All in + Entrepreneurship

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.

Like many hot startup subjects, crowdfunding is an oft-misunderstood one. At the Hardware Club we have more than 20 startups that broke $1M on Kickstarter or Indiegogo. In our portfolio companies along we have 3. We consider ourselves knowing the art of crowdfunding better than most average investors.

However, I constantly run into hardware founders that have very distorted views on crowdfunding. This article is to share my opinions on this subject as an investor. 

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 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.

However, unlike some VCs who chose to move to Silicon Valley to gain that prestigious postal address – or to Sand Hill Road if they really really desire to feed the fat belly of the landlords – we were born here in Paris. We have been feeding our energy to and getting fed with the energy from the Parisian hardware entrepreneurs for roughly 3 years. We were not follower but rather witness and contributor to this renaissance that's spelled in French. Even though now we diversify to global deals, we continue to see great startups with potential coming out of France – the deals obviously flow to us by default these days. With the right execution and the right investors, they have every bit as high a chance to become the next Nest, GoPro or Fitbit.

Therefore, I feel the question "Why France?", though kind of a passé within our firm, is definitely worth a explanation, for the sake of the foreign VCs that are puzzled by this phenomenon as well as our EMS and retail partners around the world.

Isn’t Chinese market supposed to be very price sensitive and foreign brands should suffocate in the face of the cheap local copycats? How could these stories be true? Even if we rule out Fact 1 using the all-too-convenient “Apple is an exception” excuse, it still doesn’t explain the other two facts about GoPro, a very young brand that didn’t go IPO until 2014, and Misfit, a much smaller startup that was only 4 years old.

The truth is: no consumers make purchase decisions completely out of rationality. In fact, the more developed an economy, the more its consumers make shopping decisions irrationally. And this of course also applies to consumer electronics in China.

By nature venture startups are both about risks and uncertainties. Risks are more or less visible to all experienced VCs in their respective realms. As long as VCs could do a fair assessment on all the visible risks, it won't stop them making investments. On the other hand, uncertainties are what keep VCs awake in the middle of the night – things that are out of control but that are crucial to the success of the startups.

In the world of hardware startups, manufacturing and retails are actually more like risks than uncertainties. 

In terms of "manufacturing", an experienced VC would be able to quickly spot all the weaknesses in a hardware startup in doing manufacturing: Is there already DFM or DFT in prototyping phase? If not is it salvageable? Are key components single-source? Are certain components srouced from during prototyping phase actually EOL ones? Is there any part of the product that requires special reliability test? Or standard electronics tests suffice? etc

Whatever the offering is and however the clients are, B2B hardware businesses almost always have to rely on door-to-door sales process to push revenue growth. Marketing does not have that much effect. Yes, one can join all the conferences, setting up booths & LCD TVs showing beautiful videos and all that, but ultimately the deals are closed by the companies' salespersons. This is why B2B sales or pre-sales people in the technology companies (including startups) have the sweetest bonus incentive structure compared to other employees in the company, because without them, the deals just won’t close.

This also means that B2B business expansion is not only slow, but also potentially expensive. And it’s really the slow part that really kills the vibe. Early-stage VC funds have a very high required rate of return to meet for their LPs. If a hardware startup does not have the potential to grow exponentially in revenues, it’s basically VC un-fundable.

On the other hand, consumer electronics has always been a marketing game. With an exciting product, effective and flexible marketing strategies and solid operations, a startup today has the opportunity to grow exponentially, as evident in the revenues of Fitbit in the past couple of years before IPO.

After more than a decade of lean startup revolution, I had thought that defensibility is a topic that most modern entrepreneurs, if not all, are familiar with. However, increasingly I'm running into entrepreneurs who are familiar with all the keywords such as growth hacking, cap, iteration, pivot or even scalability, but not very clear about defensibility.

This is quite unfortunate since scalability and defensibility are the two most important factors for VCs when evaluating investment opportunities. Any new business can be a good business, but only those that are both scalable and defensible are VC-fundable, due to the high-risk/high-expected-return nature of VC capital.

In fact, almost all of the consumption is driven partly or mostly by wants or desires, way beyond needs. Especially in the developed economies, it's actually easy to calculate the monthly consumption driven purely by needs, such as water, gas, electricity, public transport and health care. Almost all the rest is heavily influenced by wants or desires.

For food almost everyone spends way more than required to keep the body running healthily, and in various types of cuisine to keep us from getting bored. In terms of housing it's very common that people stretch their budget to go for an ideal apartment, either in rentals or especially in purchases.

And almost everything we buy on Amazon or in Walmart fit the wants or desires profiles better than needs: books, music, movies, consumer electronics, gardening, beauty, toys, sports, etc. In fact, take a look at the Amazon directory page and one would be hard pressed to pick out a product/service category that is truly "needed".