All in + Manufacturing

Unlike the lean-startup world where pure-play VCs dominate almost all early-stage investments, we have seen quite some corporate investors stepping into early stage investments in the hardware field. Usual suspects are large manufacturing firms such as Foxconn or Flextronics, as well as some consumer electronics brands.

I believe that a more complete hardware investment eco-system will take form in the next 2 to 3 years. However, before that happens, a hardware founder should, like any founder, really think carefully over all funding options. A dollar is never just a dollar. There could be a lot of good things and bad things coming with it.

Some entrepreneurs think that contracts with component suppliers, manufacturers and distributors would govern everything, which could not be further away from truth. When you work at a large corporate, you can rely on contracts. Your company has the resources and luxury to spend money and time to enforce the contracts, sometimes even by going to the court.

As an entrepreneur, sadly, you never have enough time and enough money.

Startups do not have volume, especially in early stages. For an EMS company to work with a startup, the EMS company has to take a long-term view. If the startup will just easily switch to the cheapest supplier, then why should the EMS firm even work with them from the beginning?

On the other hand, by working with the startups on industrialization, building testing programs and QA programs, the EMS firms know the startups won't easily switch. That allows them to take the long-term view and hammer out multi-year growth plans together with the startups.

On the EMS side, they now have all the incentives now to "pump up" the numbers of NREs. What might well have been a healthy $500k NRE might suddenly be listed as $1.5M, including many service items that were not necessary for a startup.

On the startup side, it will try to use a high valuation to bring down the dilution but the EMS might never agree with its valuation since most early-stage startups are pre-revenue. EMS's thinking is all about P&L numbers. Without revenue numbers, it could not even "pretend to" do a proper valuation.

This debate could drag on for months. The next thing you know, product shipments are delayed, cash burns out, other VC investors walk away and a promising startup dies for wasting too much time on this wrong debate for no good reason.

In any case, excluding the Shangzhai model or fairly standard markets such as routers and set-top boxes, it’s hard to imagine a decent contract manufacturer could work with a startup to produce a small amount of high-quality products with brand new designs.

Unless, that is, there’s a way to align the long-term interest of the contract manufacturers and the startups.

In other words, contract manufacturers would like to work with startups that have higher chance to grow into high volumes in the coming years, not just a one-time luck with Kickstarter or Indiegogo campaigns. By working with the really brilliant startups early on, the contract manufacturers hope to earn advantages in familiarity and specific manufacturing know-hows, so that in the later stages the said successful startups would continue to work with them on manufacturing.