As I understood it, from having worked at a (successful) startup that sold hardware, the big problem with hardware isn't that it's hard to make. Rather, the two big problems are margin and, worse for a startup, inventory costs. Airbnb can add 1,000 new customers with no infrastructure changes, but for a hardware startup to take on 1,000 new customers, someone will have to finance the inventory, and someone will need to predict the amount of widgets to stock in that inventory, and that gets very expensive quickly.
I don't know how much the inventory issue is mitigated by the fact that YC companies with working offerings seem to be immediately able to conjure up 500k-1MM in funding.
Also, YC's major successes haven't been hardware companies, have they? The last essay I read before this one suggested --- in agreement with the conventional wisdom of VC's --- that a company needs to be Dropbox-successful to move the needle for YC. Not that YC isn't, I'm sure, thrilled to have hardware product companies with traction in their portfolio.
Let me just add a banal point: YC's business strategy is, obviously, "throw everything we can at the wall and see what sticks". If you're considering your first company, that's probably not your best strategy. Even putting aside the big-ticket problems like inventory and margin, there are a lot of other things that suck about hardware: lead times, managing supply chain, QA and managing defects, field recalls, shipping. These problems are so big that major hardware companies have people who don't just have one of those tasks as full-time jobs, but are also famous for being able to deal with them.
I'm talking about a new trend. The hardware companies we've funded haven't had time to grow into Dropboxes. But as I wrote, hardware companies are overrepresented among the most promising startups from the summer batch, as far as we can tell this early.
True, hardware involves lots of schleps. But that means good ideas of this type are often lying around in plain sight, while all the other would-be founders are fixated on making the latest mobile social commerce app. (http://paulgraham.com/schlep.html)
Maybe it's particularly good to be a hardware company when the solution to the problem you're tackling requires new hardware. For instance, if 50 years from now we're all going to be getting around on motorized skateboards. But if you watch Kickstarter, there are hardware proposals that are "hardware for its own sake"; those offerings might be structurally disadvantaged compared to iOS or Android software, and you might not want to start that kind of company as your first startup.
Schlep was originally a Yiddish word but has passed
into general use in the US. It means a tedious,
unpleasant task.
Interesting linguistic tangent. I'm curious where you encountered schlep as a noun. My experience and various dictionaries define it as a verb ("to schlep"). E.g. "Oy vey. Do we really have to schlep over at this hour?"
You clearly haven't hung out with my grandmother.
Schlep can definitely be used as a noun, and commonly is by native Yiddish speakers. (As in "Oy! What a shlep!" or "Picking you up during rush hour would be a shlep, how about you just take the bus?")
There's a natural tendency in English to use as nouns words that were originally verbs. Examples: I'm going for a walk. I'm having a talk with someone.
Dictionary definition or not, a google search for the phrase "a schlep" returns >60,000 results.
If the (recently added) part-of-speech tagging on Google Books is accurate, the chronology is the other way around: it used to be equally used as a noun and verb, but sometime in the 1990s the verb form became dominant: http://books.google.com/ngrams/graph?content=schlep_VERB%2Cs...
As applied to English, it refers to the use of a verb (in its -ing form) as a noun (for example, the verb "learning" in the sentence "Learning is an easy process for some").
I've sensed a bit of a trend (e.g., with YC startups like BoostedBoards and Double, and popular KickStarter projects like Ouya), but I'm having a hard time wrapping my head around the capital requirements and ultimate profitability of these startups as they attempt to scale up into larger businesses. Maybe I just have to shake off naive preconceptions about hardware businesses being hard and difficult-to-pivot.
pg: if possible, I'd love to read your thoughts on how the economics of these businesses might evolve as they attempt to grow, especially as compared to software-only businesses.
The path-dependency (or difficulty of pivot) is an interesting angle. Certainly worth considering. Most product needs iteration if not outright pivoting. Perhaps the mitigating factor is that if the product is tangible, the need is also. SW is so powerful, as a concept, that i wonder if SW some startups may suffer from "too many degrees of freedom". Thus the ~inevitvble pivot -- combined with the ability to re-purpose a core of valuable skill-- is almost a more inherent characteristic of SW startup vs HW one. When considered in context of problem solving and product/market fit, &tc.
The issue, as I understand it, is not so much path-dependency per se, but the long lead times involved in the manufacture of new hardware at scale. Software has path-dependency too, but changing source code to modify a new software product is faster than changing physical machinery, processes, materials, suppliers, and logistics to modify a new hardware product.
This is a good comment, and sheds more light on the subject. The long lead time is a question of agility. This is subtly but importantly different that path-dependency (considered more of a lock-in to an existing technology). The link is that the ways of making the company more agile (investing in specialized manufacturing/prototyping and/or inventory) tend to create a more path-dependent trajectory (or opportunity set). So, perhaps this is better said that HW has 'interial' dependency on initial trajectory if not true path dependency per-se. Even provided that the startup is low-capital/outsourcing model. I hope this does some justice to incorporating your point.
Nice comment. I think there is indeed an inherent "inertial" in hardware business.
A software/website service can have different usage. Users may prefer to use a smaller part of the service, or using the main service for purposes not originally conceived by the creators. In this way there is a chance of pivoting.
However a piece of hardware has a very focused usage. All parts are integrated to provide a single function for the user.
Also, unlike software, there is no straightforward way to collect real-time data on how a user uses their hardware.
On some level, Dropbox is a hardware company [1]. I think that once you have installed software at a clients location, you are in a different realm than simply being a cloud/software/service provider. The customer has full ownership of the device. I think that the move to hardware is tri-fold (a) hardware is easier now than ever (b) hardware is a good strategy and a natural barrier to entry for a startup (in general, less people grok hardware and systems software than they do web programming[2]) (c) a small/mini subconscious push-back against the Cloud[3] where more and more customers are being turned off by not owning something at the end of the day[4]
[1] The hardware is the customers PC.
[2] iOS device programming, w/ human interaction (gyroscope) has also been a natural training ground.
[3] Of course, many Hardware companies these days Square, Dropbox, etc, will be paired with a cloud service.
[4] Acqui-hires..."We are shutting Down. Please Download your stuff by next week. Thanks for being a User and getting me interest from a big fish, see you on my next startup"
8% of such a tiny sample isn't anywhere near close to being able to extract trends. In such a volatile arena as investor funding even if the number of hardware companies doubled from 4% last year to 8% this, it's still noise.
We (as a tech community) need to careful thinking so small. YC is tiny. If the article was the result of talking to other investors and a similar trend was identified across the board it might be newsworthy, but to anyone with any statistical background this isn't a trend, it's noise. That doesn't mean there isn't a trend, it just means this isn't in and of itself, evidence of one.
Perhaps hardware companies don't have the "dropbox" effect of such quick growth. Do you think though that hardware companies may be a less risky proposition in some ways?
For example they are less likely to have the sort of network effects problem that some social media based application would.
Of all the companies they are funding, I could totally see Lockitron going viral. Once you have the app on your phone, you have the first key in your keychain. Once the price drops to like $50 a unit, you are in the realm of being super competitive with your standard physical lock, enough so that people would start looking at each key on their keychain as one that can be replaced.
The company I founded has custom hardware and a custom OS (not, e.g. Linux or Windows -- closer to an embedded RT OS), and our "for sale" product is SaaS.
We actually have four different hardware systems, ranging in size from a 1U box that goes on site, to a full rack that's basically a turn-key cluster with no external configuration (just plug in ethernet and power, and assign static IP addresses).
All of our hardware is based on Intel motherboards and chips, especially the E3/E5 series. This eliminates the long prototype cycles, since we use off-the-shelf hardware. The only real prototype cycle for us is choosing components and the case (!), which we did with 3D CAD software and a machine-shop-as-a-service we found on the Internet.
We went this route for reliability and performance (especially, latency), and then getting those two at a reasonable cost. By only paying for the hardware we need, and configuring it to exactly what our product/service needs, we're able to meet our product and business needs while still maintaining healthy margins at a cost our customers can afford. I wouldn't change a thing.
We also face all of the problems you mentioned (how to deal with inventory -- our hardware has a comprehensive 3 week burn in time), how to deal with repairs/replacements in the field, etc, and how to get the capital needed to sustain startup-scale growth. They're real problems.
Like most hardware-based companies, we're able to do this only with outside funding, but at least in our case (the enterprise space), we don't need any up front funding to stay cash-flow positive with slow growth, and we developed a rather innovative way to get the funding that we do need to fund fast frowth (hint: not through VCs). This took a lot of effort at the business-design level, something I suspect most tech startups don't take the time to do. It's pretty much mandatory if you're going the custom hardware route and want to grow fast.
One major positive of going the custom hardware route is the elimination of competitors. No YC-backed company going the standard AWS route can possibly compete with us -- not on cost, not on performance, not on latency, and not on reliability -- not even close. Controlling the whole stack, from hardware to OS to software is why we can do what we do at the price we do it, and grow at the rate we expect to grow.
I'm not sure we could make our approach work in the consumer hardware space today, but in the enterprise market, it's ideal for us.
I do remember the lament of Fohr on investment (re: social web startups vs hardware / (non vaporware)), and though I can't find the relevant thread, I am glad Fohr is still kicking around in the last two years since I last read about your troubles :)
Well, the particular system I described is for an operations management system we built for our film studio (Fohr).
We're in the process of packaging that up as a standalone product/service and building a business around it. As one of the commenters noted, we failed to get funding for the studio itself last year, and this is Plan B.
We've got some crazy technology in it, and I'm hoping to get some papers written up describing it all. AFAIK, it's the only Google Spanner-like design outside of Google right now.
Inventory costs are a problem, but a bigger problem is production costs.
To create a PCB you need artwork. This includes the electronic files; the drill plots, the photoplots, the etch resist masks and the silkscreens. You then need the production tools for the PCB. You'll need a stencil for the screen-printing of the solder; a pick and place machine program (and you hope your PCB software can provide something that the P&P machine can read); if there's any through hole component you might want a cropping plate made.
A team goes through the prototyping process, using hand built small batch stuff. But then they need to convert this into production ready stuff. So the above costs happen when you hope -but are not sure- that you're ready to build a full scale batch. You get ten PCBs made for test, and discover a missing trace. That means you need either another set of stuff or to modify every board as it's produced.
Without very careful internal quality procedures and excellent engineering standards it'd be very easy for a company to burn through $10k before producing any saleable product.
It is difficult to follow lean startup principles with hardware products. The feedback loop to design, build and test hardware is long and expensive. Then once you've got a workable design you'll need a lot of capital to do a production run.
Before we can have a true renaissance of hardware startups there needs to a be a platform for cheap rapid prototyping with push button production scaling.
In effect, contract manufacturers can enable "push button production scaling." They'll source parts, do engineering, pack, and ship--basically whatever you pay them to do. A high tech copy machine. The interface could certainly use some work though...
There were plenty of web app startups long before Heroku and EC2 were available, these just lowered the bar even further.
Things like arduino can lower the friction between hardware and software design quite substantially for hackers.
I wouldn't necessarily expect startups to be rushing out to compete with the dishwasher any time soon but the point is that it now becomes much simpler to think about "hooks" in your software into the physical world.
The way you explain it means two things. First the investment needed to built the necessary production capacity, but that is not production cost (production cost are a result of this via hourly rates and costs per piece). The ability to cale from a prototype stage to serial production is crucial here, and yes damn expensive and risky. One wrong step and the company doesn't even have to care about inventories.
Inventory kicks in once the company has scaled successfuly. And then iventories are more curial to success than production costs in terms of company survival. Market entry is won with product costs low enough to make a profit. Once in the market you live and die by cash expanses, inventories are huge part of this. Espacially since hardware becomes outdated pretty fast, high levels of exess stock can basically mean death for a young company.
But all that is one of the schleps coming with hardware, and bulding such an operation from scratch is a really interesting thing to do.
I suspect this would be less of a worry if you focussed on low volume high value products. If you are selling solutions that are $10,000+ then you can afford a less efficient manufacturing process. I know a few people in my local area who are doing just that in some interesting niches.
To make a PCB you design artwork, usually from the circuit diagram. This artwork is transferred onto clear sheets. You overlay the clear sheet onto a board - a sheet of fibreglass, a sheet of copper, and a layer of UV sensitive etch-resist. You expose it to UV, you fix it, you wash off the etch-resist that isn't fixed (thus exposing copper) and then etch the exposed copper off, leaving the traces.
This process involves a couple of one-off costs (design of the PCB; transfer of that design to photo artwork). It also involves some setup costs that you get every time you need more product - setting jigs to the right size to hold the stuff. The artwork costs a couple hundred dollars, and that does not include any of the design and engineering costs, that's just the price if you hand a bunch of electronic data to a PCB house.
A stencil for screen-printing solder? That's steel, laser cut, can only be used for your PCB, and if you change the design of the PCB you might need a new stencil. Each stencil costs a couple hundred dollars.
A cropping plate is steel, or sometimes fibre glass, plate that has holes drilled where you have through-hole components fitted. An assembly-operative would have the cropping plate held in a jig, with PCBs on it, and they'd stuff the PCB. When they've fitted all the through hole components the plate is put on a machine which slides a blade under the plate and crops the leads. The operative then takes the PCBs off the plate, and sends them off for (probably) wave soldering. Each cropping plate is individual, and cannot be used for any other product. You'll need as many cropping plates as you want people to build PCBs. Each plate is going to be a couple of hundred dollars (steel) maybe a hundred dollar (fibreglass).
So far you haven't got any product that you can sell to the end customer! You've just got setup costs that you hopefully amortise over the number of product you produce.
You're right that an electronic assembly house would tend to outsource all this stuff to other people rather than doing everything in house.
Tooling waived when re-ordered emphasises what I've said - this is a one off up front cost that you pay before you get any product that can be sold to customers.
Note that I haven't said that PCB manf is hard. I've even said that companies don't do this stuff in house, but that they outsource it.
I'm pretty sure Sunstone doesn't charge for tooling if you use their proprietary software. You're locked in, but the costs aren't too bad for development. I'm sure getting the actual gerbers is a pain. ExpressPCB has a similar deal where they will make three index card size boards for $51 total. Not too bad, but they charge ~$60 for the gerbers.
If you're using "normal" software that can generate gerbers, there are other options. If you don't mind long turnaround and overseas fab, Seeed Studio will make boards for ~$1 each, for 5cmx5cm [1]. Slightly more for larger boards.
For hobby projects and prototypes, OSH Park can't be beat. Started as a board pooling coop for open hardware, they now send out batch jobs a few times a week to Amitron in IL and produce high quality boards (ENIG, with silk screen and soldermask) for $5/in^2 (for three copies, so a 1.5in^2 board would be $3.75 each)[2]. Their ordering process couldn't be better--upload gerbers, approve an on-screen rendering, specify the number of boards, and enter your billing info. No confusing options to go through. Seriously, try it. It's awesome.
So board fab is not that expensive anymore, and perhaps cheaper than when you last looked. The turnaround times aren't great for the inexpensive options, but with luck or good EDA it's possible to get by without too many iterations.
Board fab is over an order of magnitude cheaper than that these days. Yes, I have old circuit boards that I designed 15+ years ago that cost me $400 for two bare PC board prototypes, but today I can get the same two for about $50 these days, shipped express from somewhere in China.
To go even more extreme, I just ordered a handful of an existing design from OSH park just to see what their quality is. Three tiny boards cost me $5. Five bucks!!!
Regarding your comment about inventory costs, it seems that if this trend for creating hardware items takes off, there might be an opportunity for a company that does volume manufacturing on-demand. Recently, most volume manufacturing of physical goods has happened in China because the labor costs there are much lower. But I'm thinking that a company which does mass production on demand, cheaply and _well_ would be very successful. It would be like an infrastructure company for physical goods.
No reason why this company couldn't be located in Asia as well, but having very close and accessible communication with the people who use its services might also turn out to be an idea that was stupid until it wasn't.
Recession hits these companies hard, because of the costs of stock; labour; etc, and because volatility of customers makes long term planning tricky.
And, really, the components that are common over many projects are cheap. It's the stuff that's specific to a build that is expensive. The PCB, the case and tooling for the case, the connector (sometimes), these are the big costs.
Indeed, looking at capital costs for our product the injection mold tooling is one of the most expensive aspects of production. Rapid prototyping (CNC milling/laser cutting/3D printing/etc.) reduces the cost of iterative development, but there's no way around what it costs to ramp up for production.
Margin is an issue when you are making just another router.
Cost of inventory is an issue, but there are several ways around it, including dropshipping and createing on demand. You can hire an MBA to optimize in this area (this is the area where they are supposed to do well).
Basically if you could honestly imagine your product doing well on kickstarter, you don't need to worry about margins.
If you can imagine your customers being willing to wait 3 weeks on the product you don't have to worry too much about inventory.
I very much doubt that YC will back a new factory to produce hardware for others.
I very much believe that YC will back a company that produces an alarm clock that makes you want to start the day, or a device to insert into your toilet that will analyze your urin and tell you if the measurements are out of whack.
I have a passing familiarity with some well-regarded MBA curricula and disagree that these problems are things that b-school grads leave school equipped to handle.
Here's a Slate story about a Kickstarter hardware project that failed spectacularly. The income Kickstarter generated was counterfeit, because the guy running the business was swamped by expenses he hadn't predicted out the outset and would only learn when he needed to ship in volume. Spoiler: all he was trying to sell was lockpicks, little shims of metal.
This is where good business people shine - whether you call them MBA's or not. Often they're not.
Good business people will anticipate the expenses needed and make sure there's a way to pay them (or delay payments and make sure everything is in a company with limited liability), borrow money in the bank with collateral in your inventory, get good deals with suppliers (If you do it right you'll get a 90 days credit line thus nullifying much of your cashflow problem), etc. etc.
That article is a blurb, when compared to the length and detail I've come to expect from Slate articles. Really, it starts by telling how a bunch of lockpicks broke at a lockpick convention, then jumps into the excitement of Kickstarter.
The article discusses how this guy abandoned his friends, launched their project without them, then went money-crazy when the project was funded. This guy is spending on conferences, unlimited air passes, and $24,000 worth of locks and Open Locksport swag, but doesn't even have a source for the lock picks he's "sold" to people.
Maybe the best part is where he has to spend $2000 to hire a go-between to talk to lockpick suppliers, as he was too insecure to do so himself. Maybe one of his friends could have done that, if he hadn't abandoned them. No...the best part is where all the conferences and flying and vacations has caused him to become depressed, so he checks himself into a hospital. sigh
Oh, and I think the friends he abandoned came back to sell his locks and sell this story. I'm not completely sure if they're his friends, because the Slate article is very unclear about this.
Those are from the top of my head. Anyone from software who is jumping into hardware needs to stop and think: it's different, and that needs to be reckoned with. It's not impossible, of course. :-)
Do you have experience with the FCC certification process? We're working on an electronic instrument, and it would be cool to hear where the pitfalls lie on the route to getting certified. Wouldn't want to spend too many trips visiting an anechoic RF chamber...
It really depends on how complex your product is, and how good your PCB designer is. We are getting into some decently high-speed designs (LVDS/USB) and it is definitely a learning process with every board...
As far as pitfalls, they range from minor product alterations like requiring the addition of ferrite beads/elements on power lines/other wires inside the enclosure or altering component values on the board, to major alterations that require another board spin (adding extra passives like ferrites, decoupling caps, or just better PCB trace layouts), to very bad problems that require major redesign and rearchitecture of parts of the product.
If you are still in the board design/prototype stage, try to add spots on data lines and high speed traces for: extra capacitors in parallel for decoupling and to target power supply ripples and harmonics, and 0 ohm resistors in series to later replace with ferrites to absorb EMI or low-value resistors to correct for trace impedance mismatches. You can always remove these when the design gets closer to production.
Budget ~$1-2k extra as well if you want the testing house engineer to try various ferrites and shielding to get a design a few dB out of whack to pass while it is in their test environment. Of course, some of their recommendations may be too expensive/unworkable and some redesign is in order.
Unfortunately, all of this costs time, money, and enormous amounts of energy cursing the gods of physics and RF when things go wrong... but that's part of the fun of designing new things, right? :)
And if you're doing anything in the critical infrastructure space, certifications are ABSOLUTELY KEY. Things like ISO9001 are no joke in the hardware space. And those can take ages to get and sometimes get very political.
Barriers to entry are a good thing for incumbents and for the market leader. They work against all new entrants to a market, including the entrants YC picks.
> Barriers to entry are a good thing for incumbents and for the market leader.
There was a time long long ago where it was also considered a good thing for startups, so that young funded companies would not be competing with bootstrapped/small-angel deals.
There is a kind of startup that comes pre-packaged with a solution for some perceived barrier to entry. For instance, your team could include a world expert on some heretofore intractable problem in your startup's problem space. Or, you could be the first mover in a market with significant network effects, and you could be raising when you already have significant traction. In these cases, barriers to entry are a good thing.
In other words: the barriers to entry behind you are defenses for your success. The barriers to entry ahead of you are obstacles to your success.
> The barriers to entry ahead of you are obstacles to your success.
If you choose it right, they are obstacles to everyone's success, which is kind of the point. A well-funded company that can make a biz work with lower-margins and inventory costs will likely not be competing with bootstrapped (for example) companies.
Edit: pg is more pithy below -
Barriers to entry are good for those who can overcome them.
Why on earth would barriers to entry be a good thing? As far as I can tell they are just a proxy method of limiting the true competition capitalism is supposed to offer.
Different kinds of "good". If you don't limit the true competition that capitalism is supposed to offer, then you can't make economic profit in the long term. If your goal, in starting a company, is to continue to make out-sized profits, then there being barriers to entry that you can overcome better than others is a good thing. One way, but not the only way, of overcoming obstacles better is simply overcoming them first: if the cost of overcoming the obstacles is more than the upside in a competitive environment, then you can rake in monopoly profits without it being worth it for others to join you.
Most of this is not necessarily "good" for the consumer or the economy as a whole - although if the barriers to entry are natural and it means that problems are being addressed that otherwise wouldn't be addressed at all, then it might be.
It's also noteworthy that startups who can overcome these barriers have not only the advantage over other startups, but also the incumbents who are clunkier and less agile. sweetspot
I don't know how much the inventory issue is mitigated by the fact that YC companies with working offerings seem to be immediately able to conjure up 500k-1MM in funding.
Also, YC's major successes haven't been hardware companies, have they? The last essay I read before this one suggested --- in agreement with the conventional wisdom of VC's --- that a company needs to be Dropbox-successful to move the needle for YC. Not that YC isn't, I'm sure, thrilled to have hardware product companies with traction in their portfolio.
Let me just add a banal point: YC's business strategy is, obviously, "throw everything we can at the wall and see what sticks". If you're considering your first company, that's probably not your best strategy. Even putting aside the big-ticket problems like inventory and margin, there are a lot of other things that suck about hardware: lead times, managing supply chain, QA and managing defects, field recalls, shipping. These problems are so big that major hardware companies have people who don't just have one of those tasks as full-time jobs, but are also famous for being able to deal with them.