All in + Branding
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.
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.
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 Taobao.com 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.
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".
A good example would be our portfolio company, Prynt. I wrote about the emotional aspect of their products as well as defensibility in another article here. But essentially we can say that Prynt is a polaroid smartphone case that is NOT.
For Prynt it is not really about printing physical photos and sharing them with friends and memories. What made it hugely successful on Kickstarter was the AR-style video playback part. Like the campaign said, "your memory comes alive". In other words, Prynt is actually in the business of keeper of the memory. By storing precious living moments for users while triggering the playback via physical photos, Prynt avoids all the awkward and oft-tried models of tagging, categorizing, face-recognition, etc on other big and small video platforms. If they can manage the memories of people properly while enabling a range of memory-related services on their crowd platform, they will be satisfying their users much more than just providing a printer or a video platform or the combination of the two. They will become the keeper of the memory and see a lot of smileys on their users' faces.
In the world of marginal cost of zero and ultimate productivity, there's really no argument why one should work to earn the right to survivorship. This argument might sound bizarre to the majority of people on this planet living in capitalism, which was heavily influenced by the Protestant ethic according to Max Weber. However it suffices to recall the utopia idea born in Ancient Greece, when philosophers did nothing but to debate and to chat in the plazas and the fora.
What allowed the ancient Greeks to live such spiritual life was the slave system more than 2,000 years ago. If the slave system is replaced by robots and machines, it's not that difficult to envision that human beings live in the same care-free state of ancient Greek patricians. The only difference here is that this time it applies to ALL HUMAN BEINGS on earth, instead of the privileged few through blood or capital inheritance.
Pebble Time will ship in May. Unlike most of the KS projects, it probably won't delay. Backers are probably thinking about the same thing. If this is true, it means that there's a group of customers that are willing to pay in advance and wait for 2~3 months to get an exciting hardware product. If this hippie consumption behavior establishes itself on a more consistent basis, it means that truly exciting hardware startups now have a chance to enjoy multiple rounds of working capital sponsorship from their customers. In other words, they can delay moving into the much-feared retail games with Best Buy or Amazon as much as they could. Avoiding completely traditional and eCommerce channels also seems to be possible given Xiaomi's success in selling everything itself, on-line. This is one big opportunity that all hardware startups should think about or even plan around
My theory is, lean startups with its low entry barrier has become such a trend that most of the time the key is execution, not the idea. This is a good thing since idea without execution has zero value. However, this also means that multiple products addressing a similar pain point will have to fight their teeth off for arguably the most precious resource of today's world — the users' time. And to achieve that, these startups need more and more capital for their Chief Growth Officers or Growth Teams to burn so as to grow faster than their competitors and reach dominance first.
This is one of the reasons why Facebook is making so much money these days, as startups burn investors' money to increase installations of their apps or trials of their services via expensive advertisements on this vastly addictive social network. This part is not unlike the dot-com bubble of the late 90's when startups bought TV commercials to advertise their websites.
And if this execution can be achieved, then the investment question about whether they would be able to generate a long-term revenue stream from rolling out newer and better polaroid cases or make money from (re-)selling the special polaroid papers becomes sort of irrelevant.
By archiving and safe-keeping the precious memories of their royal customers, Prynt will be able to fend off competitors who attempt to roll out potentially better and cheaper polaroid cases and avoid competing with grey market papers.
That'd then put them in the GoPro realm of intouchabilité, which is exactly why we chose to invest in Prynt when we met the team last year!
For EMOTIONAL consumption, consumers go after the perceived values. It's hard to quantify or even describe the benefits one gets from this kind of consumption, but the perceived satisfaction could overwhelm entirely the satisfaction on the RATIONAL end by a couple of orders. Luxury and fashion apparently falls into this end despite its relatively limited reach. On the other hand baby and pet products conquer a much larger percentage of consumers emotionally.
On the EMOTIONAL end, vendors have much higher pricing power. The marketing focuses on creating different perceptions in order to differentiate, instead of describing the benefits and costs. You will never see Louis Vuitton brag about its leather being 127.99% better than that of Hermès. Johnny Walker's TV commercials go for group identity instead of detailing the quality of the malt and the water it uses.
On the EMOTIONAL end, consumers could not easily compare the benefits of one product to those of another. That opens up the door for vendors to create much higher perceived values (and therefore satisfaction) for customers and avoid transparent competition.