Putting the “hard” in hardware

I woke up in a cold sweat. Our camera supplier filed for bankruptcy – we were single sourced and GA was only a few months away. Our Director of Hardware calmly shrugged, “hardware has the word ‘hard’ in it for a reason.” Thoughts of managing supply chains, quality issues and CoGS models still give me the chills from my experience at Brontes and Sample6. At Brontes, we built a custom 3D scanner out of 27 custom lenses,  300 LEDs, and it took 18 months.

“Guts” of a Brontes scanner

Having seen a dramatic increase in the number of new hardware start-ups, I’ve been thinking about whether its easier today to do hardware?

Here’s why it’s gotten easier …

Today’s hardware companies focus less on the hardware itself and more on wrapping a software layer on top of often off-the-shelf hardware. Arduino (open source hardware prototyping) and things like Atom’s Express (a portfolio co) allow for rapid hardware experimentation.

Additionally, incubators aren’t just for web-heads anymore. Lemnos Labs in the Bay Area, New Lab in Brooklyn and Bolt in Boston, serve as great resources. In the past, I spent months searching for lab space and buying used equipment on Overstock.com. Today’s hardware start-ups begin product development on day one. Couple this with the rise of 3D printers like MakerBot and services like Shapeways, and it has become easier than ever to create prototypes and bring them to prospective customers, partners and investors. Crowdfunding sites like Indiegogo and Kickstarter provide a forum to take pre-orders and gauge demand, while generating cash flow even before the first article is made.

But it’s still hard …

You can’t start a hardware business in a Starbucks! Hardware requires more capital and takes longer to get to market. Hardware is often evaluated as much on look and feel as functionality or value. Thus, costly services like industrial design are  needed which  forces the trade-off between design and speed-to-market. Perhaps most importantly, many consumer hardware start-ups compete against the behemoth electronics brands and thus struggle to get distribution (or give up 30-40 points of margin for it).

Go for it …

We fund a fair number of hardware start-ups at Founder Collective. I love meeting hardware companies. My view is that hardware is a field where experience matters, so I encourage hardware entrepreneurs to get someone on board in some capactity with experience sourcing and managing vendors. Also, business model creativity is really important given the risk of commoditization. Consider models like renting or pay-per-use to create recurring revenue. Finally, bake as much functionality as possible in the software and enable over-the-air updates. Tesla is a great example of this (for ex. they’re changing the software to increase the height of the car to reduce the risk of the battery catching fire on highways).

Hardware start-ups are hard. But when you get it right, there’s nothing quite like bringing a new physical product to the world.

Eyes way up in the sky, feet firmly planted on the ground

One of the hardest things for me as a start-up CEO was striking the balance between “selling” the big vision while remaining maniacally focused on the details. Sometimes it seemed as though everyone wanted to hear a different story – customers, employees, candidates, investors (especially those on opposite coasts!). My partner Eric put it best when he said, “keep your eyes way up to the sky, and your feet firmly planted on the ground.”  My colleague Gaurav points out that most founders give the “big picture” vision to external parties but do much less so internally. Founders often forget that teams need to be reminded of the broad company vision to keep morale high and turnover low.

Eyes way up in the sky

The startup CEO has to capture the imagination. I have found that most start-up meetings require “up in the sky” messaging. Like the coming attraction to a movie, the entrepreneur should confidently state a bold (but believable) statement of the future. The vision should be a couple of years out, not one, but not ten. Every employee or prospective investor should leave a meeting able to articulate the vision of the company.

When it comes to customer presentations and tradeshows, the same rules apply with a slight tweak in messaging to reflect their market knowledge. At Brontes, we started sales pitches by saying “imagine a day when dentistry is digitized like music or photography.” Potential customers (dentists) would nod in agreement. It was a hard vision to deny and we would spend the rest of the pitch addressing why we’d be the ones to do it.

Feet firmly planted on the ground

The details support the overall vision. Once you’ve compelled the audience by describing a future state, the key is to convince that you have the plan and ability to get there.  Those of us that have started ventures know how hard it is and that most businesses are built brick by brick.

Early stage company CEOs have to shown deep comprehension and appreciation of the product and tech. CEOs should be conversant on what technology platform a given product is built on, aware of the development schedule (and how far ahead/behind the project is) and he/she must be able to demo the product. At Sample6, I spent time in the lab trying to learn how a competitive product worked. I spent time at customer sites. I’d come back with real-world anecdotes about why the product needed to be made easier to use or ideas on how to pitch it differently. Most importantly, the quickest way to lose credibility with an engineering team is to seem removed from details or unappreciative of the complexity of their work. This is heightened when times are tough.

The start-up CEO is both a general and field marshall. The challenge is balancing these two roles – internally and externally.

Handshake.com meets 2013

In 1998, I co-founded Handshake.com, a marketplace that connected buyers and sellers for all sorts of services – from carpet cleaners to auto repair shops. Since Handshake came and went with the go-go days of the late 90s, I’ve spent a lot of time thinking about the mechanics of such marketplaces. Today’s online service marketplaces have been generally more successful than our foray. Recently, I tried a few to help with the construction of Founder Collective’s new office at 27th St in NYC.

Original handshake team going live in Dec, 1999

Original handshake team going live in Dec, 1999

First, I used TheSweeten, a site that matches projects with contractors/architects.  I posted images of our current space and a crude mock-up of the build-out I envisioned. I received 3 bids from vetted contractors and ultimately selected one of them. We then needed furniture moved from our Cambridge office, so I hired a Taskrabbit to bring it to NYC. Once the build-out was complete, I used Handybook to schedule and coordinate a plumber to fix an old water purifier and a handyman to assemble IKEA furniture. And last and most importantly, we hosted our kick-off party with catering from Kitchensurfing (a portfolio company). These services aren’t yet one-click and done, but they have come a long way in making it easier to coordinate moves, construction, catering and transportation.

Last week, at an ERA event, I was asked to share my lessons learned about these types of marketplaces. Here’s what I said:

1)   Pick a vertical, not many – One of the mistakes we made at Handshake was that we offered every service we could find in the yellow pages. However, we spent way too much time and money marketing the idea of an online service marketplace. If you’re trying to create a national brand, it’s hard enough to get consumers to keep you in mind for a particular service, let alone many.

2)   Control the money flow Much of the frustration around hiring service providers stems from challenges making payments(many want cash or don’t accept credit cards), whether to pay a deposit, and how much to tip. Additionally, if the marketplace doesn’t hold the money, it is far too easy for the service provider and customer to work around the system, and avoid fees or commission. If the marketplace isn’t stepping into the money flow, it’s likely because it’s not creating enough value for both customer and supplier.

3)   Delight both customer and supplier (but hold each accountable). Uber (also a portfolio company) does a fantastic job of this. The app knows where I am and where the cars are. Its just two clicks to call a car, my credit card is on file and there’s no tipping. But I’m most impressed (and surprised) by the driver’s reactions. They love the fact that they can rate me (1 to 5 stars) … the customer!

For the full Handshake story, click here.

Is timing everything? – Online scheduling in 1998

When I co-founded Handshake.com in 1998, consumers could use our service to get customized price quotes and book online appointments for a variety of service providers – plumbers, house cleaners, physical therapists and many others. Unfortunately, Internet penetration was in its infancy and small businesses were way behind the consumer.  Upon launch of the service, we faxed the job request to the service provider! Nonetheless, Handshake raised over $20M in capital, had a partnership with a major Yellow Page company, a killer team of 30 and, at the Series B round, a $100M valuation. I thought I had made a lot of money (paper money I quickly realized). By 2001, the company was shuttered. While I had gone off to business school, I mourned the loss of my first entrepreneurial experience.

Bill Gates famously said “People overestimate progress that will occur in a year and underestimate what will occur in a decade.” It’s the truth. Over the past few years, I’ve been asked several times to evaluate companies similar to Handshake. I’ve been skeptical given the challenges facing such a business (e.g. small business aggregation) but I always felt that I might be biased by my experience in the late 90s. Today there are many such services including Groupon Scheduler, ZocDoc, RedBeacon (acquired by Home Depot) that seem to be thriving. I’ve reflected often on this wondered:

Did we have the right idea but were too early?

Given the recent successes of services similar to Handshake, I’ve started to believe that we had the right plan. However, we tried to scale faster than the market would allow.  No one can control external factors like market euphoria for Internet companies or slow uptake by small/medium size service businesses. But one can try to be mindful of external factors, while keeping perspective on business realities (like revenues and profits). Unfortunately, we had built up a set of expectations among investors, employees and consumers that was difficult to back off (at least it felt that way).

What could we have done differently?

Focus and prepare for the long haul. Seamless Web (now just Seamless) initially focused on providing food ordering for law and financial service firms in NYC. Their approach enabled them to build restaurant relationships before going to the mainstream consumer. Likewise, OpenTable built out CRM functionality for restaurants as a way to establish value prior to having significant numbers of consumers booking online reservations. At Handshake, we tried to fight too many battles at once (aggregating consumers, signing up merchants, building a brand, etc) – a death trap for start-ups. Perhaps had we taken a go-slow, focused approach, the company would be quite valuable today. Back then, as today, it seemed like a large company could be built almost overnight. And while some companies reach escape velocity in just a few years, most do not. Companies like Service Magic (acquired by IAC), stayed the course over a decade, and proved successful in the end.

My learning …

Have a strong point of view on where the market is headed, but be willing to adapt as market realities change. Not all business germinate at the same rate, so stay focused, committed and enthusiastic about the entrepreneurial journey, no matter how long that may be.