Dana Madlem Presentation at our January Hardware Massive event. The presentation covers the realities hardware startups face after production begins. Check us at at www.hardwaremassive.com for more great Hardware Startup related content.

1. Hardware Startup Logistics for Growth
Dana Madlem
dmadlem@rushorder.com
Hardware Startup Wins & Fails
Realities After Production Begins

2. Topics
n What’s happening in hardware
n Lessons learned: Why hardware is hard
o Product quality
o Sales channel management
o Returns
o Existential crises
n Stories from the front lines
n Q&A

3. What I / Rush Order do
Make the
product
Product
storage
Ship to
customer
Customer
Support
Get paid
for the
order
Handle
all
returns
Global
warehousing
Order
Fulfillment to
consumers and
retailers.
Reverse
Logistics
Accounts
Receivable
Credit Card
Fraud Mgmt
Contact Center
(phone, email,
live chat,
social)

4. 2016+20102005200019951990
The Flexible Back Office of the World’s Best Ideas…
Time and Time Again.

5. My Window into the Hardware Startup Landscape
No VC pitches. We see the unvarnished data and help clients
manage real-life operations. And put out fires.
“A good friend will help you move, but a true friend will help you move a body.”
― Steven J. Daniels, Weeds in The Garden of Love

6. Sample Profile from Active Clients
n 65+ hardware startups actively shipping in 2015
o 85% are still operating as independent businesses
o 8% died this year
o 7% recently had major liquidity event or exit
o Of the remainder operating independently, there is a fairly clear
trajectory (up or down)
n All Founded Between 1999 - 2014
o 0 founded in 2015. Why?
o Average Founded in 2011.

7. Sample Profile from Active Clients
n Mostly consumer products. A few enterprise IT.
n Funding ranges from $100k in seed round to $725M
raised in private markets (unicorns).
n Total funding raised: $1.7B
n Average private funding, including unicorns = ~$30M
n Average private funding, excluding unicorns = ~$14M
n 76% raised more than $1M to date.
n 33% raised more than $10M to date.

8. Lessons Learned:
Why (Post-Production) Hardware is Hard

9. Hardware is hard. How hard?
n 0% shipped in the same year they were founded
n Average timespan from founding date to actual customer ship
date = 31 months
n Over 70% of clients’ products required “significant re-work”
after leaving the factory.
1. Firmware flashing
2. Batteries – all sorts of issues
3. Packaging (e.g. product mounts and trays, adhesives, scuffing,
barcodes)
4. Other component failure (e.g. wheels, motors, plastics, wrist straps,
etc.)
5. Sensors
“Everyone has a plan until they get
punched in the face.”
-- Mike Tyson

10. Sales channel management is also as hard
After the first crowdfunding / pre-order campaign, 0% consistently
reached those direct-to-consumer sales volumes again.
(Some second attempts at crowdfunding campaigns went well, some
not.)

11. How do the best do sales channel management?
n The old school stuff… Large marketing and PR budgets
n Successful channel strategy and execution – it’s not accidental.
VP of Sales role is critical.
n Every client is selling product on Amazon (90% are selling product
to Amazon)
n Every successful consumer product we manage is going to other
major retailers too (online and brick & mortar)
n Direct to consumer channel should be viewed as one tool in your
Swiss Army knife

12. Return rates are dictated by nature and nurture
8%
10% - 25%
3% - 8%
n Product quality (duh)
n Connectivity (bluetooth vs. wifi vs…)
n Moving parts
n Other product complexity (e.g.
installation)
n Brick & mortar retail sales
n US is highest. Asia is lowest.
n Product quality (duh)
n Certain market categories like toys
n Direct online sales and etailer
dropships
n No connectivity
n Low complexity in product
n US is highest. Asia is lowest.

13. More on returns
Consider design for test, and design for repair in your product
NOW.
The ability to create refurbished units can help soften the
landing. How?
n Use refurbs for warranty replacements
n Sell refurbs / open box units through creative sales channels
(this is what you see on Woot, Groupon, Overtsock, etc.

14. What variables are common across the success stories?
n Awesome product / market fit. Good luck.
n Market size (mass vs. niche) – hardware needs scale, or needs to
be expensive, or both.
n Price point – (a proxy for market size)
n What type of investor do you attract?
n Only relying on Family / Friends / Bootstrap = lower odds
n Emotional investors (empowering a certain group) – this is also tends to be
the Kickstarter backers.
n Traditional big money VC and private equity = better odds
n Incubators / Accelerators are not necessary, nor sufficient, but they might
help you a lot.
n Return rate
n Organizations nimble enough to survive crises
n Ability to jump from B2C (web sales) to B2B (retailers)

15. What variables are common across the success stories?
n Sales & marketing. It does take money to make money.

16. 0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
Ellen /
Today Show
/ Shark
Tank
appearance
Acquired for
hundreds of
millions $
Inbound phone
support
approaches
75,000 minutes
per month
Existential
threat #1
Spikes driven by
holiday
marketing push,
or follow-on pre-
order campaign
The Dream
The Reality
Existential threat #2
Units Shipped
First Retailer
Shipment

17. Stories from the Front Lines

18. (Mostly) Recoverable mistakes we see
n Manage all your crowdfunding backer data on
spreadsheets.
n Promise a specific delivery date. Embrace “seasons”, not
“months”.
o “Crowdfunding scammer speaks out at SXSW”
n Be surprised by credit card fraud when you become
successful.
n Insurance? What insurance? – Theft, inventory lost at
sea, hungover forklift driver, smelly product, etc.
n Retailer chargeback surprises.

19. How to avoid certain death
n Recoup quickly from the “crowdfunding
hangover”
o Queue up retail channel partners in advance

20. How to avoid certain death
n Sell in is not sell-through
o Get your marketing machine ready
o Manage credit risk… “Hurray! We finally made it!
We just signed on GoodGuys, Circuit City, and Sharper
Image!”
o Inventory management and sales forecasting are
hard…

21. 6 months later… “Hey, what are those pallets being offloaded on
the dock?”
Hurray! We signed a major retailer!

22. How to avoid certain death
n Manage Returns
o Talk to customers – spot the problems early
o Create access to returns data – watch trends
o Have access to your inventory in the warehouse
o Capture serial numbers
o Retain great relationships with your suppliers (CMs,
logistics, etc.)…

23. How to avoid certain death
n Don’t be caught off guard by 1 to 3 existential crises.
Easier said than done.
o Be agile – Can you run 24/7 shifts with a small army
charging batteries or flashing firmware or repackaging
product (or all of the above at the same time)?
From the headlines:
o “Owners eligible for full refund, can keep the troubled band”
o “Have you contributed to this health product scam?”
o “Company advices rash sufferers to remove device for a while”
o “Company misled consumers about battery life”

24. "You can lose a lot of money fast in a
hardware business if you do it wrong,
and most people do it wrong.“
"But building it is not the hardest part,"
he continued.
"It's making it, distributing it, managing
inventory, managing distribution
through the channel, understanding
the market and supporting the
product…This is really difficult stuff.“
― Randy Komisar
Partner @ Kleiner Perkins Caufield & Byers
The Wall Street Journal – March 2014
Closing thoughts
“The only way to win is to learn faster
than anyone else.”
― Eric Ries
The Lean Startup: How Today's
Entrepreneurs Use Continuous
Innovation to Create Radically
Successful Businesses

25. Hardware Startup Logistics for Growth
Dana Madlem
dmadlem@rushorder.com
Hardware Startup
Logistics for Growth