negative results the further you build your company if you don’t know exactly what your customer wants.
2. A penny saved is a penny earned
Burn.
It’s like the “full bottle of shampoo” example I’ve seen used by VC’s before.
When you have a full bottle of shampoo, you’re much more likely to overuse it. I admit that I’ve been guilty of this. I really pile it on when I’ve got a brand new bottle.
But when you’re down to that last 1/4 of the bottle you begin to only use what you need. Knowing that you’re running low causes you to be much more frugal in your use patterns, yet it still gets the job done. Until you run out.
The same phenomena happens all too often in the world of startup funding. Founders raise a fresh round of funding and waste a TON of money on things that are classified as “nice to haves” (e.g. not mission critical) while they’ve got a full bank account, and 6 months to a year later start pinching pennies because they don’t have enough money to even keep the lights on.
The only difference is going and getting more funding isn’t exactly as easy and running to the store and grabbing a new bottle of shampoo. Even if you are able to raise more funding, the founder runs the risk of over diluting themselves with their shares in the startup and putting themselves in a much tougher situation.
The bottom line: Even if you raise a good amount of funding, continue to focus on the features of your product, team and company that are mission critical, and leave “nice to haves” alone for the most part. Especially in Seed to Series A rounds.
This will automatically set you up for much higher chances at success.
3. Targeting a specific customer is a must
Although doing the correct measure of customer development will help you solve this problem for the most part, it still must be emphasized.
Once again, all too often founders are lazy early on, and don't target a very specific customer. It may not seem like a big deal in the beginning, but the problem gets bigger and bigger as you continue to build your company.
In software, there’s a little bit of a buffer. All you have to do is put your app on the marketplace and it’s pretty easy for users to download it right? So you’ll still gain some traction if you fall behind on the targeting front.
In hardware, every customer is a battle to get. Most products are priced between $100-$500 so it’s a major purchase decision for customers. Once hardware startups reach the marketing stage the customer targeting problems begin to show themselves very clearly, and they are nasty to deal with.
The main takeaway here is that ALL startups need to be very particular about who you target with your product, website and marketing. All of the most successful startups and companies in the world got this right, which is why they grew so quickly (think Ford, Facebook, Apple etc. All of their early customers were very targeted.)
Remember that if you’re a startup founder, the odds are automatically stacked against you. It’s your job to do everything that you can to increase your chances at success.
4. Plan your sales and marketing channels ahead
Product. Product. Product.
That’s what most hardware startups are all about. If you think about it, most early hardware teams have to be multiple product development guys, which leaves very little room for thinking about strictly business or marketing.
Don’t be fooled. This problem plagues ALL startups, as I’ve seen it running rampant across software and service based startups as well.
You have to plan your startup around where you are going, not just where you are currently. By thinking about where you predict the primary places your customers will find you, you will automatically guide your company and product in a direction that prepares you for success on those channels.
Here’s a perfect example. In hardware, Amazon can serve as a great sales channel for startups in the space.
The only problem is, the cost of doing business on Amazon cuts into the profit margin of the product. Many founders have not planned the product, and price point, to be able to handle a cut into the margin and end up cutting themselves off from marketplaces (like Amazon) retailers (like Target and Best Buy) and valuable partners that would have to take a percentage of sales.
The same goes for any company. You might have to get into the App store, or you might rely heavily on Facebook Ads to get traction. Make sure you’re planning your product development so that you’ll fit into these places, and it will make economic sense for you to do business there.
5. Try to kill your baby (no, not like that)
The old lean startup way of thinking.
Most founders are optimistic about their company and product idea. They try to think of reasons why it should exist.
In reality, you should try to think of all of the reasons why it shouldn’t exist.
Many hardware founders spend YEARS of their life working on a company, end of raising funding, working on it some more, only to realize their product was never meant to be. It just wasn’t plausible, or didn’t appeal to a large enough market.
In software the cycles are much shorter, but make sure you look at your product objectively and not just with optimism in mind. At worst, you may decide to work on something else, at best you’ll tweak your idea to be something much more plausible.
And as I’ve mentioned before, always talk to your customers about it as early as possible.
6. Do things that aren’t scalable, in order to scale
So many founders get caught up in trying to do things that are “scalable” they think that growth is going to come easy.
They think that if a marketing channel takes a little bit of thought, creativity and hard work it must not be scalable, and they should focus on things that come easier.
The only problem is, there is no easy way to grow an early company and founders get confused when they have to work REALLY hard art making sales.
In reality if you are in pre-seed, seed and series A funding times, you don’t necessarily need to do extremely scalable things to gain traction. You just need traction itself.
This means that going to events, trade shows, focusing on Facebook ad audiences, writing content, creating one time partnerships and things along this line may be your answer to grow your company.
But many founders, in hardware and outside, ignore these prospects thinking that there is a magic bullet which will be the right way to grow their company effortlessly. Let me be the first to tell you that any way you can grow your company, especially early on, is the right way.
Wait until late Series A - B funding to start scaling, and leave seed and early Series A to proving demand for your product and that you have a viable company on your hands.
7. Optimism and Money Don’t Go Hand in Hand
Not only do founders end up spending money to fast, but they also run the risk of not raising enough money.
When raising money for your startup, it’s always smart to overestimate what you’re going to need, but also set hard rules for you and your team to stay disciplined.
For instance if you think you need $200K, you may want to try to raise $250K-$300K and commit to only using $200K and only resort to your extra money in case of emergency. This will be much easier on you than running out of money and having to raise additional funding.
Obviously since Hardware companies are much more capital intense than your typical startup they often underestimate how much money they’ll need because there are so many hidden costs. I won’t go into details here, but there are a LOT in hardware, but don’t be fooled. There are still quite a few hidden costs in software startups as well.
Conclusion
It goes without saying that if you are a hardware startup, following these steps is a MUST.
If you’re not a hardware startup, take a second to be thankful that your problems are much easier. Now, if you implement these steps, you’ll be much more likely to succeed in your non-hardware startup.