10+ Painkillers for Scaling Hardware Startups
A decade ago, Marc Andreessen of A16Z said, “Software is eating the world.” Today, with the lion’s share of capital going to SW and AI services, I’d say, “Software is eating the world, and AI services are gorging.” We might rename “Silicon Valley” as “SAAS Valley.” But no matter the hype, we live in a physical world, and the infrastructure and our physical experience of technology depend on hardware innovation scaling it.
Although many Silicon Valley investors like looking for the next Facebook or the next “1000x return in 2 years” type of thing, some of the most impactful and detrimental technologies we use today are based on hard, painful, deep tech innovations that scaled up to the masses via radical execution and founders’ biblical pain tolerance. This sentiment is held even today by some deep-rooted investors like Bill Gates, KPCB, and Lux Capital. Hardware (HW) business is also shown to be more robust to sudden market fluctuations, hence the recent governmental incentives to bring manufacturing back to the US, and it plays a more strategic role in an economy’s infrastructure.
From deep HW innovations that enabled Apple, Bloomberg, Tesla, and Amazon, to higher-level creative service companies like Peloton, Bird, and Nest, HW is known to be, well, hard. One of the major problems facing HW startups is scale: the majority of HW businesses work only when economy of scale kicks in, meaning large upfront capital investment and a tailing market adoption risk. So today I talked with one of my dear friends, Charles Huang, who has a long track record of successfully scaling HW products, and I asked about his tips and insights into this scaling problem. Charles has pioneered several HW startups, including founding Guitar Hero, a product that has sold tens of millions of units worldwide during a time when connecting musical instruments to game consoles was completely unorthodox. The full interview is below, but here is the distilled version: the top fifteen points on how to scale in three phases.
Phase 1: Market fit–hacking your way from zero to one without breaking the bank
Charles believes that market fit is the hardest phase of any startup. You may have heard a lot about the “10x better rule,” “lean startup methodology,” or “finding a product that a small set of people love rather than everyone likes.” Here are six painkillers to get to market fit fast and with less pain.
1. Iterate with customers fast, but iterate with yourself much faster
Let’s face it, you’re going to be making a ton of prototypes, and a whole bunch of them are going to be trash. The best way to reduce pain in this process is to be your most critical self when prototyping. What are you trying to prove with this prototype? What is the minimum viable experiment to prove your assumptions? Once the assumptions are proven, start prototyping and bringing in friendly customer representatives. Listen to them carefully. This lets you toss the trash and fine-tune your MVP quicker and with less cash. Charles’ painkillers: deeply understand what you are selling, try to eliminate friction, and bring all that value to your customers. Another interesting technique he has used is hiring some hardcore customers in-house to help with internal iterations.
2. Hack into parallel pilots
Make a small menu of pilots (no more than 3 or 4, and not too far apart in principle) and stretch and twist your offerings to see how your customers respond. This way, you don’t have to fully commit to one idea at the outset, and you can let the traction define which direction needs more attention.
3. NREs: yay or nay?
Investors get goosebumps when founders say they’ve taken on a bunch of NRE projects. Why? Investors want to see, by Series B financing, $10M+ in annual recurring revenue, a great metric for them because they can quickly filter through many companies. But for you, as a business, you have limited cards to play to make your plans work, and you can’t just jump into a different business. Still, you founders may find NREs great for two reasons: (1) they serve as potential entries into acquisitions and investments, and (2) they provide some level of revenue and industry credit. True, it’s best to have a money machine that generates cash 24/7, but it’s better to have industry credit and a few cards to play than having no game at all, especially during tough times. The downside of NREs is that they can expose your competitors to your IP and could distract you from the bigger market. So NREs shouldn’t be the primary business, but, rather, a means toward a larger opportunity. If the opportunity for an NRE is unclear, then that’s not a good NRE.
4. Practice pivoting
Leave space for pivoting in your plan, in your communication with the team, and in your communication with investors. It might seem like the best execution is to have a perfect, precise plan and execute it flawlessly, but that’s unfortunately not how the world works. A startup is like a baby: it’s messy, it’s finicky, and it’s influenced by the environment, often unpredictably. If you set the expectation early on that changes and shifts will happen, and you just maintain a set of core values for guidance, then you won’t have to go through the pain of resetting expectations every time something changes.
5. Stop piloting, start selling
The bar for meaningfully delivering value to customers is usually much higher than you expect. Your inner circle is probably too nice to tell you the hard truth and will be too gentle with encouraging words. At the beginning, it may seem that pretty much everything is against you. You don’t have economy of scale, so your product is more expensive; you don’t have massive capital resources, so you can’t afford the time or money to finesse the product how you want; and the market always seems to be wanting something slightly different. To mature from pilot to a larger scale, you need to start selling and using pilots as a starter, like an appetizer ahead of the main course. The pilot should not be an experiment with a “yay” or “nay” answer at the end. Rather, it should be a respectable move toward the vision you have sold to your customers. Tangibly, that move could be a volume MoU or LoI, or a tangible contract. The way to reduce the pain of selling is to capture a “wow” factor or to communicate a vision where customers can get notable value out of this collaboration, e.g., by describing how customers can save a ton of money or provide significant market leadership or edge.
6. Start with novelty sales, but don’t take them too seriously
Charles emphasizes novelty when he talks about how working with Gamestop and how that specialty retailer almost had to have the product, solely because of its novelty. Whatever you’re offering, there are definitely a whole bunch of novelty sales you can make before you get to repeatable, large-scale sales. Explore those. Who are the companies, customers, users, etc., who must have your product simply because it’s novel? Go to them and start selling. You’ll not only polish your sales cycles, but you’ll also have those verticals be exposed to your solution.
Phase 2: Small Scale–from 100K$ to 10M$
Now you’re starting to see some market fit. You’ve sold less than a million dollars of product and want to go to a small scale. How do you go from novelty sales to repeated sales? What should you do on the team side? On the partner’s side? On the tech side? Well, the worst thing you can do is try to lock in customers one by one as outreach. I learned from one of my founder-friendly investors, Semyon Dukach of One Way Venture, about Geoffrey A. Moore’s book Crossing the Chasm, which talks extensively about how to focus on beachhead market and market positioning. In this phase, the gears must shift, and this is a painful process. Here are some painkillers.
1. Grow out of the novelty sales trap, or the “Chasm”
Novelty sales are great in those early days, especially for winning awards, earning some press coverage, and maybe even closing your Series A round. These sales create some buzz and show that your solution is valid, but they’re not enough to prove that yours is truly a lucrative billion dollar market. And, ultimately, TechCrunch and NYTimes won’t pay your bills. You have to disrupt your thought process on this scale. You can’t maintain a linear system and expect nonlinear results. Shift your mindset to alleviate pain, and move away from the “1st in the world,” “best in the world,” visionary-academic mindset, and toward an operational “market ownership” mindset. What has to stay or be amplified, and what must you cut? Another painkiller: build a bridge between those novelty sales and a larger scale funnel; you can use partnerships or contracts, or set a minimum order quantity in limited niche markets. This may make some customers wary, but those one-off customers aren’t your highest priority.
2. Locking funnel with less pain
This is probably the hardest part of going from 10s of units to 1000s units. Contract manufacturers usually want a large commitment and will charge you up front for a large volume, a volume that you may not yet have. How can you reduce this pain? Charles has a great solution: he worked with distributors and partners to pay a part of that upfront payment or inventory and then earned a cut in return at the back end of sales. Preordering is another method, and many websites, like Kickstarter, can help. But deep tech or enterprise products don’t do well there. What’s more, if your Kickstarter campaign fails, it might bring down both team morale and investor confidence. It’s much more effective to have industry-specific partners that help you scale.
3. Automate, Automate, Automate
Stay away from hand-crafted, customized sales processes, and automate as much of the process as possible. Here is when a great website, some press, word of mouth, and sales partnerships or platforms help.
4. Choose the right contract manufacturers and distributors
Choose wisely. This choice can make or break your company, especially if you sell a single product. Charles recommends that you start with a small project with CMs to get a sense of their character. At this scale, you need flexible and friendly CMs who are sold on your market vision. Always have tiered vendors and CMs warmed up, so that in case one fizzles, you still have plan B or even plan C. Make sure you reference check the partner and ask about their experience, their market, their revenue, etc. This information is critical to ensuring they are in the same league as you. Both too big and too small CMs can create problems down the line. Be careful with CMs’ promises–a lot of them (especially the smaller ones) may promise really good deals at the beginning, but then fail to follow through and blame everything under the sun for whatever they couldn’t deliver. Including correct terms in your agreement can guard against negative repercussions.
5. Over explain and over document.
At a super early phase, things get solved pretty quickly by a few calls and meetings, but beyond 100 units, you’ll need to communicate to larger teams that may have no history with your product. Keep very detailed, clear documentation to reduce the pain of back-and-forth with CMs, OEMs, or ODMs. Instruct part of your team responsible for documentation and for tracking how information is recorded and communicated. An ounce of documentation is worth a pound of clarification.
Phase 3: Large Scale–from 10M$ to B$s
Most people don’t get to this scale, but what are its typical pains, and how do you prepare for it? Charles says that at this stage a lot of invisible items become large problems. Here are some of those (surprising) items and their painkillers.
1. Logistics and customer service
Naturally, you have to think about partnerships and deals to manage logistics. If you get all or part of that folded into a distributor or retail deal, you’ll eliminate a lot of headaches. Now, one of the invisible items not usually considered on a small scale is simply box size! Charles says that here is when he starts from box size when thinking about a product, because mass retailers and distributors often just have limited space!
2. Supply chain issues
When you hit millions of units, the pure base material itself can become a bottleneck. Not only do you have to track component providers, but now you also have to worry about providers’ material providers. Try to stay away from exotic materials. Charles also mentions having some parallel backup materials in mind and folding them into negotiations with the supplier.
3. Getting better retailer deals
Retailers have product tiers, usually based on volume and trendiness. Charles names these tiers. First, the specialty retailers are those that want your product because they differentiate themselves with uniqueness in a particular niche vertical. These are chains, like GameStop or Home Depot. Next are the technology retailers, like Best Buy and Micro Center, and then come the mass retailers like Costco, Walmart, and Target. Always try to have multiple offers and credible brands behind your product to open all these doors.
4. Large-scale market positioning
Marketing can be very expensive…and ineffective. The best way to market a product at this scale is to have an amazing product (obviously!) and allow potential customers to experience it. Charles baked into some retail deals “in-shop demo stations,” which were very effective for selling more. This depends on the type of product, but you can see the same approach done elsewhere: samples in Costco, Test drives at Tesla stores, etc.
I sincerely hope these thoughts alleviate some of the pains of hardware startup founders. Nothing can replace a persistent hustle, but why not hustle in the right direction and minimize pain?
Link to the video https://youtu.be/vSiBX4A1ZZQ
