I’m going to share with you the three steps I followed to get a manufacturer to invest over $100,000 in my product without me having to give up any equity in my company.
By following these three steps, you will have a much better chance of getting a manufacturer to invest in your product too.
Several years ago, I developed and brought to market my own consumer product. My product was a miniature lighting device that illuminated any surface that it was attached to. I will be using it to illustrate the great partnership I developed with my manufacturer.
Step #1 – The Prototype
Step one is to get a prototype that looks and works like the final product. You want to accomplish this quickly and without spending too much money.
I self-funded my startup until I was able to get to the point of having a prototype, which was near production quality. My prototype was close enough to production quality that I could start showing it to customers.
You almost always have to self-fund this first step. It’s very difficult to convince others to put their time, money and energy into your product, until you have a prototype. It’s also very, very challenging to get investors, manufacturers or retailers interested in your product without a prototype.
This also applies to running a crowdfunding campaign. Typically, if you’re going to do a crowdfunding campaign, you need to have a pretty final stage prototype.
Having a prototype that looks and works similar to the final product shows that you’re serious and you know how to execute.
Most investors want to see, first of all, that you’ve invested some of your own money into the project. That just gives them a higher level of confidence that you’re not going to quit since you’ve invested your own money (and time) in the project.
Having a prototype also proves that you’re a do’er and not just a dreamer. Entrepreneurs and inventors often tend to be dreamers that often ignore the execution part of the process.
In contrast, having a real prototype shows that you’re not just doing this for fun. It demonstrates that you’re serious about getting this on the market.
On a more basic level, having a prototype proves that your solution is feasible and actually solves the intended problem. It’s way more effective to pitch your product if someone can hold it in their hand and actually use it. You will have much more success than if you only have a description of the product.
Despite all the benefits of having a prototype, it’s going to be really difficult to raise money to fund this early stage. Your options are limited to friends and family, and potentially a very few angel investors. Most entrepreneurs have to fund themselves to the point of at least getting to a prototype.
This is exactly what I did. My prototype was, by no means, perfect or ready to be mass manufactured on an assembly line. It was still a prototype created using prototype technology. The plastic was 3D printed and not injection molded.
I explained to retailers and manufacturers that this is a prototype and not a finished product. They were typically understanding of that.
Money is going to be the most limited during Step One. You’re going to have to work efficiently with small amounts of capital, unless you’re lucky enough to have significant capital of your own to self-invest.
But even then, having too much money can be problematic since it may entice you to take shortcuts before you fully understand the implications.
There are several ways you can reduce the cost of a prototype. The best way, if you have the technical skills or you can learn them, is to do as much as possible of the development work yourself.
Are you capable of doing the electronics design, software programming, or 3D enclosure design yourself? Take on as many aspects as you can, and remind yourself that it doesn’t have to be perfect.
But also be aware of your own limitations and you need to consult with professionals when necessary.
Once you’re able to use that prototype to get more money, then you can hire a professional design engineer to optimize your design into something that can be reliably manufactured.
In the early stages, just focus on trying to get a prototype that looks and works like the final product. Do this as soon as possible, and as cheaply as possible. Then you are ready to move on to step two.
Step #2 – The Customer
After completing step one, I used my prototype to get a well-known retailer to express written interest in my product. Like I mentioned previously, this is difficult without having a prototype.
One of the many applications of my miniature lighting device was putting it on your remote control. When you’re watching TV or movies in the dark, you can press the light to illuminate the remote control buttons.
One of the retailers I focused on was Blockbuster Video. This was quite a few years ago, back when Blockbuster Video was a huge internationally known company.
There was one reason I focused on them versus a Walmart, Target, Walgreens or Home Depot. I knew they weren’t constantly being pitched new products like a more general merchandiser.
My product was also a really nice fit for their business because one of the key uses of the product was to illuminate remote controls in the dark.
So how did I make a connection at Blockbuster Video? First, I found the email addresses for several of their vice presidents. I then decided to reach out to their Vice-President of Purchasing since he seemed like the most likely correct decision maker.
I was able to get his direct email address, which is the only way you should reach out to someone at a large company. You need to do the work to find the direct email addresses of the decision makers you need to reach.
Don’t ever send an email to a generic email address, like email@example.com. That’s never going to work! Instead, focus on finding the email address of the decision maker, which is what I did.
I sent him a really short email. I can’t stress enough how critical it is that you make this email short. Just a few sentences at the most. Big decision makers are very busy people so you need to be brief until you get their attention.
I also attached an image of a flyer I had made, which featured a picture of the prototype of my product in use. Finally, I said I had a prototype sample I could happily send him.
Within a day, he replied. He thought it looked very interesting, and told me he was going to connect me with their head corporate buyer to discuss it further.
Needless to say, I was absolutely thrilled! To have a top executive at a multi-billion dollar retail corporation tell me my product was “very interesting” was a huge jolt of energy.
A few days later, I was in communication with their head retail buyer. I remember being quite pleased that I was referred to this buyer by his boss instead of someone lower in the company. It increased my confidence that he would be interested in my product.
NOTE: The term buyer may sound generic but that is the term most commonly used to refer to the decision makers at retail companies who decide which products they will carry.
He requested that I send him a sample which I was happy to do since I was confident he would even be more impressed once he actually used it.
So I quickly sent him my 3D-printed prototype. I was anxious and excited to hear his reaction to my product, crossing my fingers that Blockbuster really was a fantastic fit.
He had gotten the sample, and it was time to talk with him on the phone. The response, let’s just say, was not what I hoped for.
I remember the chills running down my back when we spoke, and I asked him what he thought of the sample.
His blunt answer? “It’s awkward to use.”
I was just devastated by that. I also didn’t understand why he thought it was awkward to use.
No one had ever said the product was “awkward to use” before. How dare he say that, I thought!
I spent a day or two wallowing in self-pity, and then decided to go back and figure this out. I asked myself, “okay, why did he say this?”
I did some research and talked more with the Blockbuster buyer. I did my own experiments, and ultimately discovered exactly what had happened.
The plastic resins used in 3D printing are different from those used in injected molded parts.
I had sent the Blockbuster buyer a 3D-printed prototype. It was made out of a type of plastic which does not respond well to high temperatures.
I had shipped the prototype to Dallas, Texas in the middle of a summer heat wave.
My prototype had sat in the heat, and warped or partially melted. It didn’t melt enough that it was immediately obvious to the buyer, who had never seen the product before.
But the prototype had melted enough to make the product very awkward to turn on and off.
I mention this because it was critical that I eventually pushed through this obstacle. I worked with the buyer, even though I was devastated, and he was very accepting.
He knew it was a prototype, and not a production unit. I was able to work past this to eventually get a Letter Of Intent (an LOI) from Blockbuster.
An LOI isn’t a legal commitment to buy like a purchase order. My letter of intent just said, “We’re interested. We would like to test this product or carry this product in our stores once it’s available.”
I had achieved my end goal! The deliverable that I wanted from my first interactions with Blockbuster was merely a letter of intent.
Well, a purchase order would have been even better, but getting a PO is extremely rare without having inventory ready ship. My goal for step two was merely to get their letter of intent, so I could use it for step three.
Step #3 – The Manufacturer
Next, I leveraged my prototype and my letter of intent from Blockbuster to find a manufacturing partner. First of all, I want to stress that this is not a contract manufacturer.
A contract manufacturer is a manufacturer for hire. You tell them, “I want you to make 10,000 of these”, and they will manufacture that for you.
Some are hybrids, but in general a contract manufacturer produces products for other companies and it doesn’t manufacture their own products.
I focused specifically on manufacturers that were not contract manufacturers because I knew a contract manufacturer would view my product as just another thing they’ll produce for payment. I wanted a manufacturer that believed in my product enough to invest in it.
It is also important that you find a manufacturer that is not at full capacity. This was key in my case.
Some of their manufacturing resources were sitting around not being used. So it was in their best interest to try and bring on new products to manufacture, even if that required some investment on their part.
I also looked for manufacturers that operated in both the U.S. and China. I focused on U.S. manufacturers (since I live there) with wholly owned subsidiary factories in China.
This gave me many of the advantages of domestic manufacturing, but also the low pricing only available in China.
It also made it a little bit easier and less intimidating to deal with a “local” company versus a random company in far-away China.
I started with an online search for manufacturers that produced products with similar manufacturing requirements to my own. It doesn’t necessarily need to be the exact same market. But, you don’t want to approach a tire manufacturer to make your electronic product.
Look for manufacturers that have the basic equipment, skills and technologies to produce your product.
I began by emailing my list of potential manufacturers. Just like I did with Blockbuster, I included a flyer showing my product in use with a few key bullet points of text.
Of course, I also mentioned having a letter of intent from Blockbuster Video. I probably emailed several dozen manufacturers, and about half a dozen got back to me expressing some level of interest.
There was one manufacturer that really stood out. They essentially told me, “we get pitched products all the time by entrepreneurs, 99% of those we ignore, but we feel that your product, and the success you’ve had, warrants an exception.”
That’s how it started.
I lived in a small town in Alaska at the time, and the general manager of their Chinese factory ended up flying to Alaska to meet with me. Needless to say I was thrilled they believed in my product enough to personally come and meet with me.
Although, he did sneak in a mini vacation while in Alaska so the trip was a good tax write-off for him too.
Shortly after that meeting we signed a formal agreement. The agreement helped me in quite a few ways.
Like I said, this was much more than just a contract manufacturing relationship. This was a real business partnership.
Importantly, they let me use their engineering department to finalize my design and prepare it for mass manufacturing. That was huge.
I had taken my product pretty far, and I had all the main design requirements figured out. But there were so many little things that needed to be done to get my product completely ready for mass manufacturing.
The second thing my manufacturing partner did for me was amortize my injection mold costs. The injection molds for my product were going to cost a little over $100,000.
Normally, I wouldn’t suggest going from a prototype stage directly to high-volume manufacturing using molds this expensive. You can purchase lower volume molds for a few thousand dollars each.
One of your largest costs will be the custom steel molds used in manufacturing.
But in this case, the manufacturer felt so confident in my product that they wanted to finance the higher cost molds. I was fine with this, since they were the ones taking the large financial risk if my product ended up a failure.
They would pay upfront for the cost of the molds. Then, they would charge me $1 extra per unit for the first 100,000 units that I sold. This is called amortization.
This is a great arrangement, since it’s an interest-free loan that was essentially risk-free for me. It was a way to help fund the transition to manufacturing, that didn’t require I give away any equity in my company.
The manufacturer agreed to this because they wanted the business, and they had the money to spend. That was a really huge break for my young startup.
They also got an exclusive manufacturing agreement. This meant that I couldn’t go to another manufacturer for the first two years, or for the first million units, which ever happened first.
I thought this was still pretty lenient, since they could have required a much longer exclusive period.
The third hugely beneficial thing that my manufacturer did was fund all of my inventory. This was tremendously beneficial because it removed one of the biggest obstacles to scaling a hardware company – cash flow.
Cash flow for a hardware startup is one of the biggest obstacles to growth, and that’s because typically you have to pay your manufacturer upfront.
This means that after you pay the manufacturer, you have to wait several weeks for the product to be manufactured. Then, it takes several more weeks to ship the product to your country or the country of your customer.
For example, if it’s shipped by sea cargo from China to the US, then expect it to take three to four weeks. Then, you will need to ship it from the port (often LA) to your warehouse.
Finally, you deliver it to your retail customer, but the soonest a retailer will pay you is 30 days after they get the order. No, that is not a typo. Fair or not, that is how it is done.
Payment 60 days after receiving an order is also pretty common, and some retailers demand 90 to 120 days to pay you for their order.
The problem is, you have to pay for the manufacturing, the inventory, and the shipment to the customer. But, it will be at least three months until you finally get paid back. That really makes growth a challenge.
My manufacturing partner agreed to give me payment terms of 90 days. This gave me the time to wait for payment from my own customers before I had to pay the manufacturer.
Having a net 90-day payment term removed all those cash flow issues because I didn’t have to pay for anything until I was paid by the customer. That was absolutely huge!
These three steps helped me get a manufacturing partner that was willing to invest over one hundred thousand dollars in my product.
Step one is to get through the prototype stage. You will likely have to self-fund this stage, and aim for a prototype that looks and works similar to your final product.
Step two is to use that prototype to get a retailer (or any large, well-know company) interested in your product. Try to get them to express their interest in your product in writing.
If you can, get a preliminary purchase order. If that doesn’t work, try to get a (non-binding) letter of intent from them.
Finally, in step three you will leverage your prototype and retailer interest to find a manufacturer who will get your product ready for mass manufacturing. If they can also fund your inventory, you may be able to scale and grow your company more quickly.
But it all starts with you. That means you have to start by making serious, significant progress on your product. Success is all about the execution, not just the idea. Prove that you can execute and more opportunities will present themselves.Finally, don't forget to download your free PDF: The Ultimate Guide to Develop Your New Electronic Hardware Product. You will also receive my weekly newsletter where I share premium content not available on my blog.
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