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Only three percent of CE startup products make it to the retail shelf.
Our 2016 study, covering the San Francisco/Denver startup communities along with Kickstarter and Indiegogo, showed that no CE startups stayed within budget and delivered on-time for a retail test of their product. Of those that didn’t have limitations on time or money, the numbers are still depressing – only three percent of CE startups make it to the shelf, any shelf, with more than 20,000 units.
It’s time to get smart about how to manufacture electronics.
The American entrepreneur is trained to brush aside the naysayers, take risks, trade human expertise for equity and discover shortcuts that have been overlooked by their slower corporate counterparts. This ‘shortcut hunting’ works in software and service industries, but in electronics the entrepreneur quickly encounters a brick wall of complexity and foreign cultures. There simply aren’t any shortcuts.
In a world dominated by WordPress, 3D printers, and LinkedIn, how could there not be any manufacturing shortcuts?
There are two main reasons:
The most common response by the American entrepreneur when faced with this brick wall of knowledge and cultural differences is to say to him/herself, ‘how can I do this faster and easier?’ They push forward, blinders on, to find a ‘better way.’ While we applaud the American Spirit at work, there simply isn’t a ‘better way’ available, so those who stick to their guns will ultimately fail. Ignoring the complexities of manufacturing electronics is akin to putting yourself out of business.
And it isn’t just the entrepreneur who is wearing blinders, entire startup ecosystems struggle with the complexities of the hardware business. We attended one recent startup panel that had seven people on stage explaining how to manufacture Internet-of-Things (IoT) devices, yet not a single panelist had ever produced anything at volume and none of them had ever sold at major retail. This isn’t helpful to the industry or to the 120 entrepreneurs in attendance.
Even for those entrepreneurs who understand and accept the difficulty of the manufacturing process, there are still the cultural differences between the United States and China (or Vietnam, Singapore, Taiwan, or Japan) to navigate. Not understanding and giving credence to these differences opens up the entrepreneur to a myriad of failure points as well as the scam artists operating in the field.
We can do better. Complex systems and cultural differences in CE can be managed and learned.
Let’s start by accepting these truths about manufacturing CE:
1 . Manufacturing electronics is hard.
2 . Solid, multi-year relationships with Asian manufacturers are a necessity.
3 . The manufacturing industry is a dirty business with charlatans and naiveté at every turn.
Manufacturing in volume requires the work of experts in several fields and cannot be learned in a short time by a single entrepreneur. Yes, prototyping has gotten much simpler and cheaper in recent years, but rapid-prototyping has had little effect on manufacturing a new CE product at scale.
Below we’ve listed about 30 of the broad strokes needed to manufacture a simple CE device. For this example, let’s imagine an IoT device with a Bluetooth radio, a battery and USB charging cable. Let’s further imagine that the prototype for this device was built for less than $500.
The following is what you’ll have to undertake to manufacture this device at volume:
As you can see, manufacturing even a basic electronic device is a great feat. There are no shortcuts for getting hundreds of thousands of components to a single assembly line in Shenzhen on a particular Tuesday in September, securing a safety compliance mark from a Federal Testing Lab, meeting New York state’s packaging requirements, or… well, you get the picture.
This way of work is called ‘Guanxi’ in China, which is literally translated as ‘relationship’ in English. Guanxi represents the lifeblood of CE manufacturing. Apple recently spent five years building a relationship with an Asian contract manufacturer (CM) before letting them build the iWatch. They didn’t go overseas a few times to visit, communicate over email or get quotes, rather they went to dinner several times a month for five years before giving this CM a contract. This is how manufacturers do business.
These relationships and their vast importance have an unintended consequence in the world of manufacturing electronics. Companies who enjoy good Guanxi are secretive and unwilling to help startups with their projects. Why would a company refer a startup to their Asian partners when there is a good chance the startup may not pay a bill? Stop a project mid-run? Or ask for freebies like they do in the United States? If a startup performs poorly with a CM after a company has spent years building Guanxi, it reflects badly on the referring company and damages their hard-fought relationship. This is also why you won’t see many blog posts on manufacturing or ‘how to’ books explaining the process. People are protecting their relationships.
Guanxi is so important to manufacturing that our company is still discovering perks to strong relationships after 14 years of working with the same partners. Because Guanxi is written about so little and remains a mystery to most, overlooking it is a leading source of failure for American startups. Ignoring Guanxi doesn’t make it go away. Spending a few months in China or sending money does not build a solid relationship you can count on. These relationships take years, and bucking a system that even Apple has to play-by is a fool’s game.
Manufacturing CE is wrought with fraud and scams like any other profession. But the cultural divide between Asian manufacturers and American entrepreneurs amplifies the potential for harm and makes scams more difficult to recognize. How is an entrepreneur supposed to vet the manufacturing rep who says they can take a startup to China? For the entrepreneur, it is more convenient to take people at their word, especially if they ‘speak the language’ and make a few promises.
Why do entrepreneurs fall for scams so often? After stints with local accelerators and watching dozens of startups go through the process, we think we know why: entrepreneurs are simply overwhelmed.
The daunting nature of manufacturing coupled with the genuine surprise that there are no shortcuts is just too much to take in for some entrepreneurs. When there’s a guy standing next to you promising success in an ecosystem that is hard to quantify, it is natural to jump at an opportunity. Forging ahead in the midst of a scam only works with millions of dollars in your pocket and the time to move to Asia for a prolonged period. Most startups don’t have that luxury. Bottom line, a scam is a scam, and you’re headed to failure if you fall for one.
((Appendix ONE is a list of scams we currently know to be operating in the San Francisco/Denver startup communities.))
Considering the pitfalls associated with building an electronic device, how does a startup succeed?
The first way to manufacture a startup CE device at volume is to raise a great deal of money. We call this the ‘Venture Capital (VC) Model.’
This model showers the startup with money from day one. Intelligent startup teams with manufacturing experience use this model to find a good ‘manufacturing rep’ who will partner the startup with the right CM in Asia. Inexperienced entrepreneurs often choose to go it alone. With piles of cash, these entrepreneurs can afford to make mistakes and still succeed.
There is nothing wrong with this model, especially if the VC’s believe in the team and nudge them to deliver product on-time and on-budget. Manufacturing, like everything else, becomes much easier when there aren’t financial barriers holding you back. Pebble, Fitbit and several other high profile CE companies have had great success with the VC Model despite going into Asia completely blind. Strong teams, resolute investors, and a great deal of money allows even the inexperienced to find success.
The second way to manufacture a startup CE device still involves money, but only half as much as the VC Model requires. We call this the ‘Outsourcing Model.’ If you can raise four to six million dollars and are comfortable not learning the mysteries of manufacturing, this model is for you.
Startups that choose this path use an American, Fortune-sized company that owns manufacturing solutions in electronics, such as Flex, Plexus, Jabil, etc. These companies build many of the big name products we see on the shelves today from HP, Sony, Kensington, and Monster Cable. Hand one of these Fortune manufacturers your product requirements and after several months you’ll have a container of product delivered to your door.
The upside to the Outsourcing Model is that it’s safe and the work is usually guaranteed. This can be a comfort to any startup and one of the perks to paying an outsider for the design and manufacturing of your product.
One downside to this plan is that solid social or environmental stewardship standards, while reported, are not always practiced. This can be a deal-breaker for some entrepreneurs. In addition, these larger companies don’t have an entrepreneurial passion about products, which we’ve found to be very important for startup founders.
The third way to manufacture reliably, and if you’re on a budget under $4M, is to choose a ‘manufacturing rep’. This is someone who has built a relationship with one or more CM’s over time and is willing to work with startups. We call this the ‘Bootstrap Model.’ There are many companies who reliably take startups to volume manufacturing. We’ve included a list of the qualities you should look for in choosing one of these companies in Appendix TWO.
The downside to the Bootstrap Model is that most of the scams in manufacturing are perpetrated here. Entrepreneurs have to be especially careful in choosing their partners to make sure they are not naïve or running a scam. Along with the qualities you should look for in a good rep, we are also including some warning signs to be aware of when choosing partners (also good for the VC Model). See Appendix THREE.
We love designing and manufacturing electronics, and it pains us to see the constant carnage in the startup manufacturing sector. We feel it is time for American entrepreneurs to face the challenge of manufacturing electronics head-on. It is also time for our startup communities and investors to educate themselves, even peripherally, on the difficulties associated with manufacturing CE. We need to learn as an ecosystem that complex systems and foreign cultures are navigable with the right knowledge and tools and with our eyes wide open.
So get out there and raise some money for that wonderful electronics device that is going to change the world. We hope this article helps you make great decisions about your partners and helps alleviate some of the complexities of manufacturing electronics.
This article was originally published in 2016, but has been updated to reflect the startup electronics landscape in April 2018. Our findings on the percentage of failure have also been validated by CB Insights – thanks guys! From CB Insights: “Only 24% (of CE startups) raised a second round compared to 46% for tech companies generally. A full 97% of the consumer hardware companies we tracked died or became zombie companies. Although we did include business plan competitions and crowdfunding in our hardware funnel, the stark difference cannot be explained away fully.”
This is not a complete guide, but rather examples of manufacturing scams that are currently at play in the American startup landscape (plus one common mistake):
Don’t be the victim of naïveté or a scam. Our goal here is to put the scam artists out of business and to bring more transparency to manufacturing. The following are warning signs, so proceed with caution if these traits become evident. If you see the word ‘RUN’ next to a particular warning sign, we suggest you do just that.
Install a ‘Customer Champion’ to get your organization focused on design.How to jumpstart innovation. People print this, and post this, and pass it around – a wonderful poem on discovering the power of Design Thinking, written by a CEO client of ours. …for more articles from our managing partner on Product and Design, please visit LinkedIn.