The Biggest Barriers Every Hardware Startup Must Surpass
There are countless barriers that you will need to surpass in order to bring a new physical product to market. This is especially true for an electronic hardware product.
The best way to make it past these barriers is to identify and learn about them well in advance.
By knowing these barriers intimately, you can appropriately plan ahead. This in turn will drastically improve your odds of overcoming them.
Understanding all of your major obstacles in advance will also reduce the time it takes to get your hardware product to market.
Bringing a new hardware product to market is not an undertaking that can be done by the “seat of your pants”. You can’t make up your strategy as you go. You need to plan beforehand for every potential barrier.
In this article I will talk about seven of the most challenging barriers standing in your way to market domination.
You may have expected the first barrier I would discuss would be getting a patent. But the truth is, a patent is way overrated and is not usually where you should focus lots of effort.
Instead, quickly file a Provisional Patent Application (if in the U.S.) which only costs a few hundred dollars, requires no patent attorney, and only takes a few minutes to file. This will give you one year of protection allowing you to instead focus on more critical barriers.
Developing a production-quality prototype is your first really significant barrier. A production-quality prototype is very similar to the final product that you will manufacture at scale.
This is in contrast to a Proof-of-Concept (POC) prototype that is most often built using a development kit like Raspberry Pi or Arduino.
A proof-of-concept prototype is usually quite far away from being a hardware product that can be manufactured and sold in large volumes. POC prototypes are mostly good for one thing – proving that your product solution can solve the intended problem.
Many technical entrepreneurs are able to create a POC prototype on their own. However, that isn’t the case when it comes to building a production version of your product.
When creating a production version of your product you will need a custom designed printed circuit board (PCB) for the electronics. In all likelihood you will also need a custom designed plastic enclosure.
Two completely different types of engineering skills are needed to create both of these parts. Even if you are an engineer, it will still be hard to fully design every aspect of a production-ready hardware product.
The majority of you will have to outsource at least some of your development to experienced engineers. Engineers are expensive, so this is your first major financial obstacle to overcome in order to bring your hardware product to market.
This is particularly challenging because crowdfunding isn’t usually an option for funding such early stage development. Most hardware startups need to have the production-quality prototype before initiating a crowdfunding campaign.
In general, crowdfunding works best to fund your scaling and inventory costs, but not your development costs.
Without this option, you will need to fund the development costs yourself, raise money from family and friends, or find an early-stage professional investor.
Unfortunately it will be much more difficult to secure funding before you have a production-quality prototype.
Scaling to Mass Manufacturing
Scaling your product up to mass manufacturing is one of the biggest barriers to overcome, both financially and technically.
Most entrepreneurs drastically underestimate the complexity and cost associated with going from a prototype to mass manufacturing your product in large volumes.
Also, this work will take up a lot of time. Don’t underestimate how much time this stage will take you to complete.
Expect to spend six to twelve months just to set up manufacturing, especially if your factory is in Asia. This is assuming your prototype is near production quality already.
Many entrepreneurs underestimate the complexity of setting up mass manufacturing.
What is the best way to overcome these challenges? It will be very beneficial for you to design your product from the very beginning with manufacturing in mind. Design-for-manufacturing (DFM) is a crucial technique, and involves making a product as easy to manufacture as possible.
Any plastic parts in your product will require the most attention, because they are produced using injection molding technology. Injection molded plastic parts are produced very differently from parts made using 3D printing or other prototyping technologies.
3D printing allows you to create pretty much anything, in any shape or design. Injection molded plastic, on the other hand, requires hot plastic to be injected into a metal mold.
After the plastic dries, you have to be able to extract the pieces from the mold. This requires that your plastic parts be designed, from the very beginning, so that they can be removed from a mold.
This production process will create small imperfections in your product. This includes a visible parting line seam where the two mold halves meet. It will also leave small marks from the ejector pins used to eject the finished part from the mold.
So you will probably want to make early cosmetic decisions about your enclosure design in order to best hide these small imperfections.
Injection molding is a very restrictive technology, so it is wise to deal with it as early in development as possible. Only work with an engineer or developer who is familiar with injection molding, and who has experience designing with this in mind from the very beginning.
Scaling your production runs to produce hundreds of thousands of parts is also going to be expensive. Be prepared for the high costs of the molds you need to use during mass manufacturing.
It also becomes very expensive to make any product changes once you have moved to injection molded plastic technology.
Once a mold is machined, you can only subtract more material, not add it. It is going to be difficult and expensive to tweak the design of your product in any significant way.
High-volume productions molds can easily cost $10k – $50k each, and since most products will require several molds you can see how the cost gets quite expensive.
This is why I recommend that you work out all the kinks in your manufacturing domestically. You can begin with lower cost molds made out of softer metals, like aluminum, which can be purchased for a couple thousand dollars each.
Use small production runs (domestically if possible) to get everything running smoothly, including the PCB production and any plastic parts. You will also want to streamline the assembly process, something that is much easier to do before you move production to Asia.
One way to delay paying setup costs all at once is to arrange payment terms with your manufacturer. They may be willing to amortize the cost of your molds over your first few production runs.
This means that if your production molds cost $50,000 then the manufacturer will fund these molds in exchange for you paying them $1 extra on the first 50,000 units that manufacture.
But you can’t expect most manufacturers to offer amortization of the mold costs, and it requires that they sufficiently believe your product will be a success and are given future exclusive manufacturing rights.
This is a significant financial investment on their part, and it’s never easy to get others to invest in a new product. However, I was able to find a manufacturer for my own product that amortized the mold costs over the first 100k units.
If I can do it, so can you!
Any new electronic product will need to obtain electrical certifications in order to be sold on the market. The certifications that your product requires will depend on your type of electronic product and where it will be sold.
In the U.S. you will definitely need FCC authorization or certification. Other countries will require similar electronics certifications to guarantee that your product doesn’t emit radio waves that may interfere with other wireless communications.
There are two different types of FCC electromagnetic radiation certifications. Which one you need depends on if your product is classified as a “non-intentional radiator” or an “intentional radiator”.
As the name implies, intentional radiators are products that intentionally emit radio waves. Any type of wireless electronic product will be classified as an intentional radiator. Expect to pay over $10,000 to obtain this type of certification for your product.
You can get around this high cost if your product is classified as a non-intentional radiator. This is most easily done by using a pre-certified module, instead of a fully custom wireless circuit, for your product’s wireless functions. This way your product can be classified as a non-intentional radiator, because wireless modules are already certified.
If your electronic product doesn’t have wireless functionality then it can be classified as a non-intentional radiator.
There are other good reasons to use wireless modules. They will reduce your development complexity and your risk, which will save you time and money.
UL certification is another major certification that is required in the United States. Typically, this certification is only needed for products that plug directly into a home’s AC electrical outlets. You can expect to pay over $10,000 to obtain UL certification.
Many products, however, are able to entirely bypass the need for UL certification. Most electronic products use DC power, not AC power. To bypass UL certification you just need to make sure this AC/DC conversion is performed by a pre-certified module.
For example, do you recharge your product battery using a USB port? If so, then purchase an existing, pre-certified USB wall charger that you can bundle with your product.
For the European market you will require CE marking which is more inclusive and includes elements of the FCC and UL certifications in the U.S.
There are several other types of certifications that your product may require, such as RoHS, UN38.3, IEC62133, etc.
Initially Low Profit Margins
If you manufacture your product initially in small batches, especially if using domestic contract manufacturers in a country like the U.S., your profit margins are going to be low.
In small batches, you can’t take advantage of “economies of scale”. As your manufacturing volume increases, however, the production cost per unit will decrease.
But before you scale up, you want to smooth out any kinks in your manufacturing process. At the same time you should be also focusing on sales. Once your manufacturing process is optimized, you can strive for lower production costs and a higher profit margin.
The lower your profit margins are, the harder it is to grow your company. Having low initial profit margins means it will probably take you longer to ramp up to higher profit margins.
This is why it is usually best to start off selling your product directly to consumers via your website. This will allow you to maximize your initial profit margin because retailers and distributors aren’t taking a cut of the profit.
Most businesses suffer through an initial period of low profit margins. But you will need to eventually make enough money to support yourself and your company. That’s why its vital that you do upfront research.
First, you need to accurately estimate your Cost of Goods Sold (COGS) across different levels of production. COGS is your entire cost of manufacturing, plus shipping costs. This number enables you to forecast your profit margins at every level.
Earlier I recommended working out all your production kinks before you transfer production to Asia. The downside to this is your profit margins will stay small for a longer period of time.
The upside to being cash strapped is you are forced to make smart decisions right from the beginning.
Imagine a scenario where you calculate your COGS only to realize that your product will never make a profit, even with manufacturing in Asia? If you hadn’t done this upfront calculation, you could easily spend years developing a product that can never be sold for a profit.
Projecting your COGS across different production levels can save you years of time and lots of money. So don’t neglect doing this vital upfront research for your own product.
Finally, you’ve completed your product development, and your manufacturing is running smoothly. At this point, your biggest obstacle becomes cash flow to fund your inventory.
Here’s the problem – you have to usually pay your manufacturer for your inventory before it is shipped. Most manufacturers will require you to pay at least 33-50% upfront before they even begin manufacturing.
For your first order or two, expect to pay 100% upfront.
However, you won’t get paid by your customers until several months after your product ships from the manufacturer if you are selling to retailers and distributors.
On the other hand, if you sell directly to consumers from your website then that will likely take you several months to sell this inventory.
This means that it’s up to you to finance the cost of your inventory during this interim period.
For example, if you are selling through retail outlets, you will be paid 30 to 90 days after they receive their order. Don’t expect any stores to pay sooner than 30 days.
I know, it sounds ridiculous. But you are expected to ship your product to retailers months before they get around to paying you.
Unfortunately, that’s the way most retail works. This maneuver allows retailers to essentially get free financing from their suppliers. As a little guy you have no say whatsoever. You either accept their payment terms or find another way to sell your product.
Financing inventory and cash flow are major barriers for hardware startups.
A great arrangement to strive for is working with a manufacturer who is willing to give you favorable payment terms. With my own product, I negotiated for net 90 payment terms with my manufacturer in China.
This meant I didn’t have to pay my manufacturer until 90 days after the product was shipped. This was a huge boost to my cash flow because I received payment from my customers before I had to pay the manufacturer.
This isn’t a super common arrangement, but it does happen. Try your best to negotiate a more favorable payment plan with your manufacturer. Anything is better than paying 100% upfront, or having to give away company equity to investors in order to pay for these first orders.
Purchase order financing and invoice factoring are two other ways to finance your inventory during this interim period that don’t require you to give away equity in your startup.
Purchase order financing allows you to borrow money to pay for manufacturing once you have a purchase order from a large company. The beauty of PO financing is that your credit score doesn’t matter. The loan is actually based entirely on the credit rating of your customer.
Invoice factoring is for obtaining financing after your order has been manufactured and shipped. Invoice factoring will have lower interest rates because of the lower risk to the vendor.
The risk is lower for them because you will have already shipped the order. This type of loan is also based on your customer’s credit rating.
Have you started building an online community for your product? If you haven’t, then begin immediately! Online marketing is a very slow process, so the sooner you start, the more time your online community will have to grow.
You want your online presence to proliferate naturally, in the background, while you work on your product development.
In fact, I encourage you to embrace the idea of crowd development, or developing your product publicly as much as possible. Involving customers as early as possible in your product development process is one of the best ways to ensure you end up with a product that people will actually buy.
Its also essential for you to have your own online audience if you plan on crowdfunding. Successful Kickstarter campaigns always begin with products that have their own audience.
For example, Eric Migicovsky, the founder of Pebble Technology, built a community of 6,000 email subscribers and want-to-be Pebble smartwatch customers.
Beginning with that email list of subscribers, Pebble’s first Kickstarter campaign raised more than $10 million.
Running a crowdfunding campaign is practically required these days, because it helps you gain attention, validate your product idea, and raise money. It’s marketing and fundraising all rolled into one.
Many entrepreneurs I have worked with over the years are singularly focused on how to develop their product. Their comfort zone is the engineering, software development, or other technical aspects of hardware development.
For many entrepreneurs this is the fun part, but don’t wait too long to focus on sales.
If you fall into this tech minded category, or if you really dislike or fear making sales, then try and bring onto your team a co-founder with sales and marketing experience.
Also consider hiring an independent sales representative who already works in your product’s industry. Independent sales reps work for commission, so you only pay them after you’ve been paid by the customer.
If you are a solo founder, and don’t have marketing expertise, bringing on a sales rep that intimately knows your industry can be especially helpful.
These reps will already have contacts and even meetings set up with retailers in your industry. When I brought my own product to market, I hired an experienced sales representative.
He mainly worked on a commission basis, but for the first few months before I had product to sell I paid him a couple hundred dollars a month to help me get ready.
His established relationships with retailers made it much easier for him to get my product into stores, than if I had pitched my product to retailers on my own.
It has never been cheaper or easier to bring a hardware product to market. The vast, global marketplace means you can outsource everything from your 3D modeling to your contract manufacturing.
Not only does it cost less to bring a product to market, but there are more ways than ever to raise capital. Still, funding for early product development usually falls on the founders, since you need a prototype to obtain any significant outside funding.
There are also just more resources available to hardware entrepreneurs today than there have been in the past.
It’s still a long, challenging process, but the sky is the limit if you can overcome these biggest barriers.
Other content you may like:
- How to Price Your Product for Various Distribution Channels
- How to Determine If Your New Hardware Product is Really a Good Idea
- Why Hardware is Hard, But Easier Than Ever
- Lesson 2: The Strategic Way to Develop and Sell Your New Electronic Hardware Product
- From Prototype to Mass Manufacturing: Understanding Scaling Costs for Physical Products