This article was featured as a guest post on GigaOM
Summary: Before entrepreneurs rush to a crowdfunding site with dreams of glory, they should think hard about how their prototype and eventual product will scale. Here are a few steps to avoid a mess.
Remember the old days of launching a new hardware product? The process went something like this: A company would spend several years and millions of dollars in stealth mode developing a new consumer product. To validate the market and understand the feature set and price point, it relied on focus group testing and Voice of the Customer sessions, all which typically told the company what it wanted to hear and cost a lot of money.
Eventually, the market would determine whether the product was a success but at a significant capital and opportunity cost. If the reception was not as warm as expected, it was very difficult and expensive to change course. The process was both flawed and ultimately stifled innovation, yet until very recently was the standard practice to bring a new product to market.
Then the hardware revolution began
Fortunately, things are changing. The Hardware Revolution has truly begun. Barriers have fallen and innovation is being democratized such that small teams of brilliant entrepreneurs can now quickly grow companies that create entirely new experiences in never before seen categories. Recent examples are companies like Pebble, MakerBot, GoPro, Nest, and many more.
So what’s driving this revolution? They include:
- Cheaper components, such as Bluetooth and Wi-Fi radios, accelerometers, batteries, etc.
- New business models enabled by gathering real world data and sending it to the cloud for high-level processing and sharing.
- Access to high-level modules available through GrabCAD, GitHub and Upverter so that companies don’t need to re-invent the wheel.
- Low cost mechanical prototyping via 3D printing (such as MakerBot) and quick turn tooling (such as ProtoLabs).
However, getting a working prototype is just the beginning. A company will still need capital to build awareness, validate the market, and manufacture the product. The critical enabler for smaller companies to move from prototype to production is crowdfunding. Now consumers can vote with their wallet by backing an innovative product before it is made. This provides more authentic feedback than artificial focus group testing and is far cheaper than rushing right into the development process.
For consumer electronic hardware products however, there is significant downside if you don’t do your homework before launching the campaign. Unfortunately, it is all too common that many campaigns launch without even a basic understanding of the manufacturing process and as a result, fail to deliver to the backers.
This is top of mind for me right now, because I’m currently in China taking a group of our clients on tours of factories. It is truly eye-opening for them to see the multiple steps after the prototype stage involving tooling, molding, assembling, testing and shipping. I can only imagine what their crowdfunding campaigns would look like for lack of this insight.
The reality is, if it continues to be the norm for teams to launch crowdfunding campaigns without an understanding of the full product development process from the very start, there is a very real risk of destroying the Hardware Revolution.
The solution? Follow me if you want you to live
Crowdfunding is an incredibly public experience, and it is very difficult to hide mistakes. Success in creating a product, and ultimately a company, requires much more than just the “campaign.”
Over the last year, we’ve seen a constant stream of entrepreneurs coming to us after completing a “successful” campaign that didn’t account for even basic manufacturing costs. The result was that they made commitments to backers that were impossible to keep. Although “successful” in reaching the funding goal they had set, that goal was too low due to a lack of a manufacturing strategy from the start.
Before launching, it is essential to thoroughly analyze and understand the bill of materials (BOM) line by line, the cost of each component in volume pricing, as well as labor, packaging, markup, scrap and overhead. In addition, tooling adds a significant cost, and is often forgotten.
One needs to understand how far along the prototype is from a design for manufacturability and assembly (DFMA) standpoint. Is it a 3D-printed part full of undercuts that are not moldable? What are the steps involved going from the prototype through full-scale manufacturing and fulfillment, and how long does each one take?
Crowdfunding is a powerful tool if used wisely, as it reduces risk for the Entrepreneur and investor. To attract capital, entrepreneurial companies can demonstrate proof points that consumers are willing to buy their product, then go on to show that the product can be manufactured and delivered on an understood schedule and budget based on the funds raised during the campaign.
This process achieves three goals:
- Greatly lowered risk in building a product nobody wants.
- Ability to secure a significantly higher valuation for the company than would have been possible pre-campaign.
- Creation of greater awareness in the market to drive future sales at a much lower cost and higher efficiency than traditional paid advertising.
Crowdfunding is just one part of an amazing new set of tools that will enable the next generation of disruptive companies if used properly. It is enabling the creation of a whole new wave of exciting companies who are creating products to make the world a better and more exciting place. Like all tools, if misused in untrained hands it can do great harm. We are just at the beginning of the Hardware Revolution, and history is ours to write. Game on!