Ask HN: Any advice on taking preorders?

[Aurum197]

We are considering taking preorders for our hardware product. We have enough potential users clamoring for it (our invitation list is a few thousand long) but, thanks to COVID, it looks like we have to order the most critical chips 6 months ahead. Our newest prototype isn't fully ready yet, though our MVP worked well. To get an estimate of how many chips to order, we are considering taking preorders. We don't want to take the crowdfunding route. However given the uncertain timeline we are worried about the ethics of taking preorders. Tesla does it, But they have credibility/deep pockets. So...thoughts?

[bragr]

There's nothing inherently unethical about taking preorders. Tesla's controversial business practices aside, pretty much every car manufacturer takes preorders, not to mentions books, games, etc. Where preorders get unethical is where people start selling things that don't exist or they can't reasonably deliver on, or when companies don't have sufficient financing to produce the good without the preorder sales (since then all the money goes right out and you can't return people's money if you don't deliver).

To be honest it sounds like this may be the case for you, since you say you don't even have the prototype, let alone the final device so you really have no idea when it will be ready, what the bill of materials is, how much it costs to manufacture, etc not to mention real inflation and supply chain risks on a 6+ month time frame, given the state of the world.

That all being said, why do you not want to crowd fund? It seems like it's better suited to the speculative, in development nature of your project where there is significant risk of not delivering as described, not delivering in a timely manor, or even delivering at all. While people get upset when crowd funded projects fail, they aren't nearly as upset when they purchase something from a company and it goes under before it ships.

I wonder if at the heart of your question, there is another core problem which is that if you need either preorders or crowd funding to finance the initial run of hardware, then you really don't have sufficient financing for your hardware ambitions, and that's going to make it very high risk for anyone ponying up money either preorder or crowdfunded. Perhaps this issue would be better address by talking to banks about lines of credits or investors about raising addition capitol. Maybe I'm off base here and money is not the issue at all and you just really have idea how many to order, but if that's the case you really need to invest in hiring some kind of business analyst who can help you develop models that will tell you optimal numbers to buy given lead times, expected market size, margin, etc.

[Aurum197 → bragr]

First of all thank you for taking then time to think this through.

Our MVP worked fine. In fact we were reviewed by the BBC last year. It's our new version that isn't ready yet. Our chip supplier has asked us to order 6 months ahead. We do have the BOM and the hardware files at this point. We are at the point of getting our prototype boards manufactured. But the state of the world is definitely a challenge.

We would like to take preorders for two reasons: firstly to convince VCs that there is a market, and secondly to gauge how many chips we need to order.

Thank you for helping me think this through. I am beginning to see some upsides to crowdfunding even though I am turned off by how manipulated it has become (with paid backers, etc.)

[jmole]

What is the difference between crowdfunding and preorders? I think it would be a mistake not to crowdfund or use preorders unless you have significant venture backing and a sticky, viral consumer product where you can somewhat accurately forecast demand, or you anticipate selling out at high margins.

Don't waste your money building a product that potentially no one wants. Your crowdfunders are often the best feedback loops you'll get as a hardware startup.

[Aurum197 → jmole]

We don't have venture backing yet. We were hoping to use preorders to convince vcs/angels. We really don't want to go the crowdfunding route because it has gotten increasingly gamed and crowded (!) Plus we already have a number of signups on our own website. I see a potential downside to asking our potential customers to go to a crowdfunding campaign.

But you have given us something to think about.

[GianFabien]

Given that you have thousands of potential users and a working MVP, couldn't you get an investor to fund the initial production run(s)? Given a sound business plan and market projections, it might be an attractive proposition.

With pre-orders you are contractually required to deliver. Failing to do so could have some adverse outcomes. Crowdfunding comes with less legal risks.

[Aurum197 → GianFabien]

Here's our plan: get pre-orders. Take those pre-orders to potential investors to raise money. Fill orders. The idea behind the pre-orders is not so much to raise money directly but to convince investors to fund us.

[smackeyacky]

If you arent in a position to completely refund everyone, don't do it.

If you need the funds to afford the manufacturing, take smaller deposits instead and use that money to negotiate a line of credit with a bank.

[Aurum197 → smackeyacky]

I agree. If we take preorders, we will make sure we can refund them completely if we don't deliver.

The idea behind taking preorders is to convince VCs that we have a market. They can get on TikTok and read the comments asking for our products, but I don't think that's going to convince them. Hence the need to have pre-orders.

Any idea how many pre-orders is enough to validate a new hardware product? The MSRP is $200.

[smackeyacky → Aurum197]

Back when my startup started out, we took 10 orders although the product was B2B and the average order size was around $5000.

It convinced VCs of absolutely nothing. So I just went ahead and served those customers with a backup plan that the web services behind it could be run by the customers themselves if I folded.

To be honest, it didn't exactly work but I'm still going.

The product costing $200 isn't enough information to give an answer on proving the market. VCs don't necessarily put any value on a basic question of simpler product transactions. They want "eco-systems" and "crowd dynamics" and potential unicorns. You'd be better off with normal financing if you have demand for enough widgets to make a viable business, plus the bonus of not having to give up any equity to some disinterested finance bro.

[Aurum197 → smackeyacky]

Glad to hear you are still going!

Our TAM is $12 Billion, expected to reach $32 billion by 2025. It is a large, fast-growing market. We can definitely be a unicorn. But I have to dwell some more on the question of ecosystems and crowd dynamics.

[smackeyacky → Aurum197]

That's the "moat" that the VC crowd want. Widgets aren't enough, we all just use contract manufacturers and any secrets you have won't be secret for long.

I like to use the (now failed) Logitech Harmony Remote. The remotes were good, not the best, but good. The real value was the massive database of equipment that the users put together. Logitech ended up with a massive, crowd sourced database of infrared remote commands that made the remotes much more compelling for the users who came later.

My widgets aren't special in any particular way (except maybe the firmware). Even if somebody grabbed the firmware, the real value is in the database of stuff that the devices are gathering, because individually it's worthless but at scale it's incredibly powerful.

[segmondy]

How will you accept payment? Most processors will freeze your fund if they find out you are taking preorders and not shipping out actually products.

[Aurum197 → segmondy]

I believe Shopify allows preordering. I was not aware that processors will freeze you out for taking preorders. Thank you for letting us know; we will look into this.

[rdtwo]

Just take pre orders for your product in tiers make initial customers and scalpers pay a premium.

[Aurum197 → rdtwo]

Scalpers? And don't initial customers pay less generally?