
Will Your Hardware Startup Make Money? - tigrella
https://medium.com/@BoltVC/will-your-hardware-startup-make-money-677a8e6c665b
======
compumike
This is a great article and the estimates are decent for what it is. The
ultimate point is absolutely right: you will not make money on your first
production run. But there are three big warnings that should be in BLINK tags
under the headline:

(1) This is a decent estimate for a completely commodity product (Bluetooth
headphones). No iOS/Android app development, no content development, very
little custom firmware or electronics development required. (That
correspondingly means you face the least differentiation and the most
competition.)

(2) This is for a "plastic and PCB" product build. That's as simple as it
gets. Any product that goes beyond a PCBA inside a plastic enclosure is
usually going to have significantly greater design and engineering challenges,
not to mention COGS costs. Moving parts? Temperature? Water? Cameras/lenses?
Sensors? etc.

(3) The marketing / customer acquisition cost is either ignored or assumed to
be some laughably small number. Even at its highest, this article assumes
$3/unit customer acquisition cost. That's ridiculous (go look at Fitbit or
Gopro or any other filing statements). If it were true, a lot more people
would go ahead and get that initial capital to make their own Bolt-o-Phones.

(Disclosure: co-founder of a hardware startup
[https://www.pantelligent.com/](https://www.pantelligent.com/) and about to
ship our first production run.)

~~~
drzaiusapelord
What's your estimate for item 3?

~~~
hayksaakian
i think OP was suggesting you look at GoPro / Fitbit's filing documentation
with the government, which publicly discloses these numbers.

i'll look for them and update this comment if i find them

\----------

> We have recently begun to spend significant amounts on advertising and other
> marketing campaigns to acquire new users, which may not be successful or
> cost-effective.

> We have recently begun to spend significant amounts on advertising and other
> marketing campaigns, such as television, cinema, print advertising, and
> social media, as well as increased promotional activities, to acquire new
> users and we expect our marketing expenses to increase in the future as we
> continue to spend significant amounts to acquire new users and increase
> awareness of our products and services. In 2014 and for the three months
> ended March 31, 2015, advertising expenses were $71.9 million and $21.1
> million, respectively, representing approximately 10% and 6% of our revenue,
> respectively. While we seek to structure our advertising campaigns in the
> manner that we believe is most likely to encourage people to use our
> products and services, we may fail to identify advertising opportunities
> that satisfy our anticipated return on advertising spend as we scale our
> investments in marketing, accurately predict user acquisition, or fully
> understand or estimate the conditions and behaviors that drive user
> behavior. If for any reason any of our advertising campaigns prove less
> successful than anticipated in attracting new users, we may not be able to
> recover our advertising spend, and our rate of user acquisition may fail to
> meet market expectations, either of which could have an adverse effect on
> our business. There can be no assurance that our advertising and other
> marketing efforts will result in increased sales of our products and
> services.

ALSO

> Revenue increased $474.3 million, or 175%, from $271.1 million for 2013 to
> $745.4 million for 2014. A substantial majority of the increase was due to
> an increase in the number of devices sold from 4.5 million in 2013 to 10.9
> million in 2014, including $151.9 million from new products that we began
> selling in 2014. U.S. revenue, based on ship-to destinations, increased
> $356.5 million, or 173%, from $206.1 million for 2013 to $562.6 million for
> 2014 and international revenue, based on ship-to destinations, increased by
> $117.9 million, or 181%, from $65.0 million for 2013 to $182.9 million for
> 2014.

So ballpark 11 million units sold in 2014, and 71.9 million dollars in
advertising in 2014

That's $6.59 worst case customer acquisition cost (assuming no repeat
customers)

[http://www.sec.gov/Archives/edgar/data/1447599/0001193125151...](http://www.sec.gov/Archives/edgar/data/1447599/000119312515176980/d875679ds1.htm)

~~~
compumike
Your "assuming no repeat customers" is a key point -- when reading overall
financial statements like these, note that at "jumbo scale" like Fitbit/GoPro,
the "average" customer acquisition cost actually drops tremendously because
you get: referral sales / word-of-mouth from existing customers, much more
public awareness and perceived legitimacy, more free press coverage,
replacement and upgrade sales, gifting from existing owners, etc. all of which
contributes to $0 effective CACs on those additional units sold. It does not
mean that their _marginal_ cost to acquire an additional new customer is
$6.59; if it were, they'd certainly go out and spend it as fast as they can
until saturation.

In contrast, a hardware startup (or a software one, for that matter) just has
to go out and hustle to get every single sale, whether through paid or non-
paid customer acquisition channels. This is where YC's philosophy of treating
hardware and software companies similarly works: they both usually have very
similar customer acquisition challenges in rapidly building and scaling their
growth channels (rather than, say, technical engineering challenges, which are
very rarely the limiting factor in startups).

------
melling
You're software start-up probably won't make you money either. At least for
hardware, people don't have so many free options. The barriers to entry are
also higher. Someone won't be developing hardware after a 12 week online
course. To me it looks like a great time to build hardware.

Kickstarter has really changed the game. These guys launched today, for
example, and they'll probably be funded within 24 hours:

[https://www.kickstarter.com/projects/1152958674/the-
sensel-m...](https://www.kickstarter.com/projects/1152958674/the-sensel-morph-
interaction-evolved)

~~~
dvt
I tried to launch a hardware start-up on Kickstarter earlier this year
([http://www.pcgamer.com/introducing-gameref-the-anti-cheat-
ha...](http://www.pcgamer.com/introducing-gameref-the-anti-cheat-hardware/)).
Unfortunately, it didn't get funded.

I might just suck at PR, but I don't think The Sensel Morph is really
representative of your run-of-the-mill funding experience.

~~~
melling
These guys raised $650k for their keyboard last month:

[https://www.kickstarter.com/projects/keyboardio/the-
model-01...](https://www.kickstarter.com/projects/keyboardio/the-model-01-an-
heirloom-grade-keyboard-for-seriou/description)

I think a lot of these guys try to build a following before they launch.

~~~
technotony
Yes, there's a lot of planning that goes into a successful campaign. We
prepared for six months. It's not hardware, but similar business/marketing
challenges. Here's how we raised $484k on Kickstarter:
[http://blog.glowingplant.com/post/85922974558/how-we-
raised-...](http://blog.glowingplant.com/post/85922974558/how-we-
raised-484k-on-kickstarter-to-make-glowing)

------
bsbechtel
I would add a few additional things to consider when thinking about a hardware
product (via retail). First, creating additional value for your entire supply
chain is extremely important, and gives you a lot of leverage. The OP
mentioned this indirectly via high demand products creating walk in value, but
additional value also can include selling a higher value/higher margin
product, or creating a product that is highly consumable and has a high churn
rate (think 5 hr energy). Ultimately the retailer is trying to maximize the
$/sq ft in their store, and doing the things mentioned above will certainly
help with that. Also selling a product that drives accessory purchases will
give you additional leverage. Think phones that push purchases of cases and
screen covers. Also think of Apple and the huge amount of floor space their
products take up in a Best Buy. They can do this because of the higher value
their products offer to the retailer. In addition, the higher value product
you sell, the lower margin your retailers can be willing to take in order to
sell the product. Ultimately, the retailer has to make more money with your
product than the other products he or she could be selling in the same space
to justify selling your product. This line or reasoning goes for your
suppliers as well, especially if you are working with a factory that is near
or at at capacity.

------
jkestner
Really good explanation of all the costs people don't think about. Don't be
disheartened. Take those numbers and work them down. Get the overhead cost
down by doing it yourself and using consultants. Get the manufacturing cost
down through dogged engineering and adjusting your product spec. Write a
product strategy that allows you to ramp up toward retail availability, even
if it takes several products to get there.

Yes, you will likely fail if you've never done this before and you're trying
to make a consumer-quality product. So get experience with an intermediate
step or two.

~~~
chillingeffect
Underrated post here. Kestner's launched multiple products. Greets from the
ML.

------
hansc
It is certainly true that you can spend this amount of money on a product and
not make money on the first 5000 product run.

But it is certainly possible to make money on such a first batch: Why do you
need inhouse EE, ME, DE en Embedded Engeneer for a headphone. Many of these
functions can be done by a small design firm or freelancer that you hire for a
much smaller fee. In addition, these people do this all the time for different
companies and have a huge experience this way and good contats (you can also
go with teh bigger firms, but then you probably need the same amount of
money).

~~~
Thimothy
So... You are a hardware start-up that doesn't actually do any hardware. I
recall a guy who got seriously burnt by taking this approach in a kickstarter:
he had designed a iPad cover, successfully funded it and then proceed to crash
as all his supply chain decided that wanted a bigger slice of that money. He
even got sued by some random backer.

I think you really need some expertise in what you are trying to build. It has
to be really hard doing a decent cost estimation otherwise.

------
dvt
I did a hardware startup earlier this year
([http://gameref.io](http://gameref.io)) and tried to fund it via Kickstarter.
I need to write a post-mortem one of these days, but even after significant
media coverage (including PC Gamer, Vice, Polygon, etc.):

\- [http://www.pcgamer.com/introducing-gameref-the-anti-cheat-
ha...](http://www.pcgamer.com/introducing-gameref-the-anti-cheat-hardware/)

\-
[http://www.redbull.com/en/esports/stories/1331720277392/game...](http://www.redbull.com/en/esports/stories/1331720277392/game-
ref-esports-cheating-interview)

\- [http://www.pcgamesn.com/gameref-is-a-prototype-anti-cheat-
sy...](http://www.pcgamesn.com/gameref-is-a-prototype-anti-cheat-system-that-
uses-hardware-to-weed-out-hackers)

\- [http://www.polygon.com/2015/2/23/8090221/onling-gaming-
cheat...](http://www.polygon.com/2015/2/23/8090221/onling-gaming-cheating)

\- [http://motherboard.vice.com/read/can-this-little-device-
fix-...](http://motherboard.vice.com/read/can-this-little-device-fix-cheating-
in-esports)

.. it failed to get funded. Failure is part of the game and I wasn't too
phased by it, but it still sucks. Unlike a software start-up where I can build
and launch a working alpha/beta, you NEED some money to pour into a hardware
start-up right at the start. It's not easy and, as the article mentions, the
margins aren't as great as software. The sentiment of hardware being tougher
than software is ubiquitous from what I can tell.

Props to the people that make it though.

See the KS page here: [https://www.kickstarter.com/projects/1094040691/game-
ref-the...](https://www.kickstarter.com/projects/1094040691/game-ref-the-
worlds-first-hardware-anti-cheat-devi)

~~~
nostrademons
Curious what the endgame looks like for hardware startups that fail? One of
the things that appeals to me about software startups is that if they don't
work out, I've learned a lot of valuable technical skills that there's a
market for. I can easily do some consulting or get a job with a fast-growing
company to replenish the bank account, and then try again if I have another
idea.

Is there the same transferability with hardware startups? Do other companies
love to hire failed hardware entrepreneurs the way they usually like to hire
failed software entrepreneurs, or do you just write off the money and time
spent on the startup as a dream forgotten?

~~~
dvt
> do you just write off the money and time spent on the startup as a dream
> forgotten?

This isn't my first rodeo, but I usually just write off failed start-ups in
general as dreams forgotten (and boy do I have a lot of forgotten dreams). I
obviously gained a lot of technical knowledge: how USB works, packet formats,
some hardware engineering, driver programming, etc. But unless I ever get a
job writing low-level code for hardware devices, I doubt I'll ever use that
knowledge again.

Who knows, maybe for another hardware start-up?

------
slewis
This is probably an underestimate for the product development phase. And if
you want to sell to Best Buy you usually need to work with a distributor who
has their own margin. Rule of thumb is 3-4x COGS to get to MSRP.

------
officialchicken
I'm having trouble with this article and I hope someone from HN will help
clarify for me: why was an initial run of 5000 units selected? This seemingly
arbitrary number seems too important in HW development to be relegated to a
single non-explanatory bullet point.

If my understanding is correct, product dev teams seem to aspire to an initial
500 - 2000 units for that initial run as the symbolic point of reaching this
"finalized" level of development. Any production at this level is considered a
finished good ready for the sales/supplier pipeline.

Once a product has reached this level, my understanding is that subsequent
runs is typically for 10K to 25K widgets per run ("lot") that see anywhere
from 10,000 to 250,000+ widgets for a single SKU per production run.

Above 1 million units, everything changes, but the 5K first-and-only run seems
abnormal.

~~~
smarinov
Producing 500 or 2000 units would virtually require the same time, so you may
as well get a standard batch size and improve your margins.

~~~
officialchicken
There's a big difference between 2000 and 5000 unit initial runs... why 5000?

~~~
Gibbon1
For an initial production run there are a lot of fixed setup costs. Just from
my gut feel 5000 units is just barely off the NRE (non recurring engineering
cost) 'knee'. (And the manufacturing learning cost knee) Less than 5000 units
the NRE costs start to dominate your out the door manufacturing price. So at
2000 units that might be 50% to 80% higher per unit than at 5000 units.

Also people often forget about your suppliers management, accounting, and
sales overhead. That means that they will have minimum orders below which they
don't make enough money justify the overhead of shepherding your product
through their shop. For Chinese suppliers 5000 units appears to be typical
because lower volumes are typically on-shored. On shoring is going to increase
your costs by probably 30%.

You might ask the other question, why not 10,000 or 20,000 units? Answer is
that starts to be a huge chunk of money for something that isn't proven.

So ans: 5000 because less the NRE kills you. And you'll have to on shore
production. And no more than that because otherwise your initial production
costs becomes the dominant part of the investment risk.

~~~
smarinov
Thanks for complementing my answer. That's exactly what I had in mind, but I
(still) can't type from mobile devices. :)

------
pkapur86
Great read and sums up a lot of my experiences. As a product manager who
launched a niche consumer hardware product recently, I came up with the same
analysis. Plus, manufacturing state-side (boston) had its own perks (quality
control) and cons (labor cost and freight from china for components). Even
after you factor in all the costs, there is cost of acquire customers which
can be quite a lot for a product that is new in its category, where a lot of
startups aspire to be. What is tricky is seeding customers, organic growth
through hackathons, co-marketing, and customer stories.

Thanks for the post.

PS: Full Disclosure, i launched a robotic haptic device (cubify.com/touch).

~~~
drzaiusapelord
>What is tricky is seeding customers, organic growth through hackathons, co-
marketing, and customer stories.

How did Cubify handle these things?

------
rdoherty
One thing those tables don't account for is paying for your own (and other
full-time) employee salaries post-production. Someone has to keep working
after the initial production (and future) run is complete. You don't just sell
your hardware, make your profit and leave :)

To sell 50k units or more you will need a few people to handle your store,
marketing and support. Also will you continue to sell the same model for years
or develop new versions? Lots of other costs to keep a business running should
be included in your business financials.

A 3x multiplier is slightly low for CPGs, I'd go with 4-5x depending on the
product and market to give yourself some breathing room. Things like sales,
resellers and coupons all eat into profit.

------
lawstudent2
Those salaries seem absurdly low.

Also, why is the cost of employees with overhead lower? (NB/EDIT: Pointed out
below this is for 3/4 of the year, not the full year - but the rest of my
point stands.) That makes zero sense. Surely they are paying payroll tax,
unemployment insurance and health insurance for their employees, no?

~~~
AmirS2
> Also, why is the cost of employees with overhead lower?

I think that's the cost of the employees for the 9 months (not 12) it takes
them to do the required work.

~~~
lawstudent2
Oh right. Math. Yes. Good call.

------
misiti3780
Finding a talented EE for 75K/year seems like an impossible endeavor (if I
read this correctly)

~~~
mbesto
I know the EE space well in SF Bay Area (source - I was an internal recruiter
for a hardware based startup). EE generally sits between 70-90k (but have seen
people demand $120k), whereas software developers (especially mobile) is more
like 90-120k (and for top talent sits around $150-200k). Depending on the
financial health (i.e. funding) of the company, the full cost of an employee
can range from 1.25x-1.80x their base salary. Hardware startups generally are
stingy on their cost structure (and therefore probably skimp on benefits,
bringing them down to 1.25x) because the cost structure is so high relative to
software. For example, tooling costs could vary between $100-250k which is
terribly difficult to estimate when you don't know the design or demand of
your final product. The difference of $100k is...you guessed it...equivalent
to a full additional human resource. Resource planning for hardware startups
is scary.

I know for a fact finding talented EE people is possible at $75k, and that
same level talent would most likely cost $100k for a software dev.
Interestingly, there is a decent supply of EE talent out there, however due
the varying degree of hardware applications finding the right person is more
difficult than it seems on the surface.

~~~
ChuckMcM
But if your an EE _and_ a software dev can you get 75 + 100 or $175K ? :-)

One of the best advice my Dad ever gave me when I was thinking about majors in
college was that you could program computers with an EE or a CS degree but
without an EE degree they probably wouldn't let you build/design them. The
math and physics were, to my taste, more difficult but I got tremendous
satisfaction in being able to understand a computer from the PN junction of
its transistors, to the process model of its operating system.

~~~
officialchicken
You don't need a degree for common sense.

My parent spout a lot of the same nonsense. Just who exactly are these "they"
gatekeepers the Boomers keep referring to? Pretty sure "they" are the same
keepers of great wisdom such as "Housing prices will always rise", and "Work
hard, you'll get a pension and gold watch," sorts of people. Not intentionally
wrong, but definitely behind the times.

Want to make a computer? WE don't need "them" to gatekeep their own bullshit
anymore. Everthing, including fabs has been virtualized and is available
online. Funding, PCB design and layout, soft-hard your FPGA ASIC designs, etc,
etc, etc. Make your tradeoffs same as the rest of us, but don't think for a
second that you must have "them" to make that computer.

I know it's not really that easy (my parents spout the same nonsense all the
time, but I love them nonetheless), but try to surround yourself with enablers
not gatekeepers. And be able to quickly differentiate between the timeless and
the boomer knowledge.

------
onoj
One issue not being discussed is the revolving cost of having products out in
the market and the cost of the next production run.

if your orders double from 20K units to 40K, your costs will roughly double,
usually meaning that any profit made on the 20K is re-invested to make the 40K
- usually plus additional capital.

So long as your production quantities double, you will not actually "have" any
money (unless your FOB cost is north of four times sell price). Many companies
cannot "realise" profit until orders stabilise.

------
Michie
Thanks for the nice write up.

Hope someone can do an explanation like this for a software startup too.

------
hellbanner
Also on HN Frontpage: "When Hardware kickstarters ship"
[https://news.ycombinator.com/item?id=10113987](https://news.ycombinator.com/item?id=10113987)

------
brayton
This should be prerequisite reading material for anyone doing a hardware
kickstarter. Still waiting on my 3D printer 3 years later...

------
flountown
Is he using COGS in the right sense? I think he means CIF,
cost/insurance/freight. My company produces products in Europe and Japan and
we use the term 'landed CIF' to include all the costs associated with mfg,
freight, and duties before it hits our US warehouse.

COGS for us is how much is sold through a distributor to an end user.

------
clesoine
The first assumption "$30 to produce and you sell it for $99" is bad. That's
not a high enough profit margin. Second, obviously don't hire people at full
salary. Make something that people are excited to work on and give them equity
to do it.

~~~
donkeyd
Equity doesn't pay for a house or feed children. 90% of the time, they will
never bring in any money.[1]

You won't always be able to hire whoever you want/need if you offer them
equity. An inexperienced, younger person who's willing to work for equity
might cause delays in delivering which will also cost money.

1\. [http://www.forbes.com/sites/neilpatel/2015/01/16/90-of-
start...](http://www.forbes.com/sites/neilpatel/2015/01/16/90-of-startups-
will-fail-heres-what-you-need-to-know-about-the-10/)

~~~
clesoine
True many people won't be able to work for equity full time. I've been lucky
enough to find people willing to work with me for equity in their spare time.
I'm not a connected or wealthy person. For many people like me it's the only
option. I've been able to get people really excited about the product, but I
also have had to accept that I have to be flexible with deadlines for people
I'm not yet paying. Things take longer when you don't have money. Sometimes
it's better to go slow.

------
clesoine
This article simply makes all the assumptions that will lead you to be
unprofitable. Yes if you have a boring product and you spend too much
developing it and don't have a high enough profit margin you wont make any
money.

------
matsur
Another hidden cost here (particularly if your main sales channel is direct to
consumer) is shrinkage/fraud.

Consumer hardware is easy to purchase with a stolen credit card and fence on
eBay.

------
lpolovets
This article made me think of Betteridge's law of headlines
([https://en.wikipedia.org/wiki/Betteridge%27s_law_of_headline...](https://en.wikipedia.org/wiki/Betteridge%27s_law_of_headlines)):
_" Any headline that ends in a question mark can be answered by the word no."_

On a serious note, it surprised me that the BOM listed the shipping materials
as being about as expensive as an assembled and flashed PCB. It's interesting
that a cardboard box (which feels pedestrian) costs about as much as a printed
circuit board (which feels a little like magic).

~~~
Kiro
I haven't downvoted you but I think people are because they're tired of
references to Betteridge's law of headlines in every single submission ending
with a question mark.

I personally don't think this is a good case of Betteridge's by the way.

~~~
lpolovets
Thanks for the feedback -- I really appreciate it!

------
hberg
I half-expected a single word article with the word "no".

------
aswanson
An ee that can program and do some simple mechanical design can do all that
engineering himself.

~~~
leoedin
Maybe for a simple box, but for an injection moulded curved enclosure like the
headphone example? If you didn't get that designed by someone who'd done it
before you'd be taking a huge risk.

~~~
ajross
> you'd be taking a huge risk.

The subject at hand is a hardware kickstarter. That bridge has long been
crossed and burned. If you had all the talent and resources at hand already,
you'd probably have funding too.

------
hodwik
On a side note, is there a site like hacker news for Hardware?

~~~
geerlingguy
Also check out [http://hackaday.com/](http://hackaday.com/) \- not quite the
same, but much more hardware-focused.

