How to Price your HW Product (2/5)

Part 2 – Manufacturing, Testing, & Yield! Oh My!

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If you’re building a HW product, you’ve inevitably wondered:

  1. How much can I sell it for?
  2. How much money can I make?

In part-2 of this 5-part series, Alan Povall from Product Nimbus guides us through the sometimes daunting question:

How do manufacturing and testing affect my cost?

Part 1 – The physical product (the stuff you hold in your hands)

Part 2 – Manufacturing and testing (making the stuff)

Part 3 – Packaging and Shipping (sending the stuff)

Part 4 – NREs (hidden costs that can sneak up on you)

Part 5 – Profit (everyone’s favourite!)

Assembly & Functional Testing:

Assembly and functional testing cost is largely dependent on the assembly complexity of the product, how well DFM (design for manufacturing) principles have been applied.  The type of testing is impactful as well: automated testing equipment (ATE, more on this below) or manual labour testing. If you haven’t had a chance to talk to a CM yet and got a quote, a rough rule of thumb of 4 – 8% of hardware cost can be used to estimate this,

Pre-programming:

Does your product have a flash memory, EEPROM, or some other programmable device that needs to be pre-programmed?  Be sure to include the costs of this.  Major parts distributors offer programming services and can take care of this for you and the part can just be soldered onto the PCB during assembly.  Otherwise your CM will have to program the part (either before or after assembly) and you’ll have to help with the details.

Highly Accelerated Stress Screening (HASS):

HASS is essentially a post assembly stress testing method designed to incite infant mortality failure of components, through all-axis vibration and rapid thermal cycling. HASS testing is carried out so that failures happen in the manufacturing environment (where they can be fixed), instead of in the field where either a recall, replacement, or in-field repair would be necessary.

The investment to implement HASS testing varies from product to product, but is generally a function of complexity (and therefore cost), so it’s best to check with your CM (also to make sure they offer it – if they don’t, you can also do it yourself, but you’ll have to put a test regime in place). A useful rule of thumb is to allocate 2 – 4% of your total hardware costs.

Manufacturing Yield:

Manufacturing is not a perfect process and you’ll always get a small number of product which don’t work when coming off of the production line. Tombstoning, insufficient wetting, bridging (especially if doing reflow soldering), poor manufacturing practices and more can cause issues. Sometimes the heat profiles of automated soldering equipment induce infant mortality in components, even prior to HASS tests.

In reality yield failure can run anywhere from 0.5% through to 5% (even up to 10% in extreme cases), and depends on a variety of factors such as:

  • Quality of components
  • Number of components placed
  • Footprint complexity of components placed (BGA vs. SOIC8 vs. 0802 resistors)
  • Solder quality and type (lead vs lead free)
  • Quality of manufacturing processes & systems in place

A good manufacturing process should provide a high yield rate (e.g. a low failure rate), but this can vary significantly from CM to CM. As a rule of thumb, I’ve found 2 – 3% of hardware cost to be a reasonable estimate. As your own processes mature, this number should drop to ≤1%.

Reliability / In-Field Failure Rates:

No product will be without failures, regardless of how well-designed or test process. Strong reliability engineering practices during design phases and HASS during production can greatly decrease the probability of in-field failures, but never completely eliminate them.

As such it’s important to factor the probability of failure into the pricing model, but it can be difficult to do so as, again, there are a great number of variables affecting reliability. As a general rule of thumb a failure rate of 2 – 5% for electronics would be doing fairly well and therefore 2 – 5% of HW costs is a good range to allocate to your final unit pricing until you have empirical data to make a more informed decision.

Alan Povall is the Founder of Product Nimbus, which provides business resources for hardware tech start ups. Alan’s been involved with heavily in product development for over 7 years as part of an international HW design consultancy. He now works with aspiring entrepreneurs, start ups and even the odd charity to get their product ideas off paper and into the wild.

How to Price your HW Product (1/5)

Part 1The Physical Product

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If you’re building a HW product, you’ve inevitably wondered:

  1. How much can I sell it for?
  2. How much money can I make?

In part-1 of this 5-part series, Alan Povall from Product Nimbus guides us through the sometimes daunting question:

How do manufacturing and testing affect my cost?

Part 1 – The physical product (the stuff you hold in your hands)

Part 2 – Manufacturing and testing (making the stuff)

Part 3 – Packaging and Shipping (sending the stuff)

Part 4 – NREs (hidden costs that can sneak up on you)

Part 5 – Profit (everyone’s favourite!)

Electronics & PCB:

Once you’ve designed your PCB you should have a fairly good idea of what is going into your product, especially at low volume through buying components from distributors like RS, Element14, and Digikey. These low volume costs form the basis of this pricing model.

There are two main points worth noting here:

  1. 70 – 90% of your product cost will come from 20 – 40% of components. This means that if you haven’t fully finalized your design yet, don’t lose sleep over trying to find a source for every single component (at least not yet), especially for sundry items like resistors and capacitors (that don’t have any special requirements). You will have a handful of core, critical components which need to be carefully chosen to keep cost low and ensure long term supply (e.g. don’t choose something that you know is going to go end of life in a year or two).
  2. The mark ups that suppliers (such as RS, Element14, Digikey, etc) apply to components is similar to that of contract manufacturers (CM), so the price breaks (discounts at volume) that you receive from both (up until around the 10,000 mark at least) are roughly equivalent.

Pricing:

From my experience the price breaks you can expect relative to one-off pricing for electronic components are:

  • 100 off (15 – 25% discount from one-off pricing)
  • 1,000 off (30 – 50% discount from one-off pricing)

Once you get to 10,000 units or more of a specific component, you get into quote territory. The actual price breaks over one-off volume vary considerably dependent on the component type and are really dependent on how well integrated a contract manufacturer’s supply chain is with its own suppliers.

Whether you are able to use a contract manufacturer’s preferred parts also makes a considerable difference to your final BOM price (hence why it’s important to get talking to your CM as soon as you’ve settled on a first pass design, as they’ll make some recommendations for changes which will need to be reflected in your design).

Enclosure:

The next item to consider is the per-unit cost of the enclosure. Enclosure costs vary significantly based on a number of factors, such as:

  • Whether it is an off-the-shelf or custom designed enclosure
  • Manufacturing technique (3D printing, injection moulding, rotational moulding, etc)
  • Base material (aluminium, ABS plastic, etc)
  • Material additives (UV stabilisers, pigments, anodising, etc)
  • Enclosure complexity (physical design as well as number of parts to be assembled)
  • Production volume

Given the large number of variables it is difficult to point to exact price breaks, except saying that they can be significant (e.g. a small, 10 off ABS injection moulded cases could be $3 – $5 each, whereas at volumes of 40,000 could be as cheap as 17c each).

Check out Part 2 where we dive into Manufacturing, Testing, and Yields!

Alan Povall is the Founder of Product Nimbus, which provides business resources for hardware tech start ups. Alan’s been involved with heavily in product development for over 7 years as part of an international HW design consultancy. He now works with aspiring entrepreneurs, start ups and even the odd charity to get their product ideas off paper and into the wild.

Lesson #10: How to be a Part Picking Wizard

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Now that you have a block diagram of your hardware and have built a proof-of-concept prototype using a development board (or two or three), it’s time to take what you’ve learned and start choosing parts for your custom hardware design.The ultimate goal of this step is to discover the best components to implement each block in your block diagram while making sure that all your components will interoperate with each other.

But there are millions of chips out there.  How do you go about finding the right one?  One way to do it would be to experiment with the several search engines that exist to help with this task.  But the reality of many parts search engines today is that they’re not comprehensive enough and I often find out later that I’ve missed a whole family of parts that I should have considered.

So instead, I am going to outline the most reliable method I’ve found over the years, along with some tips and tricks to turn you into a part picking wizard!

First, what’s an ideal part?

An ideal part can be loosely defined as one that:

  • Performs the required function at the required performance and quality
  • Has an interface that is compatible with the other relevant components in the design (ie: uses the same protocol, runs at the same frequency, same data width, etc.)
  • Has power requirements (ie: voltage and current) that can be met by the power system and are similar to the power requirements of other components in the design (ie: runs on the same voltage)
  • Has a small package and is conducive to a clean layout
  • Is in stock and widely available with acceptable lead times
  • Is low cost in accordance with your budget

Keep all these criteria in mind during your part selection process so that you end up with parts that are not only good for your project but are also in stock and cost-efficient for your budget. Let’s get started!

1. Cast a WIDE net and find all your vendors

The first, most basic step would be to find all your vendors. For a given kind of part (ie: a BluetoothLE chip, LED driver, LiPo battery charger), find all the companies that play in that space.  A great way to do this is through a combination of Google and distributor websites (like Digikey, Avnet, Arrow, Newark, Mouser, etc.).  Simply search for the kind of part you’re looking for and make a note of all the vendors that manufacture components in that area.

How I’ve learned this: On a few past designs, I was well into the design process and a colleague would later suggest a really great part from a vendor I hadn’t considered.  It was sometimes too late or a big pain to switch and I felt silly that I missed it in my initial search.  This happened because I wasn’t rigorous in enumerating all the vendors that make devices in a given domain.

2. Generate a list of part candidates

Visit each vendor’s website and use their parametric search to find potential candidates.  Be aware that these parametric searches are often missing many important parameters, resulting in a search that’s too broad.  From the results, make a note of parts that look like they might work based on their titles, descriptions, and parameters.  Your list may consist of anywhere from 5 to 50 parts depending on the type of part. That may sound daunting, but don’t worry: the list will shrink fast during the next step.

How I’ve learned this:  On some prior designs, I ended up finding out too late that my chosen vendor had other parts in the family that were an even better fit.  So these days I very much prefer to use the vendor website rather than some other parts search engine because I can trust that their list of parts is up-to-date and comprehensive.

Tip: One shortcut I often use to narrow down the list is to limit my search to parts that are currently in stock on distributor websites. This works if I know I need to build prototypes ASAP, or if I can’t afford to wait a few weeks for lead times and am okay with potentially spending more money on parts. Oftentimes, my search results from Step 1 on the distributor website will yield really good candidates that are in-stock, leading me to just pick the first one that’s close to “ideal”.

3. Trim to a shortlist

Quickly visit the product page of each part and skim through its feature list, while keeping the “ideal criteria” in mind to see if there are any glaring things that disqualify this part.  You’ll find them fast.  Most of the ideal criteria are typically listed in these product pages. This should distill your long list of parts to a qualified shortlist pretty quickly.

4. Do a little–okay, a lot of reading  (it’ll pay off)

At this point, you should have a small list of parts that look like good candidates.  The next step is to read the datasheet of each part to see if it meets your criteria.  Datasheets can be long and everyone hates reading them. It’s tempting to rush through this step but it’s one of the most important stages of the whole process.  Time and time again, I see people making design errors or spending hours on debugging, simply because they didn’t sit down and read the datasheet slowly.  To save time, you can limit your reading to only the sections relevant to judging your ideal criteria.  Every component has some quirks and this is the step where you should learn about them.  Some quirks are not a big deal while others can render your design useless.

How I’ve learned this: I have too many war stories to tell, but here’s one where I lucked out:  I was doing a complex design with a new FPGA family.  FPGA datasheets are 1000+ pages so I got restless and skimmed through the important sections rather than reading them slowly.  We picked this family because it had internal series termination resistors, which meant we didn’t need dozens of these on the PCB.  We were almost finished the schematic design and my colleague luckily discovered a critical detail in the datasheet that this feature only works for I/O levels up to 3.0V.  We were planning to use 3.3V I/O on several high-speed interfaces and not having terminations on the PCB would have been a disaster.  I always remember this incident when I feel resistance to reading datasheets.

Tip: As you read through datasheets, you’ll start noticing the common words and phrases vendors use to describe these parts.  You can go back to Step 1 and reuse these phrases to refine your search string.

5. Iterate: Rinse and repeat

As you learn about available parts, you may discover new constraints.  For example, the candidate parts may only support an interface that your processor doesn’t.  In this case, you have to find a new processor or change your design.  Or you may find an ideal part but its required power rail voltage is different than all the other parts on your board.  Expect to iterate on your entire part search and change other parts of the design to accommodate them.

Bonus tips! 

Outsource your search

There are many people in the hardware ecosystem who can help you find the right part.  Part manufacturers, distributors, and sales reps all employ technical people who work with these parts every day.  Their job is to help you find the right part and they often do a good job about it.  Email or call their sales office, describe your application, and ask them to suggest parts.  This has saved me lots of time and has introduced me to parts I didn’t know about.

How I’ve learned this: I’ve done a few designs with dozens of DC/DC switching regulators and LDOs.  But there are so many vendors in this space, each of which builds hundreds of components that differ only slightly.  Finding the ideal part was always a nightmare.  So I got fed up and tried emailing all the companies I was interested in and asked them to suggest the best part available for my specs.  Within a few days they all sent me detailed reports, came into the office to give presentations, and were overall very helpful.  I’ve used this method ever since.

Use FAEs as technical advisors

If you are working with technology that’s new to you, sometimes you don’t even know what tradeoffs to consider when choosing parts.  You could spend hours reading on the Internet to get familiar with the technology.  But I find there’s a much better and faster way.  Simply find one of the biggest vendors in the space, email/call the sales office, and ask to speak with a Field Applications Engineer (FAE) who specializes in this technology.  They will be happy to speak to you.  Then be honest with her that you don’t know anything and explain what you’re trying to build.  They will start asking you all the questions you should be asking yourself.  You may not have answers in that moment but you’ll learn what’s important to consider.

How I’ve learned this: I recently did a Zigbee design but I had never worked with Zigbee or any similar RF interface.  So rather than spending 30 hours reading about the intricacies of doing a successful Zigbee design, I simply read the Wikipedia article to get familiar with the basics then called a big company that makes Zigbee modules.  They put me in touch with an FAE and I told him what kind of product I was trying to build.  I asked him to explain all the things I should consider when doing a Zigbee design.  By the end of it, I knew what questions I had to answer and felt confident in choosing a module.  That single 45 minute conversation saved me many hours of frustrating research and also gave me a sense of confidence that only comes from talking to an expert who has helped several customers be successful.

Look legit

When reaching out for help it’s important that you look like a legitimate company.  This is because all these people are helping you in the hopes that you buy a chip that they sell.  But they don’t want to waste time if they think you’re a hobbyist working from your garage.  Make sure you have a professional company website or landing page and send emails from your company domain.

Lesson #1: What Type of Hardware Startup Do You Want to Build?
Lesson #2: Exploring Ideas
Lesson #3: Customer Discovery
Lesson #4: The Cardboard Prototype
Lesson #5: The Hardware Lifecycle
Lesson #6: Setting Up Your Business
Lesson #7: Division of Labor
Lesson #8: The Block Diagram
Lesson #9: The Development Board Prototype

Lesson #9: The Development Board Prototype

Lesson 9. The development prototype

Last week, we went over the steps to drawing a detailed block diagram of your product. You’ve hopefully gained a clearer idea of how the hardware should be architected and understand the fundamental organization of how your major functional components interrelate with one another.

So what’s next? How do you take this visual map of your system and translate it to a physical prototype? Which route causes the least amount of friction?

Today’s lesson will cover how you can take advantage of commodity hardware such as an Arduino or Raspberry Pi to quickly spin up a proof-of-concept prototype. This will serve as the launching point to your custom board and help you choose the parts you’ll need to build it.


What is a development board?

Arduino, RaspberryPi, BeagleBone, TI LaunchPad. You’ve no doubt come across one of these popular single-board computers before. Development boards are readily-available, off-the-shelf boards that support a very general design that’s easily hackable. More often than not, they feature some kind of processing with a batch of common peripherals and friendly connectors to make interacting with the board highly flexible and uncomplicated. Popular development boards are also backed by a large community of developers and expansive code libraries, making the implementation of common functions much easier. In addition to being an excellent tool for learnings the basics of electronics, they are a great way to start developing your product’s first prototype.

The point of this step is to quickly come out of it with a proof-of-concept model of your device. The already-populated boards are a cost-effective way to test-drive multiple components to get a better sense of what parts you’d like to eventually build with. You might find that specific chips don’t behave the way that you had expected, or that there’s simply not enough documentation to make its application easy and pain-free. It’s good to get through these hurdles at this point so that you can efficiently get through the next stages of development.

Given the multi-functional use of most single-board computers, your proof-of-concept prototype may be overkill in terms of available peripherals, components, and I/O, especially if you use multiple boards to wire up your system. This is okay and expected. Quickly building up a prototype like this may even get you to explore other functions that are available to you and get you to think about your product from a variety of functional angles.

How do you choose the right development board?

With the rising popularity in hacking electronics, there’s an overwhelming amount of available development boards with multiple models that each offer different powers, functions, and actions. Selecting the right board largely depends on the purpose and function of your design. Is your product small? Does it require solid processing power? Does it need to communicate with multiple devices? Beyond the hardware, do you want to be working with a board that is supported by a large community of hackers and developers?

The easiest way to eliminate possible choices is to start with a single board computer that matches the processing power that your device requires. Then filter by the interfaces, peripherals, and I/O that you need to support your hardware. Again, you will probably have to connect multiple, off-the-shelf products together to achieve your desired function. Hack together a working prototype that you can fine-tune and develop into your own custom board.

Check out our infographic comparing some of the most popular development boards available on the market today to help you get started!


Development Board Infographic


A quick note on setting up your hardware workspace

Now that you’re starting to get your hands dirty, you’re going to need a well-equipped electronics lab to help you efficiently work on your prototypes. Often times, how your workspace is set up and organized is overlooked, costing you on time and causing unnecessary errors. Be sure to download and read our guide of tools, techniques, and tricks to putting together an effective lab. We like to call it Lab Feng Shui.


Next lesson, we’ll dive right into how to go about picking your parts! Anandh, our Head of Hardware, will explain some of the methods that have worked for him in his 10 years of experience in the industry. Coming next week!


https://docs.google.com/forms/d/1YXjfEg8Ljs1Y5IdwYK38HwyOEUqhKUeCiZ-QSGuOuB0/viewform?embedded=true

If you’re just joining us, spend some time going over our earlier lessons and be right on track for next week!

Lesson #1: What Type of Hardware Startup Do You Want to Build?
Lesson #2: Exploring Ideas
Lesson #3: Customer Discovery
Lesson #4: The Cardboard Prototype
Lesson #5: The Hardware Lifecycle
Lesson #6: Setting Up Your Business
Lesson #7: Division of Labor
Lesson #8: The Block Diagram

Lesson #8: The Block Diagram

Build Your Hardware Startup with Upverter

So far, we’ve done a lot of necessary ground work to get to the actual designing stage. Not only do you have an idea for what your product will do based on a problem that you are familiar with, but you’ve also started to refine it through customer discovery, gaining a better understanding of your consumer and the problem that you’re solving. You’ve hopefully started to build an A-Team around your product, and have set up a preliminary framework to collect and grow your mailing list, a.k.a. your first user group.

All of it has led up to this: the actual hardware-building portion of the course! We’re going to start getting into how you can efficiently design, develop, and prototype your product before going into mass-manufacturing. The next few weeks will largely focus on technical content with a few lessons on pre-marketing and pre-sales in between. Once again, the structure of this course covers more than just hardware; it gets into the many business-related items that should be tackled in parallel to developing your flagship product. We hope you’re as excited as we are to get into the meat of building your startup!


We’ve already introduced the Hardware Product Canvas in a previous lesson as a tool for brainstorming and organizing your idea as a collection of building blocks. Today, we’re going to use it as a preliminary step in drawing your product’s block diagram.

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Download the hardware product canvas

Roughly divided into five major functional categories, the Hardware Product Canvas is filled in by answering a series of simple questions: How do users interact with the product? How does the product communicate with other hardware? What protocols should it support? Can you control the product remotely? Does it store data? Does it sense environmental forces?

By filling in the blanks, you determine how your product functions while gaining a clear idea of what kind of parts you’d need to build it. The exercise might bring up questions that you hadn’t thought about before, which might even spark better ideas for how your product communicates and behaves. Download the template here and give it a shot! Read more tips on how to use the Hardware Product Canvas in our blog post and see some examples of what it looks like for devices like FitBit.

What is a block diagram?

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For practically any kind of project — a report, a novel, a painting, etc. — it’s always good to start with a sketch of what you want to achieve before undertaking any real work. This is the same for hardware and we call this preliminary sketch a block diagram.

A block diagram represents the fundamental organization of your device. It includes the most important, top-level components and maps their relationships to each other for an overall structure of what you’re about to build. For teams, it’s a great way to communicate how everything is connected and serves as a referential guide during implementation.

Block diagrams can be incredibly detailed, showing everything down to the pin specifics, or they can be more general and serve as a simple skeleton of how the hardware is architected. This largely depends on how complicated your design is, and whether or not you’ve already made decisions on the parts that you’re going to use. Some engineers like to use a software like Visio to draw out their block diagram while others prefer to simply hand-sketch their system.

How do I draw my block diagram?

1. The easiest starting point would be a hub, or the component that is most connected within your system. In most cases, this will be some kind of processing device (e.g.: microprocessor, micro controller, SoC). Look over your Hardware Product Canvas and see which part will serve as your “hub” block. Draw it in a box.

2. The next step would be to draw all your peripheral blocks around it. These are all the other major components that you’ve included in your canvas such as sensors, antennae, flash memory, buttons, etc. At this stage, it’s not hugely important where you place these blocks but as you move on to the next step, you’ll start to adjust where they are to visually and logically group them together.

3. Now draw arrows between each block to illustrate how they are all connected together. The direction of the arrows should indicate the direction in which the data is flowing. You could even go one step further and label the arrows to show specific protocols and interfaces.

Power is often excluded from the block diagram, or shown as a separate diagram in its own “system”. All the devices that you would need to do power conversion, power distribution, battery management, etc., can be laid out in its own diagram to simplify things.

You’ll have a good sense of when your block diagram is done when every function that your board is going to perform is represented and they are all clearly connected together.


Next week, we’ll look at how to go about making a quick proof-of-concept prototype using commodity hardware such as a development board before moving on to picking the actual components that will implement each of the blocks in your block diagram!

https://docs.google.com/forms/d/1YXjfEg8Ljs1Y5IdwYK38HwyOEUqhKUeCiZ-QSGuOuB0/viewform?embedded=true

If you’re just joining us, spend some time going over our earlier lessons and be right on track for next week!

Lesson #1: What Type of Hardware Startup Do You Want to Build?
Lesson #2: Exploring Ideas
Lesson #3: Customer Discovery
Lesson #4: The Cardboard Prototype
Lesson #5: The Hardware Lifecycle
Lesson #6: Setting Up Your Business
Lesson #7: Division of Labor

Lesson #7: Division of Labor

imageLast week, we talked about some of the preliminary things that you should cover in setting up your business. It should be obvious by now that the foundation of a successful hardware startup extends beyond simply executing on building your product: You need to do your due diligence with customer discovery; you need to build your mailing list and find a reliable pool of user group to eventually convert into your first customers/evangelists; you need to bolster up where you are weak and find a co-founder that you can rely on when things get hairy.

This week’s lesson will largely focus on your team, both internal and external. The nature of shipping a hardware product involves many different roles, skills, and players at every stage of its development. This is where finding the right talent makes a tremendous difference. We’ll also go over what the “business” side of the team should be doing in the background while the “technical” body focuses on delivering the product (hint: you definitely shouldn’t be just waiting for launch).


Hiring your core team

Much like finding the right co-founder(s), you need to grow your team by hiring talent that can fill the voids. What aspect of the company are you missing expertise in? Mechanical? Software? Firmware? Business? Your core team should be as balanced as possible, and willing to learn together what they don’t know. Cobbling together a patchwork of contractors and manufacturers is a dangerous path to go down: Not only will communication be stretched thin across the board, it’s difficult for contracted parties to see the big picture beyond the designated task and area you’ve set.

A huge upside to having a core team made up of an assortment of backgrounds is that you encourage cross-pollination of skills and ideas, held together by a unified goal and hunger for success.This will not only balance out the work load within your company, but ultimately make your product better by leveraging everyone’s proficiencies.

For a well-balanced hardware startup, you should think about finding your four core “departments”: Software, Hardware, Operations, and Marketing/Sales/Business.

What’s going on in the background?

Too many startups think that putting together a business arm before their hardware product is ready is jumping the gun. They assume that once it launches, people will automatically know of its existence when this is simply not the case. Startups have to deal with the difficulty of building traction, exposure, and traffic for a product and brand that is completely new to the world. There’s a great deal of ground work that should be done pre-launch that will give your product a chance at successfully generating revenue.

So what does this involve? We highly recommend you watch this presentation by Vidyard’s founder and CEO Michael Litt called The Anatomy of a Hustle. Among the incredible insight he gives into what he did in the early stages of Vidyard, he covers a list of things that he believes startups just don’t do anymore.

Working with manufacturers and contractors

You’ll inevitably work with an external team, especially when it comes to manufacturing. Use this section of the lesson as a reference when you’re ready to work with contractors. We’ll go over the different types of manufacturers and how to choose the one that’s right for your startup.


CM (Contract Manufacturer)

If you have hardware experience in-house, contract manufacturers will most likely be the best way to go. CMs describe companies that manufacture components or products for another hiring firm. A startup will approach the CM with a full design and, for an agreed upon price, they will serve as the startup’s factory which includes producing and shipping units.


ODM (Original Design Manufacturer)

If you lack the hardware experience and have set up your startup based on an idea, Original Design Manufacturers will be a better fit. These describe companies that are responsible for designing and building a product to another company’s specifications. While this business model has the ODM owning and/or designing the hardware in-house, the product will ultimately be branded by the hiring startup for sale.


OEM (Original Equipment Manufacturer)

Contrarily, Original Equipment Manufacturer describes a company that is responsible for the designing and building of a product according to its own specification. The product is sold to another company, rebranded, and then distributed by the hiring firm. Using an OEM allows you to obtain needed components or products without owning and operating a factory, due to the OEMs’ ability to drive down the cost of production through economies of scale.

In choosing the right type of manufacturer, think about how your idea will eventually become a product: Are you going to do the bulk of the work? Paying people to build things along the way? Are you going to partner with a factory, work with them, but in exchange give them a much bigger piece of the revenue? This all comes back around to what kind of expertise you have in-house and whether or not you will be able to design the actual hardware aspect of your product.

If your startup’s core team lacks that technical expertise and you do end up working with an outside manufacturer for the hardware design, you do not own your company’s most valuable asset: the product IP. Try to err on the side of working with outside contractors for one-offs, rather than relying on them to build out the core parts of your product. Knowing in-house how the hardware works will also pay off in knowing how to fix potential bugs or improving the product in the future.


If you’re just joining us, spend some time going over our earlier lessons and be right on track for next week!

Lesson #1: What Type of Hardware Startup Do You Want to Build?
Lesson #2: Exploring Ideas
Lesson #3: Customer Discovery
Lesson #4: The Cardboard Prototype
Lesson #5: The Hardware Lifecycle
Lesson #6: Setting Up Your Business

Lesson #6: Setting Up Your Business

Setting Up Your Business

Entrepreneurs often forget about all the janitorial company stuff that goes into building a business. It’s not their fault; there’s far more exciting things to take care of, like tinkering with an Arduino or 3D-printing a preliminary case for their product. But when it comes to setting up a robust, money-generating startup, there are a number of things to consider and make decisions on before moving on to other aspects of your business.

This week’s lesson will cover the four important items that you should tackle before you focus all your energy on your product. These items will define the structure of your startup as well as ready you for upcoming challenges in marketing.


Incorporation

Forming a legal entity ensures that you are shielded from the liabilities and debts of your company. There are additional conveniences that come out of forming a legal entity, such as income control, potential tax deferral, and a level of credibility.

Obviously, incorporation works differently depending on which country you are operating in. It’s a topic that you should definitely do plenty of research on before acting. For practical reasons, we’ll just be covering how incorporation works in the US and provide some additional resources to get you started.

The different types of legal entities


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1. Limited Liability Company

Much like a regular corporation, an LLC generally protects the owners from personal liability in the event of bankruptcy and debt. By default, it is a “pass-through” entity meaning that the startup’s profits and losses are passed through to the owners who are then taxed on an individual level. Owners also gain from flexibility in management and profit sharing.

2. S-Corporation

S-Corps enjoy a special tax election which allows for “pass-through” taxation. All corporate income is passed through to the shareholders who include the income on their individual tax returns, therefore avoiding double taxation. In addition, the accounting for an S-corp is generally a lot easier than for a C-corp.

However, there are certain limitations to forming an S-corp: shareholders must be US citizens or legal residents. The number of shareholders for your business is also capped off at 100 members.

3. C-Corporation

The main differentiating factor with forming a C-corp is that you are subject to double taxation. This means that your startup will be taxed at the entity level and shareholders will be taxed at the individual level. However, if you are planning to seek venture capital funding, most investors will require that you are a C-corp. Given that the state of Delaware holds a long and extensive history with corporate law, VCs also prefer that you form a Delaware C-corp. C-corps hold the flexibility to allow owners to participate in the management of the business or to act solely as passive investors.

If you don’t see your startup looking for venture capital in the first three years of operation, it might not make sense to form a C-corp given the cost and burden involved in maintaining the legal entity. Look to forming an LLC or S-corp for the early stages of your startup and then switching over to a C-corp tax treatment when you are ready to accept venture capital funding.


To help you out with the paperwork involved in forming a legal entity, check out Clerky, a spin-off from the law firm Orrick that helps you put together startup-focused documents. Similarly, visit Docracy, an open library of legal contracts that you can also fill out and sign online.


Founders

If you’re planning on being the sole founder of your startup—reconsider it. Why? Well there are the obvious reasons: two (or three or four) heads are better than one; bolster up your weaknesses with the strength of others; better time and resource management; a chance at actually having a social life. But the truth is, running a startup is tough. Much too tough for one person to handle on his or her own. There are going to be many mornings when you’ll want to just throw in the towel and VCs know this. If you’re a solo founder, you’ll face a lot of hesitancy and resistance from investors given that there are very little successful startups that were founded by one person.

Paul Graham has written a fantastic blog post on the 18 mistakes that kill startups where number one is the single founder:

The low points in a startup are so low that few could bear them alone. When you have multiple founders, esprit de corps binds them together in a way that seems to violate conservation laws. Each thinks, “I can’t let my friends down.” This is one of the most powerful forces in human nature, and it’s missing when there’s just one founder.

The Elevator Pitch

An elevator pitch is exactly what it sounds like: a short summary of your company and product that could be completed in a single elevator ride. As you start to network and meet other entrepreneurs (and potential investors) in the hardware space, you’re going to sometimes be caught off guard and in need of concisely describing your startup. Your elevator pitch is the thing you have in your back pocket for moments like this.

Crafting a good elevator pitch is deceptively tough. In one sentence, you need to encapsulate your product’s value prop in a way that clearly describes the problem you solve and the people that you help. It should communicate your unique selling proposition (USP)—the thing that you offer that your competitors can’t—and be expressed in a voice that your startup identifies with. Admittedly, these are many things to juggle and include in one sentence.

To give you a starting point, try to think of the thing you want your audience to remember the most about your product. This obviously should include what your device is and does, but try to highlight the thing that differentiates your product from the others to gain a bigger mind share in your market category. Keep your pitch exciting and relatable. Remember that it should be a referential center piece for the rest of your product’s messaging which you’ll eventually use to communicate every facet of your startup.

Landing Page + Mailing List

A landing page, in some ways, is a variation on your minimum viable product (MVP). Instead of offering a physical V01 of your prototype that people can play around with in their hands, you’re essentially illustrating the idea of your product with copy and a domain name. A landing page can help you gauge the general interest of the market in your hardware device and serve as a litmus test on whether or not the problem you are solving is one that actually resonates with customers.

Another incredibly huge gain from building a landing page is your mailing list. This is critical because when you eventually launch, you’re going to need to have a small subset of evangelists that can help you promote your message and product. The people on your mailing is your very first Kickstarter pledges, your first Tweeters, your first user group, and your first customers. You’ll be able to call on them when you need help with a final design decision, and gain insight from when you need to find that sweet spot with pricing.

It’s not necessary to spend weeks on your landing page. Decide on a clickable, shareable domain name, put together something on a website builder like Squarespace, and jam in your Elevator Pitch. Do use high-quality images. Do not use Comic Sans. Build it and ship it. When you get into conversation with people, point them to it and start collecting those valuable email addresses!


https://docs.google.com/forms/d/1YXjfEg8Ljs1Y5IdwYK38HwyOEUqhKUeCiZ-QSGuOuB0/viewform?embedded=true

If you’re just joining us, spend some time going over our earlier lessons and be right on track for next week!

Lesson #1: What Type of Hardware Startup Do You Want to Build?
Lesson #2: Exploring Ideas
Lesson #3: Customer Discovery
Lesson #4: The Cardboard Prototype
Lesson #5: The Hardware Lifecycle

Lesson #5: The Hardware Lifecycle

Hardware Lifecycle

This week will be a bit of a debriefing. We’ll also provide a sneak peek at what’s coming up and how we’ve structured the course to maximize your startup’s chance for success.

Some of you may be thinking, when is the course going to get into the nitty-gritty of how to actually build hardware? After all, we build tools for exactly that purpose; we should be offering more than we have on how to make a working prototype, how to pick the right parts, how to transition from a development board to a custom PCB, and more. We could have jumped into it (and we will in due time), but we also know that there are many more moving parts to building a successful startup. In mentoring and consulting for a number of startups, we know that the biggest, most common pitfall for hardware entrepreneurs is that it’s incredibly easy to hyper-focus on the product and neglect the other factors that play a part in a successful venture.

This course is structured and written to include all aspects of running a business. It’s to help guide you through the commonly-forgotten components of building a startup so that you’re not scrambling to make sense of it a month before launch. There’s much more that goes into building a hardware startup from the ground up than creating a new product. The behind-the-scenes stuff like IP, certification, incorporation, pricing, pre-marketing options, etc. All these and more will inevitably pop up and hit you over the head down the line. By providing a complete and holistic scope of topics, we know that you’ll be equipped with all the answers that you need by the end of the course.


What we’ve covered so far

By now, you should have a solid grasp on what type of hardware startup you want to build. You should also have a good foundation for your product, and know how to investigate and further refine your idea through customer discovery. If we haven’t said it enough, customer discovery at this stage is so, so important! Most hardware startups fail because they don’t do enough customer discovery and they don’t do it early enough. Your product should be developed in parallel to your learnings. There are also many positive by-products that arise out of doing customer discovery, like pre-launch traction and a growing mailing list. It’s always good to establish and build a direct channel of communication to your consumers.

What’s coming up

Needless to say, there’s a lot left to be covered. But in order to deliver the content in a form that will include all the different division of work, we’re approaching the course as a chronological playbook with suggestions on when the individual moving parts should fit into the big picture. For instance, sandwiched between our lessons on how to draw a schematic is a non-technical lesson that focuses on pre-sals and pre-marketing tactics. Because this is absolutely when you should start working on the consumer side of the world.

So with that in mind, here’s a small preview of the next five lessons:

Lesson #6: What do you do before you start building?

We’ll cover all the janitorial company stuff, like incorporation, setting up a landing page, crafting the perfect elevator pitch, and more.

Lesson #7: Division of Labour

What’s the difference between a CM, ODM, and OEM? Who’s actually involved in your venture? How do you go about hiring the talent that you need? Throughout the rest of the course, we’ll be injecting guidelines for the rest of your team that should be carried out alongside the development of your hardware product.

Lesson #8: How do you actually build a product?

Resources on how to start out on a development board, design tools, and the pros and cons of low vs. high-fidelity prototypes.

Lesson #9: System Level Design & Early Prototyping

We’ll go over how to sketch out the hardware guts of your device with the Hardware Product Canvas and how to translate that into a workable system level design.

Lesson #10: Picking your parts

How to cost-effectively pick your parts and the tradeoffs that’s involved.

The Hardware Lifecycle

To give you a better understand of all the different steps that every hardware product has to go through before shipping, here’s a checklist that follows the overarching lifecycle. We recommend that you calibrate your startup to it, and see in advance the many stages that occur after design.

These are five major milestones: Ideation, Customer Discovery, Proof of Concept, Pre-Launch/Pre-Sales/Revenue, and Manufacturing & Fulfillment. They are all fundamentally important for the success of your product. Don’t get ahead of yourself, or focus too much on one aspect of your startup. While the device that you’re building should be the center piece to your business, you should also pay attention to the surrounding pieces and build them up accordingly.

Hardware life cycle
Download the hardware lifecycle here.

If you’re just joining us, spend some time going over our earlier lessons and be right on track for next week!

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Lesson #1: What Type of Hardware Startup Do You Want to Build?
Lesson #2: Exploring Ideas
Lesson #3: Customer Discovery
Lesson #4: The Cardboard Prototype

Lesson #4: The cardboard prototype

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Last week, we covered what customer discovery is, why it’s especially important for hardware startups, and how you could conduct honest, insightful, and productive conversations with your potential customers. This lesson will hone in further on how to situate yourself for as many relevant conversations as possible, and debunk the myth of needing a shiny, finished product before approaching customers. We’ll also go over what to do if your technology by nature makes it difficult to find your market.

It may seem like we’re focusing for too long on finding your customers. We can’t stress enough how important this stage is for every startup. You want to do this ground work now so that you can secure as much as you can your product’s success ($$$) once it’s shipped. It also touches on many other facets of building a startup, like growing a mailing list pre-launch, and having access to direct market research. Once you’re at the beta stage with your prototype, you’ll be very glad to have a pool of consumers who can provide real feedback for final fixes and tweaks.


First, a story

When Drew Houston, CEO of Dropbox, first started building what we know today as one of the most seamless ways to share files between users, he wanted real customer feedback to aid Dropbox’s development efforts. The trouble was, what Dropbox was trying to do at the time was so radically different (and better) that people often had difficulty understanding the concept—it was a problem most people didn’t even know they had. On top of that, it was impossible to demonstrate the “magic” of the software because there were still many technical hurdles to get over in its prototype stage.

To solve this issue, he did something unexpectedly easy: He made a video.

The three-minute demo was Dropbox’s MVP (read our post on ideation to learn more about the MVP). Without any engineering effort, he conveyed the core function of the product. He put something in the users’ hands and got solid confirmation that this was something customers wanted.

The cardboard prototype

hw-startup-lesson-4-cardboard-prototype

Drew’s story is a great example of why delivering something to the user as soon as possible is such a valuable move for startups. For hardware, this means not being afraid of presenting an “ugly” prototype. As long as it shows what it can do, it could be made out of cardboard with wires hanging off of it. Entrepreneurs tend to hesitate when it comes to sharing their product while its in development, or default to assuming that they need more polish for fear of causing a bad first impression. This is a critical error. Evolve your product in parallel with real customer feedback. Assumption at this stage can be detrimental to your startup and all your capital and engineering effort will ultimately be for nothing.

Are you a customer of your company?

Hopefully by now, we’ve successfully ingrained in your mind that customer feedback is an imperative component to building your startup. But where do you start? How do you find your customers and vet your idea?

The first thing you need to ask yourself is whether you are a customer of your company. Are you personally familiar with the problem that your product is fixing? If you weren’t building this product and came across it in a store, would you buy it and use it? This is your ideal square one. You’ll already have a pretty good idea of where people with similar problems/interests like to hang out. Or even better, you’ll have direct access to a network of users (friends!). Expand on this resource and reach out to once-removed, twice-removed connections (friends of friends). Start your conversations down this channel.

If the answer to the question above is a no, your customer discovery is going to be a slightly murkier process. Do you know one or two people who have the problem that you’re trying to solve? Grill them on everything: Where do they discover new things? What publications do they follow? What events? Who do they know that experience similar problems? Leapfrog to their social circles and grow your pool of customers.

Now—if the answer to the question above is a no, and you also don’t know a single person that you can tap into, you’re starting to enter the danger zone. You’re venturing into a realm where you may be trying to solve a problem that really isn’t a problem; the solution without a problem category.

This was a dilemma that Upverter CEO Zak encountered with a young startup called Jugnu. They’ve developed a super high-speed way of wirelessly transferring data through a beam of light. The technology is no doubt innovative and cool, but they were at a loss with who had this problem. In other words, they had no idea who their customer was.

If you find yourself in a similar situation, try following Zak’s recommendation to Jugnu: make a list of ten hypothetical places that could have this problem. Reach out to professionals in these places and narrow down the list to those that actually experience the pain (remember The Mom Test in order to collect valid responses!). For Jugnu’s technology, it made sense to target places that don’t allow RF like airports and airplanes. Another potential scenario could be places with no infrastructure, no outlets, but access to batteries and laptops. If transferring high-speed data in these regions is an obstacle that exists today, they’ve found one market segment where their product makes sense. They may even evolve the way their product operates to better suite other conditions that are present in these scenarios.

If by the end of your list, you find that none of your hypothetical places experienced the problem that your product is trying to solve… kill it. Have your Old Yeller moment. It’s sad and upsetting, but there’s no point in carrying on if the needle points to no on buying your hardware in the end. Learn from as much as you can from this attempt, and rebuild.


So far, we’ve done a lot of necessary pre-op for building your hardware startup. You may be more advanced in the process than what we’re covering now. Stick around! We’ll be releasing a chunk of the course outline next week so that you’ll know what’s coming up in the next few lessons.

https://docs.google.com/forms/d/1YXjfEg8Ljs1Y5IdwYK38HwyOEUqhKUeCiZ-QSGuOuB0/viewform?embedded=true

And as always, share the course with your friends and colleagues! Get them building their startup today.

Lesson #1: What Type of Hardware Startup Do You Want to Build?
Lesson #2: Exploring Ideas
Lesson #3: Customer Discovery

Lesson #3: Customer Discovery

Customer Discovery

By now, you have identified the type of hardware startup you’d like to build. You’ve also sketched out the basic idea of your product and have started to refine it. Now it’s time to sculpt it some more: shave off the bits that you don’t need, and build on things that make your hardware product different and attractive to customers. But how do you know which aspect of your idea should stay and which should go?

This next step involves rigorously testing your idea and developing it in parallel to match your learnings. It’s often referred to as customer discovery. This is a phase of the refinement process that should be approached with an open mind. Some facets of your idea which you are convinced is a key feature might not be the case once you start getting into conversations about your product.

The strategies, processes, and techniques outlined in this section will heavily borrow from Silicon Valley serial-entrepreneur Steve Blank and Rob Fitzpatrick, author of The Mom Test. We highly recommend reading up on their methodologies, which we will link to at the bottom of the lesson!


What is customer discovery?

Watered down to its basics, customer discovery is a way of improving a product’s success by developing a better understanding of the consumers. As a cornerstone to the Lean Startup Movement, it anchors the rapid iteration and deployment cycle of a new product to real, validated feedback from potential customers.

This is an incredibly important practice, especially for hardware startups. Unlike software development where continuous iteration takes little overhaul and cost, hardware by nature is comprised of “chunky” stages: design, prototype, manufacture, deploy. There’s very little wiggle room to physically test and learn from the product, or to accurately gauge whether or not your consumers will react the way you anticipate—that they would actually buy it.

Doing the ground work now to figure out what your customers are like and how they think will ensure that you avoid being one of those startups that builds something that nobody wants in the end.

So how do I do customer discovery?

A great launchpad to start you on your customer discovery journey is Rob Fitzpatrick’s The Mom Test. Its subtitle, “How to talk to customers and learn if your business is a good idea when everyone is lying to you”, should give you an idea of how misleading some conversations can end up being. Because people are (generally) nice; much like your mom, they don’t want to hurt your feelings, or they often try to say what you want to hear, especially when you are pitching a business idea.

In order to have good, insightful, non-biased conversations, The Mom Test outlines these key components:

  1. Avoid pitching: Don’t mention your idea, or what your product is today.
  2. Ask about specifics of their past and present experience, and not generic opinions about how they would act in the future.
  3. They should be talking (and you should be listening) 90% of the time.

But before anything, do some prep work so that you’re never caught off guard. Rob Fitzpatrick recommends figuring out three big questions you want to ask in every conversation. Always have these ready. They’ll most likely change over time as you learn more about your market segment, but having this at the top of your mind helps keep you on track and lets you handle spontaneous conversations.

Avoid misleading data

1. Deflect compliments.

Compliments are fool’s gold. Everyone will say them and they are all worthless, until they are validated. Only facts and commitments have worth. Immediately ignore all compliments and get back to asking good questions about your customer’s life today. Refraining from pitching your idea helps to avoid receiving compliments.

Again, people are simply nice and they don’t want to hurt your feelings. Don’t feel good when you receive a compliment. Unvalidated compliments have little correlation to the likelihood of them buying your product.

2. Anchor the fluff.

These are statements like, “I usually”, “I always”, “I never”, “I would”, “I might”, etc. Anchor them by asking specific questions of their past and present experience: “When did it happen last?” “Did you try to fix it?” “How did you try to fix it?” Often, you’ll find that there is nothing substantial underneath the fluff (ie. this problem only comes up once a month and is not really significant pain).

Perhaps the most dangerous of all the fluff is, “I would definitely buy/use that!” It can trick you into thinking everyone loves your product. But it’s meaningless unless they actually pre-order/commit with money. People are often overly optimistic of what they’ll actually do in the future.

3. Dig beneath ideas.

People will ask for features: “Do you do X?” Always follow this by asking why they want this, how they are coping now, why it matters. Deeply understand their motivations. They will reveal their ultimate goal and how important it is to their buying decision (deal-breaker or nice-to-have?). The same goes with strong emotional signals — dig beneath them to validate.

Other tips

  • Never expose your ego. Don’t ask for honest feedback and reassure them that you can handle it. People usually won’t be honest because they don’t want to hurt your feelings or because they want to believe in your entrepreneurial spirit. In contrast, people can’t lie to you if you only stick to specifics about their present and past experience.
  • Let them show you their mental model of the world. Don’t correct them or dictate how it looks for you. Even if you have an answer to one of their concerns or objectives, let them talk because you are getting valuable insight into how your customer thinks.
  • Most people love to complain. They will have lots of problems they don’t care enough about to fix but will happily tell you all about them. It’s your job to qualify these. Make sure that they really care about a problem before zooming in to ask more questions. Don’t get excited when someone starts talking about a pain- Ask about the magnitude of the pain and get excited only if it’s big.
  • Ask at least one question that can change or invalidate your whole business. This is your “terrifying question”.
  • Learn to love bad news.

Where do I find people to talk to?

This all depends on the buyer persona you have defined in our previous post. Who is the product for? Are they young/old? Female/male? What’s your product’s pricetag like? Is it consumery? Techy?

You should have a pretty good idea of where your consumer likes to hang out. Whether these are shopping malls, parks, hobby stores, meetups, etc., target these places and actively get into as many conversations as you can.

How to know if it’s working

In addition to obvious good signs like pre-selling before building, there are other signs of a good, valuable meeting:

  • Facts. Concrete, specific facts about what they do and why.
  • Commitment. They are demonstrating their seriousness by giving up more time (another meeting), risking reputation (an introduction to someone else), money (pre-sale), or requesting more info (growing mailing list).

How to know if it’s NOT working

  • If all you come back with are compliments like, “They love our vision”, or “they’re really excited”. These are not facts.
  • People are saying “yes” a lot but are not paying or committing in an way
  • You weren’t scared of any of the questions you asked.
  • The responses you get from 20 conversations are all over the place. This indicates your market segment is too broad and you need to focus on your buyer persona more.

Resources

Homework for next week

  • Come up with your set of three questions that you’ll always have in your backpocket.
  • Decide on your “terrifying” question; the question that will invalidate your whole business.
  • And if you’re feeling eager, draft out a flexible script with prepared responses for common questions.

Next week, we’ll cover what level of polish you need before approaching your customer and debunk the widely-believed myth of having a fully-working prototype. Watch this space!

Lesson #1: What Type of Hardware Startup Do You Want to Build?
Lesson #2: Exploring Ideas

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