Hardware Start-UpsSimilarities, Differences, and Difficulties

Agenda A Brief History of

Manufacturing 5 Phases of Hardware Hardware vs. Software

Start-ups Jobs

Target Markets Traction and Sales Margins and BOMs Intellectual Property

Manufacturing Capital Pricing Competitive

Advantage Case Studies Resources Available

Brief History of ManufacturingPro

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Brief History of ManufacturingPro

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Brief History of ManufacturingPro

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Brief History of ManufacturingPro

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Brief History of ManufacturingPro

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Brief History of ManufacturingPro

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Brief History of ManufacturingPro

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Brief History of ManufacturingPro

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Brief History of ManufacturingPro

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Brief History of ManufacturingPro

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Brief History of ManufacturingPro

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Moore’s Law Number of Transistors per sq.in. doubles every two years or so

5 Stages of HardwareSketching, Prototyping, Production, Manufacturing, Scaling

Sketching

Sketching

Push Tech Problem

Pull Problem Tech

Prototyping

PrototypingPR

Funding

Software Dev

Pre-Order

Batch Manu

12+ Month

s

Prototyping

Batch Size

PricingCustomer Acquisitio

n

Production

ProductionTooling

Packaging

Manuals

Manufacturing

CertificationPre-Sales

Marketing

Customer Management

Financing

6+ month

s

Manufacturing

ManufacturingQuality

User Support

Production

Logistics

Supply ChainSales

Marketing

Customer Manageme

nt

Financing

Ship Here

ScalingProduction

Distribution

Capital

Supply Chain

Sales

Marketing

Customer Manageme

nt

Financing

Legit Compan

y

Hardware vs. SoftwareWhy They Are the Same, Why They are Different

Hardware vs. Software - Overview

Hardware ≠ SoftwareHardware = Software + Lots of Other Crap

Software = PM, Soft Eng, UX, UI, Support, Sales, Marketing, Finance

Hardware = $$$$$$$$$$$$ + Tik-Tok * ∞

Hardware vs. Software - Overview

Big Company

Small Business

Hardware Start-up

Software Start-up

Hardware Eng

Hardware Eng

Design Eng/Industrial Designer

Industrial Designer

Industrial Designer

The “Make-it-Sexy”-ersRequires many, many

iterations = $$$$$$$$$$$$$Integration with UX, UI,

Engineer, Product Dev, Supply Chain

Design Eng

Design Eng

Industrial Design

Design Engineerin

g

Hardware Engineerin

g

Finished Prototyp

e

Firmware Eng

Firmware EngSoftwar

e

Firmware

Hardware

Firmware Eng

Firmware

Hardware A

Hardware B

Hardware C

Logistics

Logistics

Product Logistics Customer

Product Logistics Customer

&

Certifications

Certifications

Production

Production

Time

MoneyExperience

Production

Product

Sourcing

Tooling

Pricing Lead Times

Payment

Timelines

Target MarketsWho Actually Gives A Crap About Hardware

+ =

Target Markets

Consumer

Usability, Design Tech

Business Utility Usabilit

y

Business to Customer (B2C)

UI, UX

Cool Factor

Robust

Business to Business (B2B)

Robust

Utility

Design

Business to Tech (B2T)

Tech

Robust

Design

Traction and SalesHow do we evaluate Hardware? What changes from Software Start-ups?

Early Adopters

Traction

Sign-ups = 5%Reservations = 65%Pre-orders = 90%Sales = 100%

Total =Comparable Values

Hockey Sticks in Hardware?

Hockey Sticks in Hardware?

Virality = X Y Z

where Z>Y>X

X

YZ

Hardware “Hockey Sticks”

Margins and BOMsHow Many, How Much, What Kind, From Where, From Who, To What?

BOM = Bill of Materials

BOM = Bill of Materials

BOM = Bill of Materials

Bill of Materials (Actual)

Margins

Margin = Selling Price – BOM (Supplied Cost)

Revenue with 0% Margin = No $$$$

Margins! Hardware Software

Customers 1,000 1,000,000

Price $100 $10

Margin 30% 100%

Retention % 100% 3.6%

Lifecycle Monthly Yearly

Total $360,000 $360,000

Margins

30%

Manufacturer

30%

Supplier30%

Distributer

IPShould you file? Why or why not?

IP

Not “Is it patentable?”Rather, “Is there anything

patentable, and how much will it cost?”

EU ≠ US

Start-up IP?

Bad Idea

Types of Patents: ProvisionalTemporary (<1 year)Before Public Disclosure1-year grace period in US~$100 USD in each country/regionCan claim ANYTHING (no audit)

Types of Patents: PCT International Filing, by regionTemporary, 1 yearBefore Public Disclosure~$5000USD Drafting Fee, ~$1000 USD

Filing in each regionAuditedDoesn’t become “real” until filed in

each region

Types of Patents: Actual Patent Regional Filing Permanent for X years, depends on cost Follows Provisional (usually) ~$15,000USD Audited, Revisioned, $$$$ Only holds by region Goal

Broad enough to cover all possibilities

Specific enough to be unavoidable

Be a “Linchpin”

ManufacturingImportant Details on Making Cool Shit

Manufacturing

Manufacturing

Volume

TimeQC

Manufacturing: Time

Iteration = Time + MoneyGas ($) < Plane Tickets ($$$$$)

Min. 6 Time Zones18 hr. Flight

Manufacturing: QC

30+ Suppliers = QC Clusterfuck 30+ Suppliers = Lots of little details to go

wrong Shit going wrong = Many trips to Suppliers Close by >> Oceans away

Manufacturing: Volume

Initial Costs: Tooling, Production Templates, Production Runs, Testing

Initial Costs = Pricing Complications Batch Sizes start at 1,000 Suppliers min. at 10,000 Batch Cost not constrained by location Variable cost difference between China and

Local is negligible

Manufacturing: Don’ts

Capital RequirementsTalkin’ Bout Dem Dolla Dolla Billz, Yo.

Capital

Margins = f(BOM, Volume, Materials, Market, Dev)

More units, lower price per unit

Capital: Initial Costs

Capital! Hardware Software

Initial Tools $10,000 per tool $0

Tooling Time 4 weeks 0 weeks

Test Run Costs $100k - $300k $0

Test Run Time 4 x 1-2 Weeks 0 weeks

Other Costs Forklift, QC Equip Nothing

Capital: Working Costs

Capital Again! Hardware Software

Units 3000 1,000,000

Cost per Unit $100 0

Margin 30% 100%

Capital Required $210k 0

Bank Fundable? Yes Yes

Other Costs Tooling, Production, Certification, Etc. None

Capital: Production

Extremely Rare: Just-In-Time Batches

Very Likely: Order in BatchesLead Time: 8-12 WeeksMust Finance 2 Cycles ahead to

avoid loss of Market Share

Capital: Fund-Raising - Seed

$25k-$250k3-6 months salary10k-100k usersDesign EVERYTHINGActually Need: 6-9 months + Initial

Costs$500k-$1MM

Capital: Fund-Raising – Series A

Second Gen ProductFigured its Shit outSales, Marketing, Optimize Supply

ChainSoftware: $3-5MM = 18-24 monthsHardware: $3-5MM = 9-12 months or

less

Competitive PositioningSo… Why the hell would you ever want to start a Hardware Start-up?

Competitive Positioning

Competitive Positioning

Positioning! Start-ups Big Companies

Advantages AgilityFirst Mover

Supply ChainExperience

Disadvantages No Market Control Slow and Stupid

PricingThe Mother of All Hardware Problems

Pricing Models – One-Off

Manufacturer (Distributor) Customer

Pricing Models: Keurig

Big Hardwar

e

Product System

Software or Small Hardwar

e

Recurring

One-Time

Pricing Model: Keurig

Pricing Model: Keurig

Hardware-like Customer Acquisition

Software-like Recurring RevenueGenerally <15% of Hardware Cost

Pricing Model: Keurig

Pricing Model: Keurig

Pricing Model: Keurig

Pricing Model: Keurig

ExamplesPeople Doing Good Shit

Resources AvailableI don’t know how to do that!? What the hell do I do now!?

Resources

Resources

Resources

Resources

Resources

Resources

Resources

Local Manufacturers Local Grants Local Suppliers Local Mentors Local Resources Local Talent Local Connections

Further Reading