Episode #12 – Hardware Startup Horror Stories and How to Avoid Them with Dave Millman of BizDev.Global
In this week’s podcast episode I speak again with Dave Millman of BizDev.Global. This time we discuss some hardware startup horror stories and how to avoid the same outcomes for your own startup.
Dave has decades of experience helping hardware startups and he specializes in helping them find their first customers.
He was originally my guest back in episode #2 where we discussed common mistakes hardware startups make with customers.
Dave has also taught a couple of live workshops inside the Hardware Academy.
One workshop was on validating your MVP, and another one was about finding your first big customers (these links take you to shortened public clips from these workshops, the full versions are only available to members).
Podcast MP3: Download
Dave Millman of BizDev Global
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 again with Dave Millman of BizDev.Global. Dave has decades of experience helping hardware startups, and he specializes in helping them find their first customer.
He was originally my guest back in episode number two, and he has also taught a couple of live workshops inside my Hardware Academy program.
In this episode, Dave and I discuss some hardware startup horror stories, and how to avoid the same outcomes for your own startup.
Welcome to the show, Dave.
Dave: Glad to be back, John.
John: I’m glad to have you back. For any listeners that didn’t hear our discussion back in episode number two, can you maybe go ahead and give a quick introduction?
Dave: Sure. I’m a double E, and after about five years in design, I went over to the dark side of sales and marketing. For the past 30 plus years, I’ve been out here in Silicon Valley working with technology startups on building their products and selling the products.
John: Okay, great. The selling part’s really important. You can’t just build it without selling it, so that’s great. Why don’t we go ahead and jump right into the list of horror stories that you’ve put together. I’ve got a story or two of my own to share, but why don’t we go ahead and jump in with horror story number one.
Dave: [laughs] Horror story number one is very fresh, John.
John: Yes. Sounds so ominous sounding, but–
Dave: Client hired the developers, overseas software and hardware developers recommended by their chairman. The product is a health wearable that monitors various vital signs, and it stores it up and continuously reports them.
There’s a lot of interest in this in healthcare these days, particularly elder care. Things are going swimmingly. Everybody’s really excited by the progress of the device, and we start going out and showing customers.
We’re working with one particular healthcare customer, and they innocently they ask the question, “Tell us about how you encrypt the private health information. Tell us how you protect that private health information.
That’s all covered by HIPAA and lots more privacy regulations all around the world?” To folks with the client, looked at each other and looked back at the clients and said, “We’ll have to get back to you on that.”
It turns out that had been a minor oversight, but in fact they were transmitting all of this private health information in the clear, which was a violation of pretty much every privacy regulation out there. That’s a giant oops back to the drawing board mistake.
John: Absolutely. How much did that set them back?
Dave: Three months and counting.
John: This is a story in progress still.
Dave: Still pulling their hair out over this one.
John: Okay. Wow. Okay, great. Well, I guess not great story, but not so great for them.
Dave: I think it’s going to be six months before all is said and done.
John: That’s why this type of thing, it’s much better to deal with this in advance and know what requirements you have to meet instead of trying to do it after the fact that obviously.
I think that’s also the nature of the beast. It’s like there’s going to be things that are forgotten. Obviously this is a big one, but nonetheless, I always think the most important thing is that you’re able to pivot and adapt from when you run into these types of problems.
Dave: This one crept up on them, John, because as diligent as they were, it never entered their consciousness that the information transferring from the wearable to the smartphone or to the hub, in their case, would in fact be protected health information, but it is very much so protected health information.
John: Yes, I can see how that would be overlooked. You think it’s such a short range. It’s not like it’s going over the cloud or going through WiFi or something like that.
I could see how they would overlook that as a requirement if it’s just going from the wearable to the phone. Okay, that’s a good one. Do you want to go ahead and we can jump into the next one?
Dave: Well, you had a similar story, didn’t you?
John: Yes. Well, yes, that’s the next one I was going to tell. It’s a little bit different, but it’s got some similarities. The story that I have is, this is actually, I’ve seen this happen to at least two startups or entrepreneurs that I’ve worked with, and that is that they’ve– I’ve had them contact me and they had hired, in both cases, it was an offshore developer. I believe in China. They’d spent paid thousands of dollars.
They had a prototype that they believed was fairly close to being complete, but then, and this is months into the process, but then they ended up discovering, they saw on alibaba.com, which is a Chinese website where you can look at different products and stuff from Chinese suppliers, but they found their board exactly the same board that they thought they had custom developed.
What they ended up discovering was their ‘developer’, I’m putting that in quotes, basically purchased an off the shelf board, and all they did was put a sticker over the previous label and then tried to pass that off as a custom design.
These entrepreneurs or startups, it was just money that they lost. Obviously they were dealing with someone that was completely dishonest and wasn’t going to give them a refund. This ended up being an expensive lesson learned, and is also one of the reasons that I always encourage people to get independent design.
This would have been most likely caught if you had an independent designer look at it, because I don’t recall the details, but I doubt that they had a full schematic and a PCB layout and all the Gerber files. Somehow they had a trick to the entrepreneurs and just were not really designing anything but were instead just reselling them something already that existed.
If you get someone, a third party to look over it, then that’s a case where it would– that type of review would prevent you from being scammed or ripped off. Exactly what this is. Definitely be careful when doing that. These were both offshore developers, but there’s dishonest people all over the world, so you just always have to have that in mind and have the checks and balances in place to make sure that you protect yourself from this type of thing.
Dave: Well, what happened? Did they have to start over?
John: Yes, they had to start over. They had learned some lessons from the board that they had. It wasn’t entirely an entire waste of time, but yes, they had to start over and hire a new designer to just basically start everything from scratch.
It was just four to five months and several thousands of dollars that they had lost. Fortunately it was a freelancer, and they were based in Asia. The prices they were paying were a lot cheaper. I don’t think they spent tens or thousands of dollars, but thousands of dollars. It was still a significant financial lesson learned.
Dave: Sounds like it.
John: Yes, absolutely. One I always like to share with people just to encourage them that you need to have the checks in place, and that’s the risk of being a nontechnical founder, is if you don’t have, which is the case with these people, they didn’t have the technical skills to judge the work of the developers that they were paying, and that is just making you right for being ripped off if people feel like that you don’t have the knowledge to be able to judge their work.
That’s why I encourage you, listeners, to either learn those skills to be able to at least judge that work to some high level, or bring on someone on your team that can or outsource that to just an independent their feet.
Okay. That’s it for horror story number two. Let’s go ahead and jump in number three with another story from you, Dave.
Dave: This is another wearable, since we’re enjoying wearable stories today. This was a consumer product, not a healthcare product, and it had a metal back, and the guys designing it were crowdfunding this one on Indiegogo and decided, “Hey, wouldn’t it be fun if we could allow our backers to engrave something on the back of the wearable since we’ve got this stainless steel backpack there.”
They made that available as an option, and they let people send in a bitmap of anything. It could be a photograph, it could be their signature, their initials. I love you, sweetie. Anything they wanted onto the back of the watch, and people were pretty enthusiastic about that, and it helped them raise a little bit more money. Not a lot more money, but a little bit, 10% more when they announced that one.
Everything’s going along swimmingly. It takes a lot of effort to ship a hardware product, right? You have to get it manufactured, you have to get it shipped, and then when you get it landed, then you have to typically work with a third party logistics firm to start doing distribution in each of the regions of the world where you’re distributing.
Again, this is their first product. They’re new and they’re working with a really good third party logistics firm here in the States. There were three hardware variants. There were three SKUs. Although when the watch bands came into play, that turned it into a total of eight SKUs. We did a bunch of tests, and everything was working out really well, but for shipping the eight SKUs and then on the website e-commerce, ordering more product and shipping those eight SKUs, was all working great.
Then in one of the meetings with the logistics firm, we mentioned engraving, or the client mentioned, and the third party logistics guy, his eyes popped up, his head popped up real suddenly and he goes, “Engraved?” They go, “Yes, got our backers engrave the backs of the watches if they wanted, about 1,300, 1,400 of them.”
His eyes got really wide. He goes, “That’s not eight SKUs. That’s 1,300, 1,400.” Once again, everybody starts looking at each other, a little bit panic looks on their faces.
John: Oh, I imagine.
Dave: Because it’s a very different operations to ship 1,300 SKUs, all quantity one, then having eight bins, if you will, and plucking product from the eight bins to fulfill orders from eight.
John: That sounds like a nightmare. You couldn’t have the product package beforehand. It’s not like you could have it manufactured, packaged, then you ship it to the logistics company, but now it’s already packaged. Now it can’t be engraved.
It seems like it opens up a lot of problems with now you have to have the unpackaged product go to the engraving company, and then back to the packaging company. I don’t know what type of packaging this had, but there was something like consumer electronics packaging, and that creates a lot of extra work that you–
Dave: Well, it turned out to be a little bit easier than that, John. The engraving was handled overseas. There was no packing orders. There was no unpacking and then repacking involved.
John: Well, that helps.
Dave: The solution to this one was not three or six months, the solution to this one cost them just a few weeks, although the engraver turned out not to be able to deliver the engraving as promised, so that took more months. Logistics problem took only about three weeks to rearrange the logistics for shipping 1,300 of quantity one, so not too bad there.
John: Not too bad, but it’s still any delays you can eliminate are always good.
Dave: The engraving ended up costing an additional four month and anticipated delay because the engraver didn’t know how to do bitmaps even though he thought he could do bitmaps. Most of the engraving was bitmaps.
John: Do you know, are they still offering this engraving?
Dave: No, they never offered it again. They’re absolutely out of the engraving business.
John: I got it. I have my own lessons learned with having too many SKUs, nothing custom like an engraving, but for my product, it started off with just one single color, one single package, you just buy them as an individual.
Then I had some retailers that wanted a three pack. I started offering a three pack, and then people were wanting different colors, so then I started offering three different colors. Now I had two packages, three different colors, and one of the packages was a three pack. It had combinations of all the colors. Ultimately, it created a lot of headache for me, the main issue being the inventory side.
Instead of selling one product to everyone, that which would have been much easier to keep an inventory, I was having to try to focus which of these different SKUs were going to be more popular, and my estimates were wrong. I ended up having too much of some SKUs and not enough of the SKUs that were selling. It just really added more variables to an already complex process of getting a product out there.
I know there can be a lot of emphasis or motivation and want to have multiple SKUs, and you will eventually need to do that. Most companies, distributors, retailers don’t want to work with just a one SKU company forever.
You’re going to have to add on other SKUs eventually, but my lesson learned is to not rush into that, just focus on that one model. Get that everything working with that, get sales going, and then you can start expanding, is the lesson I learned.
Dave: John, it just occurred to me we should probably explain what a SKU is. What is it, shop keeping unit?
John: Stock Keeping Unit.
Dave: Stock Keeping Unit?
John: Yes. Think of it as a part number, but every color of your product would have a different SKU. It’s just another item that you have to manage, or the retailer has to manage. It’s another line item in their database. That’s what it is. In general, it adds a lot of complexity.
Delay expanding to too many SKUs as long as possible, and don’t get overly excited because with my product also, after it was on the market for a while, I realized there were marketing, I needed to tweak the messaging on the package, but now I had all this in multiple packages I was having to change, and some of them weren’t selling out because I ordered more of that SKU than would sell, so it just created– I had this extra inventory that I couldn’t get rid of with the less popular SKUs, and then because of that, that financial challenges for me to order the new SKUs because I had money tied up in inventory I couldn’t sell.
Dealing with inventory is such a big part of being a startup once you get past the beginning stages. Anything you can do to simplify that when you’re getting started is going to go a long ways.
Dave: Two products, three colors, now we’re at six SKUs, then you have, you said three packs, is that 9 or 12 SKUs?
John: Yes, I think it was no excuse total.
Dave: Yes, adds up quick.
John: Yes, it does. I went that way because there was a little bit of pressure on me from the distributors, the retailers, the sales reps I had, they all wanted more more SKUs, more colors, but it just I regret rushing into that.
I should really optimize just one. If you want to call that even an MVP, you’re kind of getting away from the MVP if you’re starting to offer all these different colors. It just create a lot of headache that I think is best avoided in most cases.
That’s story number three. Let’s go ahead and jump to story number four, which is one that you have.
Dave: Well, this one’s also really fresh in my mind. We’re recording this in March, it started in November. Working with a client in the home automation. I’ve been working with many delays, but finally production underway, all looking good. Working with their logistics vendor in China, this time, they’re going to ship directly from China.
They were doing that to basically address some of the terror efficient at different areas. They were shipping from China. First thing I know, in early November, a box shows up on my door, and it was the product. First shipping test work, they did five boxes to five different people that day. A couple of weeks later, they did 30 boxes to 30 people, and for that in that case, we actually all went onto the website and selected our products. That one worked.
Good, we’re testing, we’re making sure it’s all going to work. Finally, now it’s time to ship. I think the quantity was 1,800 boxes. They brought this shipment down, and a different guy took care of this one for them. The different guy examined their paperwork and said, “Oh, you have a battery.
We have different regulations for the battery. You’re going to have to do it this way”, and this way was not a bulk shipment, but 1,800 individual shipment. They said, “Wait, we just did this two weeks ago with this other guy.” He goes, “Well, he’s not here anymore.
These are our regulation.” I know there’s a lot of regulations about nikhat– I’m sorry, not nikhat, about lithium ion batteries, and how many of them in a package, and in the package or out of the package or whatever. I know there’s a bunch of rules about that, and I don’t know which rule they want to follow, but they want to follow of it. They spent three weeks unpacking, relabeling and repacking.
John: Maybe you mentioned it, was this a retailer or a distributor? I don’t know if you can give the name of the company, but what company were they that was giving them this issue with the shipping requirements?
Dave: This was the shipping agent.
John: This was the shipping agent, okay.
Dave: The issue was the lithium ion batteries, and how many lithium ion batteries were on the pallets?
John: Okay. They didn’t run into this when they were only doing 30, but as soon as they went up to 1,800, then they hit this limit.
Dave: Maybe that was it, or maybe the other guy was just letting them slide.
John: Yes, that’s rough.
Dave: By the way, this was not an air shipment.
John: Yes, it’s obviously even more stringent with air shipments. How did they deal with this?
Dave: They unpacked the pallets and broke it down into individual shipments, 1,800 of them.
John: Wow. What about in the future? That was obviously their solution for that one order, did they? I’m assuming that’s not their long term solution, though, that was just for that one case.
Dave: Well, with all of what’s going on with the tariffs, all the changes, they’re constantly having to reevaluate where it makes sense to ship to and ship from.
John: Yes. That’s a moving target.
Dave: I think all your listeners who are distributing on different geographical areas or different continents go through this, where we set up a regional shipping center inside the EU. Do we ship straight from China? Do we ship pallets to the US and then we distribute from there?
John: Yes, there’s a lot of different ways that you can go about it. It’s nice if you ship it all into your own warehouse in the US, and then from there, you break it down and ship it to the individual.
Please have a few more checks in place before it reaches the customer, but I’ve had cases where, especially for larger orders of customers will tend to want to just purchase directly from China and not go through your warehouse.
Dave: The only thing we know is the rules changed last week. The constant anymore is the rules changed last week.
John: The tariffs, especially that you had mentioned, those are changing constantly. That’s very much a moving target. Hopefully, that will eventually settle down and go away, but right now, they’re pretty significant, which I believe that’s one of the other stories that we’re going to talk about, is the effect of tariffs.
Next, we’ve got the story number five.
Dave: Translations, localization. What happened in this case was, this was all repeated to me, second hand by the folks who were involved. They worked really hard on printing the manual inside the box in eight languages.
They worked also really hard on getting the right certifications, labels, test results, all the other labeling requirements in the right languages on the outside of the box, and any of your listeners who have done this know that there’s actually a little bit of flexibility, depending on the size of the box, the different regulatory bodies do not make if you have a large box, they want you to print all the information.
If the box is smaller, you sometimes have the opportunity to not put all the information on the outside of the box, which wouldn’t fit, but do some inside the box, except when you go to Canada, you have to have the French and the English in the same size on the package.
John: Yes, I’ve dealt with that one. That’s really fun if you have a small package, because my product was originally in the US where you have English and then Spanish and really small, but then you went to Canada, and like you’re saying, they require the English and the French be the exact same size, and that really convolutes your packaging if you have a small product.
Dave: Now, when you go to the store and you notice a package on the wall that’s got French on it, you’ll notice that the French is equal size to the English, or typically one side of the box French, one side of the box English. The reason for that is because to sell that same box in Canada, that’s the requirement.
John: Yes. As you’ve already mentioned, every country, every region is going to have different requirements on that.
Dave: Yes. Germany changed their wireless certification requirements about three years ago, 2017 timeframe, I think. That required a whole bunch of rejiggering of labeling inside now.
John: This is another reason I think it’s best to start with one region and really grow that out before you start going outside of that region, because whether it’s languages or certifications, there’s just so many differences for different regions that it’s going to create a lot of headache.
Dave: Back to contract manufacturers, same product now, and still in the translation. The contract developers overseas changed a couple of the scripts. Yes, fine. Everybody approved the changes, except the manuals had to be changed, and that means the translations had to be changed. One of them involved the pairing, and in one country, the change in the pairing instructions caused a hiccup in the documentation for that country for wireless pairing.
John: Was this just a language issue, something wrong with the translation?
Dave: It was what needed to be documented in print.
John: It wasn’t an issue with the translation, it was just that they didn’t have the right instructions for that country?
Dave: I think it had to do with the way the power on worked, or how long the power stayed on, or something like that, or the fact that I think the feature might have been a turn on turn off versus a turn on and self power off required a slightly different type of documentation in exactly one country. If they didn’t have backers in that country, they would have skipped that country, but they had backers there. This caused them to have to put custom documentation into 30 or 50 packages to backers in that country.
John: Wow. It’s another example of just how it complicates things when you start scaling outside of your local region, and just even the translations, you’ve got to be really careful with the translations and not just hire your cousin who happens to speak English and Spanish or French and English or whatever.
From my experience, you really need to hire a professional that does like commercial copywriting. Otherwise, you may end up, what’s the one where, I think the Nova via the car that they tried to, I know 30, 40 years ago, they tried to sell, I feel like in Latin American. I think Nova means in Spanish no go, or something like that.
Dave: No go, yes, that’s the story I heard.
John: You got to be careful with the language translations. Okay, number six. This is a good one here on capacitors. Let’s hear number six.
Dave: I’m a little emotional about this one still, and it’s been a couple of years. This one’s an older story. All the rest were current, last few years, or even the last few months. This one’s an older story, though. Mac users might remember a company called Power Computing.
There was a time when Apple allowed Mac clones, and licensed Mac clones. They licensed a company called Power Computing, that instead of producing low cost machines, started competing with Apple at the high end and producing higher performance, lower cost machines than Apple could produce. All of us in the Mac world were were thrilled by this.
All of a sudden, we’re saving $1,000 off of a high end Mac machine. I bought one myself. It was absolutely delightful, besides the fact that it was using common peripherals, PC peripherals, at the time. I loved this thing.
We get attached to our computers, but after six months, it started to randomly reset once or twice a week. It’s like, damn it. I thought my machine was more stable than this, and you constantly jigger your– update all your software and whatever, and randomly resets. Then starts happening every day or so. Then starts happening every day. Then three times a day. Three times a day, the machine’s really painful, and beyond, that it’s almost– After probably 12 months, the machine is now unusable. I’m heartbroken.
1998, there were some online forums, and other people, “Yes, we’re having the problem”, some other people were having the problem. I abandoned the machine and moved on with my life and found another computer to love.
Something like two years later, by the way, Apple yanked power computing’s off. Actually, Apple yanked all of the clone license when Steve Jobs came back, and so all the clones went away, or there were no more new clones made. Power Computing went out of business.
We’re now two years later, and I’m talking to– My dad lives in Florida. I live in California. My dad has a guy come in and do computer stuff for him. Set up the internet, make sure the printer is working, and he calls the guy in once a month to come in and help.
I’m talking to this guy, because we were doing something custom together, me and him, to help my dad out. I’m talking to this guy, and I say, “What else do you do?” He goes, “Well, I do this and I do this and I also fix Power Computing machines, rebuild Power Computing machines.” I go, “What?” [laughs]. He goes, “Yes, I was with Power Computing the whole time they were alive.
They all fail for the same two reasons.” I go, “What are you talking about?” He goes, “Well, the high end machines all fail because the contract manufacturer in China swapped in inadequate electrolytic capacitors into the power supply, and so they all started restarting after six months. They all went bad.” Son of a, you know what.
John: Yes. [laughs]
Dave: I sent this guy my dead Power Computing machine as a gift for closure on that one.
John: I started to say I was going to ask if you ever swapped out the caps or if he just let him have the computer?
Dave: I shipped the computer to him.
John: That’s interesting. I would say the other lesson learned with that story is, don’t tie yourself to one company. You mentioned that they lost the– the Apple went through all the licensing for any clones, and that just instantly they’re like instantly put out of business.
Dave: Doing research for this podcast, John, just checking my facts, I went looked up bad electrolytic capacitors, or fraud electrolytic capacitors, something like that.
It turns out that it’s quite common for contract manufacturers to swap in 25 volt parts when you specify 50 volt parts, or swap in lower quality parts for the high quality parts, like 10 items that you specify. That may have been what happened. I was trying to track down exactly what it was, and some parts are just flat out effective.
John: That’s a bad one. You definitely have to be careful with maintaining that control over that you know what components are going into your product.
For most products, it doesn’t make sense to source all the components yourself, but for my product, that’s how I started off initially, was instead of having my manufacturer do all the sourcing, I handled all that. It creates a lot more work but it just gave me direct control over all the components.
That would help prevent that type of problem, I think, from happening versus when you pass all the decision making over to the manufacturer, then they can make these wrong decisions like this, which could be the death of a company.
I think we’re ready for, unless you had something else to say about that one, I think we’re ready for story number seven.
Dave: Well, I’m just trying to breathe deeply and calm down from that one.
John: Don’t cry, don’t get too upset. Do you still have a picture of the computer hanging on your wall or frame?
Dave: No, I ripped up all those computer.
John: Okay, try to hold your emotions and let’s merge number seven.
Dave: Number seven was another recent example. This was a small wireless device that had a multi part enclosure, plastic all around, injection molded plastic enclosure. The bottom was one type of plastic, and the top, which was a display panel, was a different type of plastic. The top had electronics screwed to the back of it. Fairly typical, the display board going on the back of the display, the clear display part of the smoke.
The testing units, I think there might have been as many as 200 testing units, all hand assembled. We’re fine, and minor changes made here. Changes and tweaks, of course always, and everything went fine, but when they went to volume production, they switched from handheld screwdrivers attaching the PCB to the front display panel, to electric screwdrivers.
That, of course– I can hear people in the audience groaning. Of course, those electric screwdrivers over torque the screws and caused something like 40% or 50% of the screws to either strip out or break or otherwise destroy the front panel display.
John: Wow. That’s a huge scrapper, 30% or 40%.
Dave: Well, either they didn’t see it or they didn’t pay attention to it. I think actually it wasn’t stripping, it was over torquing, actually I misstated. It was actually over torquing the display such that the critical Hayden’s component broke in shipping or broke while in use on the desktop for a day.
John: I think this is a great example of why there’s really no such thing as a minor insignificant change. Sometimes those changes to your process that you think are the ones that the easiest there’s no risk of, I don’t think anyone obviously gave much thought to changing the type of screwdriver and what impact that was going to have.
These types of changes are the ones that a lot of times will come out to bite you. The ones that you’re expecting to be problematic, you’re prepared for, but the seemingly minor ones can really wreck a lot of havoc on your process. Once you’re up manufacturing, then this obviously gets every type of problem, like this gets amplified, where your 30% or 40% of your products are being scrapped.
Dave: If I would make a recommendation here, it seems like everybody has challenges with bezels and displays and clear components. This is not necessarily a bad thing. This is one of the reasons you do multiple test runs, but in this case, they’ve gone through several plastic to get the exact transparency and color tint that they wanted.
Possibly, the problem was caused by the last change in the type of plastic, and that plastic couldn’t handle the torque or power, but clearly, the electric screwdrivers were over torquing thing and the whole thing was stressed, and I think 30% of them fail just in shipping, and then another 10% or 20% failed on sitting on the desktop when they were touched.
John: Did they change the type of plastic or go back to handheld screwdrivers, or just lower the torque setting on the electric screwdrivers?
Dave: They changed the design. They said okay, we’re not going to let any hint of this happen to design, so it was no longer screws.
John: Okay, got you. You mentioned that the transparent plastic, had they changed the type of plastic, or was it always that same type of plastic when they were using the handheld screws, or did they change the plastic to a transparent type at the same time they switched to doing the electric screwdrivers?
Dave: They had actually gone through several types and colors of plastic on the way in previous test batches. Of course, test batches are never exactly like the final batch.
They did make a very minor change at the end, so they were never 100% sure if the final change had made the plastic more brittle, or if the electric screwdriver would have cracked all of them. They never knew that, but it didn’t matter, they designed around it.
For that reason, by the way, because they didn’t know whether it was the fault of the reformulated plastic, which was perfect for the display, because they didn’t want to do further experimentation, they just got rid of the screw. They just changed the mounting arrangement. There was no longer a screw, problem solved.
John: Interesting. That’s a good one. It sounds like I think you said they were just still just doing small batches like pilot runs and not this one.
Dave: No, unfortunately not. The batch that broke was a shipment run of thousands, actually.
John: Since a lot of this was damaged in shipping, which a lot of times–
Dave: The time when it left the factory.
John: A lot of times, the term walking wounded is commonly used, so it’s a product that’s got some damage or flaws with it, but you don’t– It’s walking and wounded and it doesn’t die till later once it reaches the customer.
Dave: Well, John, you got to wonder if that many are failing and shipping, you got to wonder if there weren’t a fair number of failing right there on the assembly line.
John: Yes, that’s a huge scrap rate, 30% to 40%. It’s hard to imagine that some of those wouldn’t have happened immediately and not had to have been shipped. Well, let’s move on. I think our last story or last potential pitfall, this is something a lot of people are dealing with now, but I’ll let you share the last story.
Dave: Well, it’s the whole tariff issue. We mentioned it before. If you were a hardware manufacturer during 2019, then whatever budget and whatever carefully balanced business plan you had at beginning of the year, was null and void by the end of the year because of tariffs.
I had clients telling me that their margin was 21%, and the tariff was 25%. Obviously, that’s untenable. What that ended up meaning was, instead of selling a $59 product, now they’re selling a $99 product.
John: Those tariffs are, they’re definitely impacting a lot of companies, 25% tariff. That’s massive. I think the only bright spot is, I believe most people look at this as a short term tariff and not something that hopefully is going to be long term. That doesn’t help if you got products that you’re selling now.
Obviously, you’re being impacted by this, but for those that are maybe just getting started or don’t have art shipping product yet, this is hopefully going to be something that’s not the tariff will be removed before you get to the point of shipping. This is, at least in the US, every country has different tariffs and duties, but this is all related to the US-China trade war.
I know back in, it’s constantly changing, but back in, I believe early 2019, maybe 2018, they had the tariff set where the 25% tariff was only on components or sub assemblies. If you had your board and enclosure made in China, then you shipped it to the US and did the final product assembly in the US, and packaging, then you had to pay that tariff. If you instead had all that done in China and then you purchased an import of the final packaged part, then that tariff didn’t apply.
Which was a really weird situation because it was encouraging, because I will normally, for those in the US, I’ll recommend that you do that type of hybrid manufacturing strategy when first getting started, just so you can control the quality and such, but at least for 2019, you were being penalized for doing that with a 25% tariff.
Now they’ve since where it includes completed products or sub assembly, so you don’t quite have that differentiator there. Definitely 25% is a massive tariff that I just don’t see how that can hold for any long-term.
Dave: I don’t know how you manage through that, John. What do you do when you’ve spent two years driving to a specific cost point, a specific, margin, and then all of a sudden, oops, it’s plus 25%.
John: Well, I know what a lot of companies are doing, is they’re doing things like maybe having a product still made in China, but doing the finishing touches in Taiwan. Maybe they package it in Taiwan because their tariffs don’t apply from products coming from Taiwan.
I know for the tariffs alone, that you’re getting a lot of companies are transitioning their manufacturing out of China, and Taiwan is being one of the places that’s taking up a lot of that. Then the Corona virus obviously isn’t helping also with people’s dependence on Chinese manufacturing.
There are ways around it. Obviously that gets really complicated if you’re going through Taiwan or a third country and importing it from there.
I know that some of the changes that some companies are making in order to have to avoid this tariff, because I don’t think most companies can afford a 25% tariff. Okay. Well, I think that was our last horror story. This just shows you there’s always going to be obstacles that pop up that you’re going to have to work through.
I think every startup, and especially every hardware startup, it’s a guarantee you’re going to run into some problems like these. You have to be adaptable and be able to pivot and do whatever’s required to make it happen. I think these are some good lessons learned and just it gives you an idea of the things that can happen. Sometimes things that you may think are minor, like changing the screwdriver you’re using for assembly, can really lead to significant design changes. Just that’s something-
Dave: Particular that battery shipping example I gave you, they did everything right. They did multiple shipping tests in increasing quantities, and they did tests where we all ordered product from different countries and different quantities, and to make sure all the pieces were working.
How heartbreaking show up at the shipping vendor, the post office, wherever it was, and be told, “Oh no, you can’t ship those as one shipment. You’ve got to ship 1,800”, or whatever that number was.
John: Yes. Even if you do everything right, there’s always the likelihood or possibility of problems just popping up, whether that be the tariffs coming out of nowhere or the Coronavirus. There’s a lot of people in my audience dealing with the Coronavirus delays that are trying to get there.
They have got one member of the hardware Academy where this is something he’s really been struggling with. He had promised all these units to be delivered, and the Coronavirus impacted that, and he ended up having to redesign his enclosure so he could go with a different manufacturer, so it required some creative pivoting, but that’s what it takes to make this all work.
Okay, Dave, well, this has been really great. I think this is some really valuable lessons learned here. Hopefully we’ve prevented the listeners from making these similar mistakes. I really appreciate you coming on here again.
Can you maybe tell the listeners how they can learn more about Dave and what you do?
Dave: Well, come on over to BizDev.Global and take a look, and actually I’ve got a little bit of an exciting story. We’re starting a sales community for high tech startups called sales dev.global, or at least that’s the working name, and by the middle of the year, you’ll be able to log into that and join in.
Come to BizDev.Global to learn more.
John: Yes, that’s great. I’m excited for you with that. You and I have talked about this quite a bit, so I’m excited for that to be available. Okay, Dave, thank you again for taking the time to do this. I really appreciate it. It is great to have you on again, and we’ll talk soon.
Dave: Thanks, John.
John: Okay. See you, Dave.
John: Okay, that’s it for today. Be sure to tune in next week for another episode of the Predictable Designs podcast.
Other content you may like:
- Episode #27: The Importance of Defining Project Milestones with Dave Millman of SalesDev.Global
- Episode #2 – Five Biggest Mistakes Hardware Startups Make with Customers with Dave Millman of BizDev Global
- Episode #20 – 6 Facts About Product Development That Hardware Startups Underestimate with Dave Millman of SalesDev.Global
- How to Avoid Common Mistakes Developing and Manufacturing Your First Hardware Product
- How long does it take to develop a new product and get it to market?