Episode #11 – Transition from Prototype to Mass Manufacturing with Scott Miller of Dragon Innovation

Published on by John Teel

In this episode I speak with Scott Miller who is a mechanical engineer and the founder and CEO of Dragon Innovation.

Dragon Innovation specializes in helping hardware startups transition from the prototype stage to mass manufacturing in China. They are well known for helping successful hardware startups such as Pebble and Ring.

Scott is also a partner at Bolt which is an early stage investment company that focuses specifically on hardware products.

Scott and I discuss his experiences working with Pebble, his story about Dragon being bought by a multi-billion dollar company, the biggest challenges of transitioning manufacturing to China, tips for designing a product for manufacturing, and his suggestions when seeking professional investors, and so much more.

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Scott Miller, Dragon Innovation

Links mentioned in the show:
DragonInnovation.com
Avnet.com
Bolt.io
Hackster.io
Follow Dragon Innovation on Twitter
Connect with Scott on Linkedin
TheHardwareAcademy.com

Download the PDF transcript of this podcast episode.

Podcast Transcript:

John Teel: Welcome to the Predictable Designs podcast, where we discuss all things related to developing, manufacturing, marketing and selling successful new electronic hardware products. I am your host John Teel.

Today I’m speaking with Scott Miller who is a mechanical engineer and the founder and CEO of Dragon Innovation.

Dragon Innovation specializes in helping hardware startups transition from the prototype stage to mass manufacturing in China. They are well known for helping successful hardware startups such as Pebble and Ring.

Scott is also a partner at Bolt which is an early stage investment company that focuses specifically on hardware products.

Scott and I discuss his experiences working with Pebble, his story about Dragon being bought by a multi-billion dollar company, the biggest challenges of transitioning manufacturing to China, tips for designing a product for manufacturing, and his suggestions when seeking professional investors, and so much more.

This is definitely an episode you don’t want to miss!

Welcome to the show Scott.

Scott N. Miller: Great to be here, John, thanks for having me.

John: Oh, absolutely. I’ve been excited to chat with you for quite a while, so I think this will be really good. Can you maybe go ahead and just start off by giving a quick introduction, telling everyone a bit about yourself and about Dragon Innovation and what you guys do?

Scott: At Dragon, we’re a consulting company that focuses on helping companies of all sizes safely navigate their journey from a prototype through high volume production. We do this just using system and processes that we’ve honed over the last 20 years building, at this point, millions of consumer electronic hardware products, and IoT devices.

We’ve got the team at Dragon of about 25 people spread between Boston, Seattle, Hong Kong, Shenzhen, Shanghai, Taiwan, and Amsterdam. Just with having such a diverse set of skills and locations, we can really help companies navigate that one to many on their manufacturing, journey using the global network. We’ve built up of about a thousand factories and partners.

John: Are all of these factories in China? I’m assuming that’s where the majority of them are.

Scott: The majority are in China. We have over the last couple of years really been branching out to include the US, Europe and also the Asia Pacific region outside of China, specifically Indonesia and Malaysia as well. We’re always agnostic on where we build, but we definitely got our start in China.

John: Yes, of course. I’m curious about the, we can call it the origin story of Dragon Innovation. I believe you founded it in 2009, is that correct?

Scott: That’s right. We’ve been added about 11 years.

John: I’ve known about you guys for probably at least four or five years. You’ve been around for quite a while. What was your original motivation for starting Dragon Innovation? I know that you worked like project manager I believe at iRobot with the Roomba so you obviously have a lot of experience in that area, but what motivated you to start Dragon Innovation?

Scott: A couple of things. As you noted, I had just a really great 10 years at iRobot from the early days all the way through the IPO, building the first 4 million Roombas and had a chance to live in China for four of those years to set up all of the different manufacturing lines during which I learned a lot of what we know firsthand the hard way.

What I found is we had gone public, I had come back as the VP of engineering to run a team of 70 people, but I found that being part of a larger company then it just wasn’t as dynamic as the old days. I was also so far removed from the actual engineering part and more just doing the management side of things that I was eager to get my hands dirty again.

Basically, two things happen that were enough to give me the impetus to start Dragon. One is that I found that a bunch of startups like Zeo kept coming to us saying, “Hey Scott, we’ve got this prototype. Can you help us think about how we can scale it.”

That’s really what I love to do. I started to see there’s a little bit of a demand. Then the second thing is I went to a Jimmy Buffet concert and my background is in addition to engineering, I’m a pretty hardcore sailor and I’ve sailed from Boston to Tahiti, Boston to Portugal and so on. I think inherently being a sailor, I, of course, have to have a love of Jimmy Buffet. The question I had going into the concert was, Jimmy’s sung the same signs probably 10,000 times.

I wondered if he liked going to work in the morning or in his case, going to work in the evening.

My question was answered when he came on stage barefoot in a bathing suit and just have the time of his life. When I saw that, “Oh my God, I got to do what I love,” and even though I’ve got a good stable job, in ’09, the economy was crashing. We had one kid out one on the way, but I got to do my own thing. Jimmy was the little push I needed to jump off and start Dragon.

John: You definitely have that entrepreneur mindset it sounds like we all wanting to do something bigger and not just work for one company.

Scott: I think with many things entrepreneurial, looking back on it now, that was a big risk. At the time, it didn’t seem like a big deal at all. It just seemed natural. Sometimes not knowing everything that can be a good thing.

John: I don’t ever advocate taking huge unnecessary risks, but if you’ve always take the safe path in life, it makes things boring in my opinion. A little risk and with risk comes the potential for big rewards obviously.

Scott: It continues to be just a really, really fun journey. No, only good things.

John: You’ve mentioned that you had lived for four years in China. I didn’t realize that. Obviously, there’s a lot that you learn by being on the ground there and I suspect that’s probably instrumental in giving you the knowledge to provide the services that you do?

Scott: What we do at Dragon is based on myself and others’ firsthand experience going through it ourselves for the first time so we can really relate to what it feels like for our customers. Just trying to find trusted partners or realizing there’s a lot of unknown unknowns.

As you said, it was definitely the four years I spent in China really knowing nothing when I started with was instrumental in climbing the learning curve. We, of course, made a thousand mistakes and almost bankrupted the company many times but, “That which does not kill you makes you stronger.”

We managed to get ourselves out of the holes we had dug and learned a lot in the process and also saw the opportunity to take those learnings and then share them with other companies just so they could be more efficient in their journey.

John: I was quite excited. I don’t recall when it was that I’m not real good with time, I feel like it was maybe a year or two ago when I had heard the announcement that Dragon was being bought out by Avnet. First of all, congratulations on that.

I was quite excited for you when I had heard that. I’m curious, was that exciting for you? How has that transition been? Obviously, Avnet is a multibillion-dollar global company, so that was quite a big transition for you and for Dragon. I’m curious how that process went and how it’s going today.

Scott: It was fantastic. I’m really excited to be part of the Avnet Team. They’re just a great group of people that give us within the people and the capabilities of Avnet, a lot more reach and different offerings that we can add to our existing manufacturing knowledge to be able to create better outcomes for our customers. All across the board, it’s been awesome.

Our journey we started as a consulting shop and then ended up raising some money from Amazon and a really great group of ECs in 2013 with the goal of adding a software layer to Dragon, automate some of the stuff that we ended up doing time and time again for greater efficiency.

We’re just at the point where we’re going to raise a follow on round. I’m based in Boston, but I was out in Seattle maybe, just interacting with Amazon.

That was for us, a really good investor and reached out to Adam from Hackster who’s a buddy, just to see if he was free for dinner. Over dinner, he mentioned that Hackster was joining the Avnet Team and why he was so excited and encouraged me to give Dayna Badhorn who is a VP at Avnet and one of our strongest champions a call.

I called her up, we hit it off and we’re faced with the decision, do we raise this follow on round from a phenomenal VC or do we join the Avnet Team? I was just really excited about the synergies with Avnet so we went that direction.

The other thing that swayed me is back in the early days of iRobot again when I knew nothing, we ended up partnering with Avnet to basically program the bootloader on our IC, which was a way to keep our IP safe.

I was just really impressed with how they took me under their wing and kept us safe and provided just great services. I didn’t know at the time that I’d have the honor of being part of their team but it’s funny health things loop around.

John: That’s awesome. I knew that they had also bought out Hackster but I wasn’t quite sure of the timing if they were both. I feel like I knew that Dragon and Hackster were around the same time, but I didn’t realize that Hackster was first and that you had spoken with Adam at Hackster and that he had encouraged you to reach out to Avnet so that’s exciting.

I get the impression from both Hackster and Dragon that that Avnet’s letting you operate as still as a small independent company. I’ve not noticed any huge changes in what you guys do or your website or anything. It still looks like Dragon Innovation and still looks like Hackster is that pretty much true?

Scott: That’s one of the real strengths of their relationship is that they’ve let us continue to do what we do. I guess the big change for us is that we still work with a lot of phenomenal startups and we love that, but we’re also finding a whole new class of customer coming to us.

Unfortunately, most of the names are under NDA now, but they’re typically the Fortune 100 or Fortune 50 companies that historically have not built a hardware product but do want to get into the hardware space. As we look at it, they’re just like startups. They don’t have a lot of experience. They often have a prototype and they need help.

It really plays to our strengthened what’s in our wheelhouse. The only difference is they’re insanely well-funded and have the ability to move tremendous volumes so that they can scale up very quickly and they’re not constrained in terms of buying inventory or by having to raise another round or things like that.

Where being part of the Avnet Team has really helped is that if a company came to Dragon when we were standalone and wanted to do $100 million of business, we would have been thrilled, but we just had no way to handle that money.

We don’t have the infrastructure, lawyers, processes in place, whereas with Avnet being a $19 billion company, they’ve got all that infrastructure and the ability to handle it. It’s the best of both worlds that we can help interact and engage with these huge companies that need help that Dragon can provide. Then Avnet can make sure the whole process runs smoothly.

I think that’s probably one of the big additions, but Avnet has really given us a tremendous amount of freedom, which we’re really thankful for, but also back this up with their team. They have insanely deep doubly knowledge, which is an area that we weren’t as strong in before. It’s been a really great partnership.

John: Interesting. That’s interesting that you’re, even though they’re large companies they have the same knowledge of product development as a startup so that the lot of the same advice and the same services that you offer to startups can also apply to a large company that hasn’t done product development or hardware product development before.

I find that with my own business to some extent, obviously, I focus on the more the prototype stage and helping people get to a prototype. I also and especially with hardware startups and entrepreneurs, but I also work with small companies because I find that a small company, even though they’d been around for a while and they have a little more money if they’re developing their first product, they’re essentially like a startup or an entrepreneur.

I don’t ever work with large companies, Fortune 100 like you’re talking about, but it does seem regardless of the company size, that if you’re new to hardware development, you’re like a startup at least in some regards.

Scott: I think they all want to move quickly which is not usually what big companies do. It’s often special entrepreneur teams that have that little bit different DNA. Which is great. It’s much more startup like that.

The cool thing too is now that there’s such a focus on IoT, which is awesome, but it’s also insanely complex with the device level firmware to the protocols to get to the cloud as security and everything else along the way. Avnet invested a huge amount of time and effort and money into building out IoT solutions, which are– it’s never really plug and play of course, but it’s a very robust, powerful solution and being able to offer that stuff to big companies and small companies has been very cool. Whereas before we wouldn’t have had that capability within the walls of Dragon.

John: Interesting. I definitely get the impression that Avnet has made some moves in regards to startups and such. Obviously, buying Dragon which you mainly work with startups and then especially Hackster which is not really startups or entrepreneurs, but more makers and such. It seems like that that they’ve realized that’s a market that they want to get into, which I assume is part of the reason they purchased you and Hackster as well.

Scott: Certainly, connecting with startups, they’ve done a few other acquisitions recently. I think we were the 101st or 102nd acquisition and pretty much before Hackster and Dragon, most of them were distributors that they rolled up, but recently they’ve bought a company called Softweb which does IoT roughly from the transmission to the cloud to the analytics.

Then more recently with Tech EO, which does the firmware on the IoT device. It’s cool to see a company of Avnet’s size that’s been around for 99 years, really go through this transformation of still being strong in distribution, but looking at areas where they can build on that foundation and offer additional value. It’s cool to have a front-row seat and see how this all grows and evolves from there.

John: There’s nothing like having a $19 billion company in your back pocket there to provide resources and help so that’s exciting for you. I’m sure

Scott: It is, they are just a great group of people, really strong leadership. I’m learning a lot and really thankful to have the opportunity.

John:  I know that you’ve worked with, over the 11 years, probably hundreds of products and I realized that a lot of these are covered by NDAs and you maybe can’t talk about them, but I know that I’ve read I’ve known this for years, that one of the products that Dragon was, I believe it was in your very early days that was instrumental in working with was Pebble and their smartwatch product. Is that correct?

Scott: Oh, it is. We had a blast. We had been working with air probably six months before they ran their famous Kick-starter campaign only. I remember sitting at a meeting right after they launched, I think it was two hours into the campaign and they’d sold something like 200,000 units, like $200,000. It must’ve been. I got an email from Eric saying, “Scott, I think we need you.” Like none of us knew how it would unfold going forward and what the levels of their success and how they would grow. I still have that email. It meant a lot to me.

John: Oh, that’s interesting. I didn’t realize that you were working with them before. I figured they had the big a Kick-starter success and then reached out to you, but you were already working with you. That sounds like they had a little bit of a head start on getting manufacturing setup than just not so many people will run a crowdfunding campaign and worry about manufacturing after the fact and not before.

Scott: That is certainly our experience. I think that the Pebble guys did just a really good job of being thoughtful ahead of time and once they launched the campaign, which took off more than anybody ever thought. I think it might’ve been like they’re 12 or $13 million raised.

There’s obviously a tremendous amount of pressure on them and they’re great engineers but they’d never manufactured anything in volume. The product itself was really challenging. It’s a wearable, which obviously we always just think of is the Olympics of hardware because you’ve got bio-compatible materials, flexible. In their case, it was waterproof to five atmospheres. Packaging is tough. It’s got to look good.

They were basically doing the hardest thing they can with all eyes on them on a really tight timeline and they just did a great job at handling the pressure, making intelligent decisions and building a really awesome product. I mean the first battery lasted or the first watch, I think the battery lasted for a week. Whereas Apple would maybe last 26 hours. They did some incredibly good work and we’re really proud of what they built.

John: How long did it take after their Kick-starter campaign before they were able to deliver? Do you happen to remember the timeline? I know that’s been quite a few years ago.

Scott: Good question. I think their campaign if I remember was in June and I think we started shipping around January.

John: Oh wow.

Scott: My memory may be a little off cause it was a few years ago.

John: That’s better than I expected. I didn’t think you would remember down to the month. That’s pretty good.

Scott: It was a crazy ride. Then they went on to do the multiple different generations after that. That was a blast.

John: Were you working with them? Because obviously you mainly work with startups and there became a point where they weren’t really a startup anymore, so I assume that they got to a certain size where they took over manufacturing and you were involved, is that correct?

Scott: I think we probably were involved in the first million or so watches. We did that initial Kick-starter and then the steel. I might have that number wrong, just because it was a while ago.

John: That’s a pretty good place to leave someone is after they sold a million units.

Scott: Transparency is really important to us as well as teaching. We were psyched that we were able to help them build up the expertise and then they ultimately were able to take the ball and run with it but it was just a great team and a really cool product.

John: Are there any other products that are currently on the market or that you can share any examples of?

Scott: Sure. I think at this point we’ve probably worked with about 300 companies working from the prototype through a high volume production. Just thinking if a few that we can talk about, we were really involved in Ring working with Jamie from the early door. He had also a crowdfunding platform called Christie Street. We were able to just get in with him early.

John: Wow. I didn’t realize that you’d worked with Ring.

Scott: Yes. We’re proud of them and just a another great team. I’ve got one of the earliest Ring doorbells sitting by my front door and it’s still working beautifully, so that’s cool. We worked really closely with Dropcam the same story of just getting in early, Sphero, MakerBot. We had the chance to work with Formlabs super early on. We worked a little bit more with them later on in their strategic standpoint, but I remember meeting Max after he just graduated from MIT.

I think there’s only three or four people at the time and he was so clever. He was using, if I remember correctly, speaker drivers to get the DDA circuit because they were so cheap to drive their galvos.

The thing is that the speaker driver cards for our PC were super low cost so they didn’t have very good frequency fidelity and you would see the effect of that represented in the part they printed that it wasn’t exactly accurate just due to that the frequency response to the card, but it was cool just to see how clever they were. Again, now they built it into a unicorn. That’s fun.

John: Those are some great examples. I think most listeners are going to be familiar with at least several of those, if not all of those that you’ve mentioned. You’ve mentioned that you help startups go from prototype to manufacturing, but what level do they typically need to be at or what the sweet spot for you to help them?

Do they have to prior– obviously, they probably don’t have any sales because you’re helping set up manufacturing and loss? Maybe they did some low really low volume sales tasks of some sort but even as far as the prototype, do they typically have a prototype that’s pretty close to being ready for mass manufacturing then you just help with the design for manufacturing aspects of it or do some of them just have a proof of concept prototype and obviously, that’s a whole other level that they have to go from that to a manufacturable prototype. What’s the level of startups that you typically work with?

Scott: We’re all trained in product development, but at Dragon, we don’t do any of that. We’re typically not zero or we’re never a zero to one, but one to many. In terms of the OnRamps for Dragon, typically our earliest customers will have a working prototype bill of materials and then both electrical and mechanical CAD files, but they don’t really need to have thought through design for manufacturing assembly.

It’s really helpful for us also if they know what volume they want to produce. If they were building a thousand units, we might approach it in a certain way if they’re building a million units then we think about it a little bit differently. Generally, something that can plunk on the table that’s not running on an Arduino or a BeagleBone or a Pi. Generally, a little bit more production-ready chip and then we can help them figure out how to go through the DFM, DFA, pick a factory, create quality plans and scale the thing up.

John: Are most of them funded or are bootstrapped?

Scott: Many are funded. Generally, either a large company where funding may not be their top priority, but just creating a quality product on schedule or venture back startups, we try to help everybody just because we know how hard this is.

For companies that are bootstrapping or maybe have the napkin sketch, we try to connect them with great partners that can help them be able to develop that idea and do a proof of concept or a prototype.

We’ve also created a pretty cool online design for manufacturing design for assembly course, which is based on some of the work I did when I was an adjunct professor over at Olin College of Engineering. It’s a good online course that we’ll go over the basics of how do you pick a factory, injection molding 101, and things of that nature.

John: Since setting up manufacturing tends to be, especially for the injection molds tends to be rather costly. I assumed that and typically I always recommend it most startups are going to need some outside funding once they get to the point of mass manufacturing.

I assumed that the majority of the customers you work with have either or larger companies or have some type of outside funding and it’s not just a solo entrepreneur because, at that point, you’re typically going to need some outside funding. Is that what you’ve found?

Scott: Yes. Just outside of ignoring like just Dragon’s business model, but just being able to buy the tools and the inventory and then get through the assorted UL or different compliance testing, usually does require a fair amount of capital. Of course, it depends on every project, but typically 2-5 million isn’t a bad starting point to build 5,000 units.

John: I’m curious, what are some of the biggest mistakes, the biggest challenges that you see for startups when going to set up manufacturing specifically most likely setting up manufacturing in China, but just also manufacturing engine or are there any big mistakes, big challenges that you see just over and over that you think people need to be aware of?

Scott: Yes, there’s definitely a lot of things that can go terribly wrong which is why it makes hardware so exciting. If I had to pick the biggest mistake, it’s selecting the wrong factory and just trying to pick a factory quickly or talking to a guy that knows a guy and then working with that factory. Often, the factory may be very capable. It’s just not a good NPN snatch. Even though everybody may have the best of intentions, it just something that’s not going to work.

We always recommend, of all the things you got to get right, picking the factory is top on the list and going through a very thorough and methodical process which we just called the RFQ or request for quote process.

Typically, it involves having a long list of maybe 10 factories down, selecting the three to five and then creating a detailed RFQ document. The most important thing you can do is go and visit the factory because you’ll learn so much in doing that and those are all things, of course, we can help with the Dragon as well, but I think the biggest thing is not being thoughtful in what factory you want to work with.

John: Are there any specific guidelines that you would suggest in regards to picking the right factory? For instance, the size of the factory or their capabilities obviously are all important, but I think the size, you don’t want them to be so big that you’re just an ant to them and they don’t give you any priority. Obviously, you don’t want to pick too small of a factory. Is there a sweet spot to aim for?

Scott: Yes, he hit the nail on the head and we would use the analogy of the fish in the pond. You don’t want to be a small fish in a big pond or a big fish in too small of a pond. That’s probably the most important thing.

Typically, factories are categorized by tier 1, tier 2, and tier 3. In different industries like automotive that means different things then and consumer electronics but the way we might define tier 1 would be over a billion dollars of revenue. That would be your Fox, Flex-Cable, Sanmina, Wistron and so on.

Tier 2 is typically 250 million to a billion and then tier 3 is under 250 million. Usually, if you’re trying to build 5,000 units to get started, which isn’t a bad first run, you want to look at a tier 3 and it’s not a value judgment. It’s just simply a size judgment.

The bigger factories typically have a lot more working capital and can give you potentially better terms and more capital equipment and engineering but the thing is you’re just not going to make any difference for their bottom line. If an Apple comes in all the resources are going to go over there. Whereas if you pick a great tier 3 which admittedly is hard to do or take some expertise, you can find a partner that will grow with you and give you a much better chance of succeeding. You are exactly right. Getting the right size is critical.

John: Yes. It also seems from my experience finding a factory that isn’t at full capacity at least in my case, I found that to be beneficial because they were– If a factory is at full capacity then they don’t need new customers quite as bad as one that’s not operating at capacity. Is that at all come into play when picking a factory do you think?

Scott: Yes. We look at factory hunger. Factories are just made up of people and in some cases, you’re going to really resonate with them. It’s a great team, they’re excited, they have capacity and they also see the vision for your product and see that it can grow.

Early on in the development process, a factory is really investing a lot of time and effort in a company without immediate payback because the way that the factories make their money isn’t necessarily on NRE or non-reoccurring engineering but on just building products where they take a markup for every product and it’s so critical that they see the potential of a product and they have the capacity to grow.

Finding that we’d often make the analogy of picking a factory is a lot like getting married, that if you select a great spouse then you can do anything. If it’s not a good fit then it’s somewhat of a disaster.

John: I use that same analogy for co-founders, but it applies in a lot of instances.

Scott: Yes. It’s exactly the same thing and, yes, towards your point like they need to have capacity but they also need to be hungry and excited and passionate about it and feel that they can influence it. All those things are important and that’s why we really encourage our companies to go and visit the factories firsthand and build up those relationships.

John: Have you found, because, with my product at finding a manufacturer, I found it was really beneficial that I had a big retailer, it was a blockbuster video who I had met with and expressed interest in my product and that’s what allowed me to get a manufacturer that was willing to invest in it.

How have you found having some sales data or marketing data or crowdfunding success tends to be critical for getting a manufacturer that wants to actually partner with the startups since it is a lot of upfront work and cost before they’re going to start actually making any profit?

Scott: Absolutely. Yes. Part of our RFQ process we’ll spend a good portion of the document trying to describe the background of the team and the founders, any other successes they’ve had or educational background.

If they’re venture-backed we’ll talk about the VCs involved in some of the other companies they’ve supported. Certainly, retail partners are important so that there’s a channel to actually sell the product but all of these things are equally important to what is the actually the thing that you’re building just to give the factory’s confidence that you’ve got a great team in place and access to capital and access to channel so that if they can build it, you have the ability to sell it.

John: Yes. Interesting. I have a question coming up about investors. From whether it’s investors or manufacturers, obviously the product matters and that the business plan matters, but I’ve found that the founders tend to matter the most because as you all know, the value is not in the idea the value is in the execution and the execution comes down to the founders.

Would you pretty much agree with that? It sounds like in the information you provide to the manufacturers there’s background about the founders because you’re also having to sell them on the founders and not just the idea.

Scott: Yes. What we like to do is have the founders go and develop a rapport with the factory owner. Just again, everything is a people business. Chances are particularly for startups that they’re going to be one of the smaller customers to start and if things go well, they’ll grow and expand.

By developing that rapport, when the company needs a little extra help maybe there is somebody else in-line for the molding press or the S&T line. If the founder can call up the factory owner and say, “Hey, can you help us out here?” That can help a huge amount so that it’s not some nameless, faceless customer? Yes, that really helps and it also is important that the founders are charismatic and can have good emotional intelligence as well.

John: Yes, absolutely. As a founder, you have to wear a lot of hats and you have to interact with a lot of people so you have to show that you can do that aspect as well.

Scott: Yes. That’s incredibly important.

John: One thing that I will commonly recommend for startups and first starting is to do there may be very initial manufacturing and typically I’m talking hundreds of units, maybe a thousand or two to do that mostly domestically or I’ll even call this a hybrid manufacturing strategy, so by that, I mean have the printed circuit board made in China, the enclosure made in China, but then do all the assembly, the quality testing, the packaging domestically so that the founder has more control over the process until you get all the bugs worked out.

I’ve found that setting up manufacturing in China, when you’ve not done any manufacturing for the product there’s a lot of details that you have to work through and just the time difference can complicate that.

I’ve always liked doing it domestically then transitioning to China once you prove the product and you’re getting some manufacturing volume that’s thousands or ideally 10,000 plus units. What are your thoughts on that? Do you typically recommend that they go straight to China or do some smaller more local manufacturing before doing a full migration?

Scott: We’re always a huge proponent of building locally if possible. One of the big challenges in manufacturing is communication. If your factory is just a short drive away and speaks the same language, that’s so much easier to deal with than having to get on a plane, pay $1,000, fly halfway around the world, be exhausted and speaking a different language. If possible we would always prefer to build locally.

At Dragon, we’re agnostic on where we built. We just want to help our customers pick the right solution. What we find is the key thing to look at is what volume do you expect to be building in the next, say, two or three years and then start with a factory that can handle that. Sometimes what we find is if you pick a local factory, but know that you’re going to exceed their volume capability relatively soon that may not be the best choice because it can be expensive to transfer the tools. The tools may be built differently.

Often in the US, we use something called mud frames or master unit dye which is different than the type of injection molding they use in China which would be based on a mold base. You spend all this time tooling it and you can’t even move it over. We also worry that if you move when you’re just ramping up it’s incredibly challenging both to scale up, but also to work with a new factory and transfer the domain knowledge.

For us the Northstar is two years from now, three years from now, what volume do you think you’re going to build and then pick a factory over there. I like your hybrid approach a lot in that potential you could build some inroads with vendors in a different country if needed and then make that transition easier if you did want to go that route though.

John: You mentioned a point that I find that a lot of entrepreneurs have a hard time estimating and that’s future volume. How many units are they going to be selling in two years from now?

From my experience most entrepreneurs we tend to be an optimistic bunch and I think most people think that they’re going to be selling millions of units during really quickly much faster than typically what happens. I just want to mention that if you’re listening, Don, you have to be really careful when estimating future sales volumes because most likely what you’re thinking is going to be overestimating or not quite realistic.

Have you found that as well with startups estimating future sales volume?

Scott: No, much of the time and I think nine times out of 10 they are over-optimistic and then one time out of 10, it’s much stronger growth than they anticipated. They both create problems just in both ways. I think it is one of the hardest things for new-to-the-world product to be able to anticipate what the volume is until you actually get it out there.

John: Yes. You have no data. It’s really guesswork to some extent if you’ve sold other products then you probably have more realistic expectations. But it’s an area that I’ve found that– As you know everything in business or everything in hardware, everything’s always harder than what you think it will be, and it always takes longer and it costs more.

Scott: Yes. That’s the truth.

John: The Corona virus is obviously such a big news now, and it’s having such a big impact in China. I’m curious- and that’s where you do a lot of your manufacturing, but you talk about that you do manufacturing in other places. What other alternatives are there for doing electronics manufacturing other than China? I know Taiwan is one good possibility. Are there any others that you guys are doing manufacturing in?

Scott: Yes. In addition to China, the US, and then we spent a lot of time building out in Europe. One of the areas we’re focusing on very aggressively now is the Asia-Pacific or APAC region, excluding China.

Towards that end, we sent last year one of our senior Dragons to spend a hundred days exploring multiple countries, to really get some firsthand knowledge as to what their state of readiness and capability is. He was in Taiwan, Japan, Vietnam, Malaysia, Indonesia, Singapore, and so on.

John: Sounds like an exciting trip.

Scott: Oh, I’m jealous. I would have loved to have done that.

John: Yes. That’s work? That just sounds like traveling the world.

Scott: I know traveling the world and visiting factories, like that’s kind of a dream job, but we are so encouraged by what we saw that we actually deployed them over there again permanently. He’s now based in Taiwan, which has a lot of capability. He’s an American citizen, but grew up in Taiwan, so he’s got some good connections there. We’re seeing a lot of good stuff out of Indonesia, particularly Batam. It’s just a short ferry ride from Singapore. In some ways similar to the Shenzhen not being too far from Hong Kong. I was there, I want to say in 2005.

At that point, it wasn’t really ready for prime time, but it’s come a long way. We’ve got some customers building down there, which is exciting just to be able to offer more options. There’s an interesting article. I probably saw 10 years ago, but it really rings true from the economist looking at different Southeast Asian countries as a function of manufacturing capability over time.

I may have the order wrong, but I believe it started in South Korea, then went to Taiwan, maybe South Korea, and Japan, Taiwan, China, Vietnam, and then just worked further and further West to Bangladesh in India, and maybe now ultimately Africa. But initially, the quality is terrible, and it’s all like cut and sell.

So clothing, jeans, and what have you. And then they build up the supply chain, logistics, domain, expertise, processes and so on, and move up the value scale. If we think of just China in our lifetime, we’re a lot younger, the quality was crap. You just would never consider getting a good quality product out of China.

The stuff they’re building today is amazing. It’s just some of the best quality I’ve seen in a long time. My expectation is that if that trend holds, we’ll start to see countries like Indonesia and Vietnam and so on getting more and more capable, which is pretty exciting.

John: Do you see any electronics manufacturing ever really happening, say in the Western hemisphere, or obviously like Mexico is looked out for, I think, maybe cloth textiles and things like that, but to my knowledge, it’s not really any significant electronics manufacturing. Is that pretty much– You’ve mentioned Asia in general. Is that pretty much where Dragon is focused?

Scott: Yes, right now we’re focused in Asia. We have an office in Europe that had been aggressively expanding in both Eastern and Western Europe, as well as the North of England. An area that we have yet to really get into is Mexico.

It’s certainly on the list. We have to get more- be able to build up some expertise in other areas before we get in there. We’re excited to learn that. From my understanding, Mexico tends to be very horizontal, similar to the US, where China is very vertically integrated in that you have everything under one roof. But every geography has their own sort of unique features.

One of the key things that we find is a criteria for success is the ability to have trusted feet on the ground in the factory, which we can do now in the US, Europe, and Asia-Pac in China. The next part of the journey will be trying to build some relationships in Mexico, so we can get some Dragons down there, and be able to embed them in the factories.

John: I think with China, a lot of people, they just think of that there’s a lot of- that they can find a factory easily. But the big advantage really with China is that they have this mass of supplier ecosystem. As you know, you can get just about anything in China, versus if you’re manufacturing in Mexico, just even sourcing all the components is going to be more problematic.

Scott: Yes. China, they have a huge labor workforce compared to just about every other country. Logistics and infrastructure that you can get the products to the container yards really efficiently and move the goods quickly. I still look at China’s a very powerful manufacturing location, and in many ways, the world’s workshop.

John: Absolutely. I’m sure it will be that way for quite the foreseeable future. But it would be nice if manufacturing would ramp up, say in Mexico. It’s so much closer, makes it easier to work with that, not really any time zone difference versus China. It’s pretty much you ask a question, and then you get an answer the next day, and it’s communication really slow, which is one of the big disadvantages I find going through China is just the time difference.

Scott: Yes. The more local you can build, the better off it is, I think.

John: Yes. Let’s switch gears a little bit and kind of go a little more technical and discuss design for manufacturing. I’m curious just in general, obviously, this is a huge topic, and you can list hundreds of things to do for design to make it more manufacturable. I didn’t know if there were any top tips that you have for designing a product to make it more manufacturable.

Scott: Sure. A few things to think about. One is, first off, trying to figure out how much design for manufacturer design for assembly is required. In my opinion, that’s just simply a function of the volume that you’re building. Imagine you’re building 10 units.

That would imply that you probably- you don’t need to build a separate set of tools to make your parts, which is a whole effort in itself. With only 10, you can file the corners and get it to work, and really interact with each one.

But on the other hand, if you’re building a million units, and the last thing you ever want to do is to have to touch every one of them, and you want to make sure the design is very, very robust, that it’s just going to go together the right way. It’s going to be very cost optimize, because that- what I always remember is every penny you save at a million units is $10,000. There’s a lot of leverage on it.

John: That’s a good way to put it. That makes a penny seem pretty significant.

Scott: It totally does. Whereas if you look at 10 units, it’s 10 cents. It’s not worth a lot of effort. So thinking about how much effort to put into DFMA is, in my opinion, a function of volume. Let’s say that you are building closer to that 5,000 to a million units, that would imply that it is going to be important. I would typically start with design for assembly, or DFA, which is really looking at how many parts do you actually need, and how do those parts go together.

Within reason, if you can reduce your part count, the fewer parts you have, generally the lower the assembly time, the less number of items you have to order, or worse yet, the fewer things you can forget to order, because presumably if you’re missing a part, you can’t build the product. It just simplifies as your supply chain.

Now again, you do want to apply common sense and not go crazy trying to integrate 28 parts into this super complex on multiple piece. Generally, I would start with DFMA- sorry, DFA in looking at the reduce part counts and then how do the parts go together.

Once you’ve done that, then you can move into DFM, or design for manufacture, where you really focus on the part level, and will think about, say injection molding, how do you incorporate draft, which is a slight angle to the vertical walls. They can come out of the part as it shrink, out of the tool as it shrinks, to rounds in the corner so that the resin will flow evenly, and you want to have pressure drops and things like uniform wall thicknesses.

A very simple three step process. One, look at the volume, figure out how much work you need to put into it to start with design for assembly, and then three move into design for manufacturer.

John: I know for my product, I had spend for the design for assembly aspect, I’ve spent so much time constantly assembling my product, which was heavy on the mechanical side.

It had lost springs and things that had to be inserted in. For me, that was the biggest part of the design for manufacturing aspect is simplifying the assembly process. I just remember doing so many prototype versions, and just sitting- timing myself how long each step took, and how can I simplify this, and constantly trying to optimize that process. That’s definitely something that I can relate to.

Is designed for manufacturing- you mentioned things like draft and such– You already touched on this. I don’t think you need to overwhelm yourself with first prototype design that it has to be, that you’ve got to have all the draft angles, and the uniform wall thickness, and everything just perfect. You do need to at least understand the process enough to know that your design can be taken there. You don’t want to obviously design something that could be designed with the simple pool mold, but you’ve instead made it where it has all these side actions, and complicated your product, or the mold for the product.

I’ve seen so many cases were- especially with enclosure designs, you design something that just can’t be injection molded. It can be 3D printed, but then when they go to try to scale it, they’re like, oh, it’s not just a matter of scaling that I have to pretty much redo the entire design.

Scott: Yes. What happens is often companies will work with graded industrial design firms create an aesthetic shape they fall in love with, and then realize that it’s just not practical to produce it in volume.

What often gets them is the vertical walls because generally any vertical wall has to have a slight slope or a draft angle to it. If the wall is quite tall, then even though it’s only maybe half a degree, that can add up to be a significant deviation over a couple inches. There are ways to get around that using side action, but it makes a much more complex tool, and we usually get a witness line on the corner, which might not be what you’re looking for.

John: Those are good. The last topic I’d like to touch on is I know that you’re also a partner with Bolt, which is an investment firm. I suspect a lot of people- listeners will know Bolt, if not, definitely check them out. They have a great blog.

But they’re an investment firm that specializes in investing in hardware, startups, early stage hardware startups. I wanted to just touch on the topic of finding investors for a hardware startup, and I’m just curious if you have any quick tips, or just a few of your top tips for startups that do plan on seeking outside investment.

Scott: Sure.

John: Specifically hardware startups, since that’s what Bolts specializes in.

Scott: Hardware is certainly a lot more capital intense than software. I think that first thing I would do is just step back and– VC is one type of funding. There’s a lot of other sources of capital that you can use to scale your business.

My favorite by far, and also the hardest is just profitable growth, where you tend to sell fund based on the margin you generate operating your business. This is cool, because it lets you retain full ownership of your company. But at the same time, if you don’t have access to capital, maybe from savings or other things ahead of time, then it can be more challenging to find a way to buy the molds and inventory. But if possible, I’d always go that route.

If that one isn’t viable, then I’d also consider bank loans, friends and family, and even angel investors are great, particularly if they are strategic and can help you with connections, just to get rolling.

Typically, early on, you want to find that product market fit, and the longer you can delay taking outside money, in my opinion, the better off you are, because it gives you a lot more flexibility. At some point, you may get to the stage where, like, all right, now we’ve gone through friends and family. We’ve bootstrap, we’ve got some good angels on board, and we’re really ready to raise that raise around from a venture investor.

At that point, there’s a lot of different VCs out there. Bolt were an early stage investors. Generally, we’ll write a half million dollar check and be the first institutional money in.

There’s many great late stage investors that want to be able to see that you’re scaling, you found product market fit, and that for every dollar invest in the business, that generates a dollar and a half in profit, and something like that. That’s a whole different type of investor. As you’re looking, you want to find one that’s the right stage, and also the right vertical. At Bolt, we do hardware. If you’re doing a hardware product, that could be a good fit.

Typically, the general guidelines are that you should have a path to get to 100 million revenue in five years, ideally with a large part of that consisting of some sort of recurring revenue, which in the hardware context would mean some sort of a SAS or cloud based model, where the hardware is in the loop, but not the main focus.

This definitely is not a fit for all companies. Some companies, it’s a great business model to sell $10 million a year for our standalone hardware product. But from a VC perspective, they like reoccurring revenue because it has the highest multiple, and it’s a lot more predictable criteria.

Certainly at early stage, the VCs are going to look a lot at the founders to see if they’ve had a successful exits before, what their education is, what their experience is, where they’ve worked, who they’re able to put together for a team. That’s often more important than almost anything else, because early on there’s the expectation that there’s going to be a lot of pivoting while they find the product market fit. But it’s going to be after a huge market that’s going to make a meaningful impact.

I always think about VCs that they’d prefer to get– If it’s getting- in a baseball analogy, getting a hit the first or second is a lot less interesting than swinging for a grand slam, and either get the grand slam or get a strikeout. They’d prefer to strikeout then just make it to their first.

They’re going for the really, really big win. And if you break down the math of a VC fund, which you’ll probably won’t have time to do here, but you’ll see the way they’re structured. The only way the VCs or general partners win is if they have these massive sort of Fitbit style exits, which means that when they’re investing in a company there, that company has to have the potential to address that really sizeable market.

John: Yes, absolutely. Obviously, VCs are much later stage not- it’s not going to be an early stage- that’s going to be more the realm of angel investors as such, which angel investors do. They don’t have quite the requirements of a VC as far as that you have to hit 100 million in revenue in five years. Would you agree with that?

Scott: I wouldn’t- with an angel investor, especially if you can get a strategic one that knows your business and can be helpful, the math is totally different, because generally they get 100% of the upside, but also if the money’s gone, they lose 100% of their money.

Whereas with the VC fund, they’re typically structured on this concept of carry where the group of general partners in the fund may only get 20% of any upside. There needs to be a lot more leverage for them to make any money. Or as an angel, if you can invest in a company- and even if they don’t get to a 100 million, there’s still an opportunity to have quite a nice outcome.

John: In regards to angel investors that you mentioned strategic investor, which I feel is can’t be overemphasize how important that is. It’s so many entrepreneurs, they focus on just the money, but money doesn’t solve the problems. Obviously, you need the money, but you also need experience. Having an angel investor that has that experience, I think, can be more valuable than the money itself.

Scott: Yes. Often the angels are also entrepreneurs that potentially have had a successful exit and have connections with the VCs. In the VC world, who you’re introduced to the VC by is really important. It’s a great stepping stone if you do go down the VC path later.

John: Absolutely. When it comes to investors, you definitely cannot just reach out to them cold. It’s all about having a personal introduction to an investor, because otherwise, you’re just randomly asking some stranger for money, and that’s just not a good way to start a relationship.

Scott: Yes. It’s a much harder road to get to a successful outcome.

John: How do you feel investors, whether that be angel investors or VCs, how do they look at crowdfunding? If you’ve had a successful crowdfunding round before you’re bringing on these other investors, is that a positive because it shown market proof? Or is it a negative because you have all these other investors in the company?

Scott: I think eight years ago, or let’s just say a while ago, crowdfunding was really an important proof point. So if you had a pebble style kickstarter, then pretty much every VC would want to talk to you.

Today, I don’t really see that that holds anymore. I think it’s nice if you have a good one, but maybe there’s more downside that if you don’t have a successful campaign, then it may create some additional hurdles to get over. So yes, I don’t think it carries the same amount of weight as it used to.

John: Do they look at it as a negative ever?

Scott: I think they could if it was unsuccessful. But I think also the best investors will look at the team, the market, the competitors, try to understand why one product or one team is 10 times better than everybody else, and then decide to invest in them. Some VCs are just– like Lemmings, they are following me. But the best ones actually are a little bit contrarian and see things that other people don’t. I think the crowdfunding may be unrelated to that.

John: Scott, this has been really great. I think we’re running just over an hour, so I’ll go ahead and wrap this up. We’ve covered a lot of great topics, and you’ve shared a lot of really great wisdom. Can you maybe just tell listeners where they can learn more about Scott Miller? Obviously, they can learn more about Dragon Innovation on Dragoninnovation.com. If you want to give any Twitter, or if you have a personal website that they can find you on, if you want to share that, that would be good.

Scott: Oh, absolutely. Thanks again, John, for the opportunity to be on the podcast. For Twitter, we’re @Dragoninnovate, and feel free to reach out to us anytime. Then I’m pretty active on LinkedIn, which is just Scott, my middle initial, N, and then Miller. So also feel free to reach out.

John: Yes, I’ll definitely put those links in the show notes for this episode, so listeners can easily find you.

Scott: This has been a lot of fun.

John: Scott, this is really good. I’ve been excited to talk with you for quite a while. I know we talked a couple of years ago, but obviously we’ve never done a formal interview. So I’ve been excited to pick your brains for everyone to listen to. Thank you so much for doing this. I really appreciate it.

Scott: Likewise, yes, this has been a blast.

John: You have a good day.

Scott: You too. Thanks, John.

John: Okay, that’s it for today. Be sure to tune in next week for another episode of the Predictable Designs podcast.

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