Article Technical Rating: 4 out of 10
Most of us have learned something from our mistakes, but have you ever learned from the mistakes of others? Studying the failures of others can actually ensure that you don’t make the same mistakes they did.
When it comes to new hardware startups, there are so many possible mistakes to be made. There’s a reason behind the cliché “Hardware is hard!”. You would be wise to study in detail how other hardware startups have gone wrong.
Over the years I’ve worked with a lot of hardware entrepreneurs, and I’ve been one myself. I’ve also spent considerable time reviewing “autopsy reports” for hardware startup failures.
The top reasons for hardware startup failures can broadly be divided into three categories: technical, financing, and sales/marketing.
“I’ve found learning from failure is one of the most powerful tools we have to help hardware companies prosper.”
– Ben Einstein, Founder of Bolt.io (Venture capital firm specializing in hardware startups)
Technical Reasons Why Hardware Startups Fail
Technical issues generally occur during the development and early manufacturing stages. The more complicated the product the more challenging it will be to avoid mistakes during these stages.
#1 – Underestimating product development
Product development is complex, expensive, and almost always takes longer than anticipated. Even big tech companies developing new products always struggle to estimate the time and cost required.
I’ve worked on many large product development teams and it’s extremely rare for any project to go better than expected. It’s always the other way around. There will always be unexpected challenges regardless of the experience level of the developers. Creating something completely new is never simple.
#2 – Underestimating the complexity of scaling to mass manufacturing
Entrepreneurs tend to completely neglect the complexity, cost, and time needed to scale their product from a prototype to mass manufacturing. In fact, I’d say this is the most forgotten step in launching a new hardware product.
From a very early development stage you need to be thinking about how to design your product so it’s easy to manufacture. This is called Design-For-Manufacturing (DFM). The sooner you begin incorporating DFM practices into your design the easier and less costly it will be when it comes time to scale manufacturing.
For most electronic hardware products the plastic enclosure is the most complicated part to scale to mass manufacturing. This is because completely different technologies are used for making plastic prototypes (3D printing) versus production units (injection molding). Injection molding requires adherence to very strict design rules, so most plastic pieces require considerable modifications to prepare them for injection molding.
#3 – Insufficient quality testing and shipping bad product
You’ve spent all of this effort and money to get your product ready for market. Don’t ruin your opportunity by shipping faulty products to your customers. In the early stages of manufacturing it’s definitely best to err on the side of too much quality testing. This is true even if it means you won’t make any profit initially.
A sure way to kill your startup is to ship a bunch of defective units. Of course, a small percentage of flaws will always make it past your testing (no production process is ever 100% perfect) but you should strive to reduce the defect rate to about 1%.
#4 – Feature creep
You may have heard the phrase feature creep before. It’s a common mistake made by a lot of entrepreneurs. You’re passionate about your product, so you want it to be perfect. This means not only must everything work perfectly but your product also must have every conceivable feature.
This can be a great strategy if you have unlimited capital and unlimited time. Maybe in ten years you’ll have your perfect product. Sorry for the sarcasm but I just wanted to drive home the point. Obviously, no one has unlimited money or time so this strategy is almost always a bad idea (Steve Jobs may be a notable exception).
I instead encourage the strategy known as Minimum Viable Product (MVP) which was made popular by Eric Ries in his bestselling book The Lean Startup. Start by developing the simplest version of your product with only the core required features. Get that version on the market so you can begin to gather real feedback. Then use that feedback to create the new and improved version 2.0 of your product. This is a strategy commonly employed when developing software, but it also works great for hardware.
I find that it’s also helpful to begin by listing every feature you’d like to include. Then do the work to estimate the production cost for each feature. Based on your results, you can then make a better decision on which features you should include in your product.
#5 – Overpromising to customers
Don’t promise something until you have it in your hands. Regardless of when your development team says something will be ready, it’s best not to promise anything until you have tested the product yourself.
On the other hand, it’s good to have customers involved as early as possible. I’m not advocating that you ignore customers until you have inventory ready to ship. Keep them updated on your progress, and perhaps give some approximate dates. Just don’t overpromise on what you can deliver.
Financial Reasons Why Hardware Startups Fail
Many entrepreneurs think if only I had more money I could quickly and easily launch my product. There’s no doubt about it, money is a huge obstacle for most hardware startups.
Fortunately, not having lots of money can be a positive. This is because it forces you to make smarter choices. That being said, you still need money to get started. Generally, you’ll need to fund at least the initial stages of development. You should take the product far enough that you can get others interested in investing (unless you plan to bootstrap yourself all the way to market).
#6 – Ran out of money
This may be the most common reason why hardware startups fail, although it’s rarely the fundamental reason. For example, if you run out of money because you underestimated the development cost, then I’d say the problem wasn’t that you didn’t have enough money, the problem was you underestimated how much money you needed.
Most reasons for failure eventually lead to running out of money. Perhaps you develop the wrong product that no one wants, and you don’t have enough money to create the product people actually want. Your problem wasn’t a lack of money, your problem was not knowing your customers.
Be sure to check out my 10 tips for hardware startups to save money.
#7 – Insufficient profit margins
When doing small batch manufacturing in the beginning your profit margins will be low or even non-existent. This is because you’re not yet getting the advantage of economies of scale. As your manufacturing volume increases, your cost per unit will decrease significantly.
Once you have manufacturing (and sales) flowing smoothly, you’ll likely begin spending considerable time striving to lower your production costs without sacrificing product quality. This is how you increase your profit margins.
In the early days, a low profit margin may be acceptable. But you have to eventually make a profit to be able to sustain your company, yourself, and your family. Even in the beginning having low profit margins will make growing your startup much more challenging because you won’t have any significant profit to invest back into your company.
You need to know your Cost Of Goods Sold (COGS) at various production levels in order to forecast your profit margins. COGS is the total cost to manufacture and ship your product. It’s key to determining your profit margin. Without a good handle on your production costs you’re more likely to run into problems in the future with low profit margins.
#8 – Underestimated manufacturing cost
Underestimating the production cost is one of two elements leading to the low profit margins I just discussed. You only have two knobs to turn in order to adjust your profit margin – either decrease your cost of goods sold (COGS), or increase your sales price.
If your profits are lower than expected then you’ve either underestimated the production cost, overestimated how much people are willing to pay for your product, or both.
Also, if you underestimate your manufacturing cost then you’ll also underestimate the cost of inventory. Once you have manufacturing setup, inventory costs will be your biggest obstacle.
#9 – Overestimated sales price
This is the other side of the coin from underestimating the production cost. If you overestimate your sales price then your profit margins will be lower than expected.
Unless you can make up for this by lowering your cost of goods sold, a lack of profit margin will kill your startup. A company with low margins is very difficult to push forward toward sustainability.
#10 – Cash flow
Cash flow is a huge problem for hardware startups. It’s likely the biggest problem after getting manufacturing up and running. Most manufacturers require a partial payment upfront with the remaining amount due before shipping.
If you plan to sell your product directly to consumers via your website then the time it takes to get paid for those units depends on how fast you sell your inventory. It most likely will take months to sell those units. If you instead plan to sell your product through retail stores then you can expect to wait a minimum of 30 to 90 days to get paid.
In both of these scenarios there is a length of time between when you spend money on inventory and when you finally get paid. This creates a serious cash flow problem. You need a considerable investment to keep your hardware startup afloat during the early days.
If a big retailer told you they want to purchase $1 million dollars of your product, that means you’ll likely need to finance about $500k for 2-4 months. Purchase order financing and invoice factoring are two common ways for you to finance this amount.
Sales/Marketing Reasons Why Hardware Startups Fail
Most entrepreneurs focus all of their effort on product development while neglecting the most important part of launching a new hardware product: selling it. Without sales nothing else you do really matters.
For many entrepreneurs the idea of actively selling is downright scary, especially for more technical entrepreneurs. I know, because it was terrifying for me, and it forced me outside of my comfort zone. But to be a successful entrepreneur you need to embrace going outside of your comfort zone. If I can muster the courage to call on large retailers, manage a team of 20 sales people, and run a tradeshow booth, then so can you!
#11 – Failed to know their end customer needs/wants
Don’t mistake positive comments from potential customers as proof the product will sell. Just because someone says they like your product, or that they would purchase it, doesn’t really mean they will purchase it. Nothing speaks the truth like actual sales.
This is one of the biggest challenges with hardware. You need sales feedback as soon as possible, yet it takes considerable time and money to get a product ready to sell. It really is a catch-22 situation.
My favorite solution is crowdfunding where you can get people to “vote” for your product using actual money before you have it ready for market. However, you still need to do considerable work on your product before you’ll be ready for a crowdfunding campaign.
#12 – Didn’t build a community around their product
Stop what you’re doing and begin building an online community around your product right now! This allows you to grow your community slowly in the background while you develop your product.
This is what the founder of Pebble Technology did. Eric Migicovsky built up an email list of around 6,000 subscribers during the years he was developing the first Pebble smartwatch. Having this email list was key to raising over $10 million from his first Kickstarter campaign. Without an email list of interested consumers you will never have a successful crowdfunding campaign.
You need this community to help you develop a product that people actually want to buy, to help raise crowdfunding, and to sell your product to later. You should strive to collect as much feedback as possible as soon as possible. There is no better way to do this than by building an audience interested in buying your product.
How do you build a community around a product that doesn’t even exist? You do this by collecting email addresses of anyone that may be interested in your product or industry. Setup a web page showcasing your product and ask anyone that’s interested to enter their email address. There is almost an endless amount of information online on how to build an email list around your product.
#13 – Didn’t begin sales/marketing soon enough
So many of the entrepreneurs I work with focus solely on developing their product. The more technical the founders are the more this is true. Your best bet is to bring on a co-founder with marketing experience. Startups with two founders, one with a technical background and one with a marketing background, is a good combination.
“A maker, a hacker, and a hustler”
Brady Forrest, head of the hardware accelerator Highway1 and co-author of the excellent book titled The Hardware Startup: Building Your Product, Business, and Brand, describing the ideal early team for a hardware startup
I highly recommend that you bring on an independent sales representative from your industry as soon as possible. Independent sales representatives work on a commission basis so you normally only pay them once you’ve been paid by the customer. This is an ideal situation that really lightens the load on your cash flow. This is especially true for solo founders who don’t have a marketing expert on their team, or for teams without marketing experience in their particular industry.
However, if you are in the very early stages of bringing your product to market you may have to pay a sales representative a small monthly fee for their help until you have an actual product to sell. This is what I did with my own product which was one of the best decisions I made. This sales representative eventually became a stockholder in my company.