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.
The general feeling is that if you're working on B2C products, you don't have to interact with too many adults other than your investors or potentially your acquirers.
This is definitely not the case in the hardware space. The reason is very simple: to deliver a product to the consumers, the hardware entrepreneurs have to work with suppliers, manufacturers, distributors, stores, logistics partners, etc.
Locking oneself in a garage, even with a 240 IQ, won't get these things done.
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.
The real operational profitability should be judged on Operating Cash Flow (OCF). If OCF is turning positive and growing, you could be sure that real VCs will be more than happy to fund your startups even if you're still losing money accounting-wise. The new money will be used to do more investments and will hit the Investing Cash Flow (ICF) but as long as where it's spent feeds into OCF in the feature, this is a very healthy outflow.
Especially at Pre-Seed, Seed or even Series A, the first ticket from a VC is usually more like an information ticket. It allows them to work closely with the most promising startups. And if some of them are progressing exceptionally well, the VC will be able to double down on their bets by participating or even leading a follow-on round.
While most outsiders think a VC's job is the same as a stock picker, which is to make better decision in buying stocks than others. It could not be further away from the truth.
90% of our job is sell-side, if not more. Making the buy-side investment decisions is key to our eventual financial performances. However, without the 90% of sell-side effort, we may never get to choose, to exit and even to have the money to invest!
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.
This means that the discovery process of a hardware product is vastly different from the discovery process of a pure software app. It's not correlated to the app download slowdown we're observing now.
It is therefore entirely possible that a different scenario emerges: consumers buy a new connected hardware product, download the necessary app to run it and get hooked by the great UI/UX.
Note that any time of the day you could run into a random rich guy that appears to love your startup at the first sight like no one else. However, by taking his $200k (which means nothing to him) for a $20M valuation could block other real value-adding VCs to join the round.
Worse, it might block the next round completely as well if you can't grow the company fast enough to justify a valuation higher than $20M in the next round.
The key to the success of a consumer electronics hardware startup remains marketing and branding. In other words, how to sell products faster and achieve scale and defensibility of sort faster than others.
Every buyer in consumer electronics by default churns. Only when the company is able to lure them back to buy the next generation product or other related products would there be any meaningful discussion of future expected contributions.
And only product itself and branding would bring them back to buy the 2nd or 3rd products. CAC itself won't.
The truth is, today a lot of the expenditures categorized as marketing in accounting are actually channel costs. Specifically I'm talking about the on-line advertisements on Google, Facebook, Twitter or any other social network platforms.
Whether it's in the forms of texts, images or videos, the kind of on-line advertisements that lead the users to the product pages on the web stores usually do not contribute to the general perception of the brand.
As we see in the consolidated income statements of Alphabet Inc., in 2015 the company as a whole generated almost $75B worth of revenue, out of which (see blow) direct advertising revenues is about $67.4B, or about 90% of all its revenue.