Timothy Lord for Slashdot: Brady, we’re talking about your new book, and your new is about hardware manufacturing and hardware startups. So, by way of background, can you explain – can you talk about some of the start-ups that you’ve been involved with?
Brady Forrest : Yeah. So, I was involved with some start-ups back early in my career, i2 and MongoMusic. One was doing spy-gen management, and the other one was doing kind of Pandora type service and that was back in 2000. Now I run Highway1, which is a hardware accelerator. We’re part of PCH, which is a big operation that does unique different manufacturing solutions for companies. So, they do little bits and they work with Apple and they work with other large companies, doing both like designing products, manufacturing products and distributing products and then selling products through Fab.com, which they own.
And Highway1 is their accelerator. And I came over to PCH to start it and run it. And we’ve had 46 companies go through, some of them companies you may have heard of, such as Navdy, which is a heads-up display for cars. They were in our first class; Ringly, which does Bluetooth notifications for women; ModBot, which is a modular kind of industrial robotics system – and they just raised a round from Formation8; and some other folk and Autodesk. And then Cue, which does at-home medical diagnostics, so you can test at home if you have the flu, what your inflammation levels are, if you’re fertile. And so we look for hardware startups only that are doing high-tech companies and that have a software component.
Slashdot: Okay. So what are some things that distinguish a hardware startup from software startup when it comes to logistics? Because we’ve heard of companies that we know that is happening that you can have remote workplaces. I’ve always worked from remote. And you can work on a database project from Tibet or from Zagreb or anywhere else in the world. When it comes to hardware, can you get enough from things like CAD visualization and video chats and things like that? Or do really have to sort of be in one geographic space?
Brady: The thing with hardware is that everything takes longer. So, you design your board and then you usually will send it out to get it made. And so, you wait a couple of days and then if you have made a mechanical enclosure, you print that and then to test it, you need a couple of days with that device. And so hardware like to – actually like try out a prototype, it usually takes a week to make it, a week to test it and then you're back to making the next version again. And so it is – all are going to move faster if the people are co-located.
That being said, there are tons of teams that aren’t and you know, you’ll end up having kind of the master builder in one spot, who is working really – he's the person or she is the person who brings it all together and makes that prototype, but you can send in files remote and video chats go a long way. So I’d say it's more about it takes longer than they have to be geographically close together because so much of the work is actually sent out to contractors and firms that will do a one-off board for you. And the work isn't necessarily even done in your own lab.
So, they take advantage of software – of like software- like team structures. The other big thing that I think really matters though is the number of people. Software, one person can build a website and that just generally is not the case with hardware. There's so much stuff that has to be done and it’s so specialized that you’ll need an electrical engineer, you'll need a mechanical engineer, you need someone who knows firmware and then you usually need someone who knows software. And so at minimum, you're looking at four people and this is to make the prototype. When you get to manufacturing, you’re going to need a manufacturing team that knows how to do a supply chain, logistics, supply base, which is actually finding the parts at the right price. So, the number of people changes.
And then the other huge difference is the amount of capital you need. Because again with software, you can scale up very quickly with Amazon Web Services, or any other hosting service. You don't have to actually lay out much money to buy the servers, whereas with a hardware startup, you have to buy materials and when you get into manufacturing, you have to fund the inventory and so that’s why you see hardware startups raising significantly larger rounds. I kind of liken it to – back when Friendster first started, they raised a fairly large round of $40 million to build out a data center. Facebook, a couple of years later, just used Amazon Web Services. We are still in the Friendster time for hardware where there is no Amazon Web Services for hardware, and startups have to fund all that inventory themselves and it just takes a lot of time and so those are the three big differences: takes longer, more capital intensive, and you need more people.
Slashdot: One thing you just mentioned is actually the need to have things done by specialists and to send off work elsewhere. One of the things you talk about at some length in your book is about manufacturing at scale because you can always do a one-off print if you have a 3D printer and you have an object that is amenable to that process, but what are some numbers that you say, you can't actually make 10,000 of your new widget with 3D printers, it would take too long, the material is expensive. Talk about a little bit what makes manufacturing at scale, where does that start off and what does it bring with?
Brady: Yeah. Well, when we're starting out in like – in our workshop at Highway1, we’re designing for building one to ten of something and anything more than that, it would take you too long to actually produce them. At that point, we start recommending people send things out. And you can find local manufacturers who will actually do that for you and it's when you start to hit maybe like 5,000 units and it could be 3,000 units, it could be 7,000 units, depending on economics that you want to start looking at overseas manufacturing. But until then, it often makes sense to use your local suppliers. That way you can figure out and iterate the products, learn how to make it and then go overseas, often that is to Shenzhen and that's where PCH does their primary operations. So I definitely have a somewhat biased point of view there.
But a lot of our companies, they'll start off doing U.S. manufacturing when they're just doing a couple hundred and trying to figure out and once they feel like they have the products that they want to produce and that they have the pipeline, then they’ll move over to China as soon as they can, on the idea that they can then start to ramp up very quickly because the cost differential would drop substantially. And one thing a lot of companies don't think about is NRE, that's the non-recurring engineering cost. That's basically line set up. And that can be quite expensive, and so you have to look at like how am I going to amortize that over the number of units I'm producing. Yes, it can cost several hundred thousand dollars to get that – for NRE and if your product doesn't have the margins to afford that, then you can run into some problems somewhat.
Slashdot: Speaking of money that it takes to get a product off the ground when it is going to have that sort of expense, right now something of an obvious thing to do is you put your project on a place like Indiegogo or Kickstarter. Is that in fact the place that most hardware startups should really think about first, it? Crowdfunding? You talk about some other ways of raising money as well.
Brady Forest: Well, if you're doing a consumer device and you think that your crowd is on Kickstarter or Indiegogo and understands what presales are, then there's no way you can't consider it. But I've seen companies like, say, Lively, which is a PCH company, they are selling a set of sensors for the elderly. It's not an impulse purchase, it’s not the type of thing you're going to buy from a crowdfunding site, and so their campaign failed. The company is obviously doing fine, they are still moving forward, they have raised additional rounds, they are shipping tons of products, but that initial launch strategy didn’t make sense for them.
And so the first thing is, you have to say, well, does crowdfunding make sense for the product that I’m making? So if it is, then you need to look at how much does it cost to actually produce the campaign and do you know when you are shipping it? So if you know that you’re going to make this product and you’re going to raise money to do this, then crowdfunding is just another step. So in that case, what I recommend is people go out, they raise some money, they build a prototype, they start to lineup their manufacturing with some caveats around how the crowdfunding campaign is going to do, and what the costs are going to be, and where they will get things done, if it goes from 1,000 units to 10,000 units to 100,000 units.
So before they go to crowdfunding, they want to do it from a position of strength. They want to have the money to pay a really good video creator, and make sure they have their social media lined up and make sure they have PR lined up, and make sure they have their manufacturing lined up. So that when they say to their users or their potential customers, like, oh we’ll ship in six months, they know that they will ship in six months. Now if you are not that type of project, if you’ve gone out and you’ve tried to raise, or that’s not something that’s interesting to you, then yeah crowdfunding is a great path and one that potentially can help you judge whether or not you should pursue this going forward. But in all cases, I’d really recommend that people set the limit fairly high for the threshold of whether or not they do the project. Because the worst is to end up making something like 500, where it’s going to be a really high unit cost, you probably didn’t charge enough, you didn’t actually get that much capital for the NRE aspect of things and it’s a lot to assemble.
Slashdot: And then you are on the hook for it?
Brady: Yeah. And then you are on the hook for it. And so we just had one of our companies FishBit, they did what we’re calling a Kickstarter beta where they launched a crowdfunding campaign, they had raised a little money, so they had a nice video but they limited it to 30 units. They sold out in 24 hours until they were able to show VCs like, oh look we actually can sell, but because we don't our manufacturing done and we’re still iterating the product, we’re going to put this in the hands of users, validate IRDS and then assuming everything is going well, we’ll be able to launch a real Kickstarter in the fall with all these customer success stories. And so they are prepping for that right now, they're like doing assembly at Highway1 as we speak.
The other story I’d like to pullout is Particle formerly Spark, which makes the Spark Core. When those guys first got started, they were over in China and they wanted to make a Wi-Fi enabled light bulb, and they launched a Kickstarter campaign, $250,000 was the limit, and it failed. And so they are like, well maybe we don't want to do a light bulb, so they then decided – they then looked at how hard it would have been to create a Wi-Fi connected device and decided to release the Spark Core, which raised $650,000 and created a whole new company and now Particle is off to the races.
If they had actually done the Wi-Fi enabled light bulb, it would have been a crowded market and maybe they would have raised that $250,000, but they would be slogging away for light bulbs as opposed to having created like what they should have created from the beginning. So I always look at crowdfunding as like a double-edged sword. You get the money but you’re locked into that promise, and if your ducks aren’t in a row, you can really screw yourself and your company.
Slashdot: I think besides that kind of risk and other thing that stops lot of people probably from pursuing a crowdfunding idea, or any manufacturing idea is they have an idea but they don't have the money to do it. That means that they tell someone else, there's some risk, I think, some perceived risk I believe that someone is going to take that idea and run with it, and not give them credit or cut them out of involvement. So is that sort of fear of sort of disclosure, is that warranted or is that an overblown risk? If you come up – if somebody comes up to you with a great napkin sketch to you and says, Brady here's a thing I’d like to do, what’s to stop you from giving that to your friend with a factory and going with their idea, what sort of ways can people protect themselves and what should they think about with this?
Brady: Well, I mean if someone comes up to me, that's not in my interest, because my whole business is based on reputation.
Brady: Back when I was at O'Reilly, I would learn plans at planning conferences and now I learn product plans to help companies. But I think in general it's something people should be smart about, but they should – more ideas have died in darkness than in sunlight. So you're more likely to not get help, not get money, not be able to recruit and basically not succeed if you keep your idea to yourself, because 99% of an idea's success is the execution, it’s not just the idea. And you're not going to be move very far by yourself unless you happen to have a factory. So there are things that people can do to make sure to guard against this. One is lookup who it is you’re sharing your idea with, make sure you can trust them, make sure they have a good reputation; two, if there is very specific technologies, you can keep that – you can keep some of the secret sauce hidden and you can wait until an NDA is in place.
And then if there are specific technologies involved, you can hide that, and you can just explain what the device does, not actually how it does it. Now when it comes to NDAs that can work with potential employees, potential partners, it won't work with investors. Investors will not sign NDAs. So you have to realize that and again, this is where you have to watch and look at the reputation of who you're working with. And so it’s generally fairly public, what other companies’ investors are in, so think about who your competitors are, don’t go to any of their investors and always ask if they have any conflicts after you explain the space that they are in.
Most investors are honest and will reveal these things and will end the meetings if they realize they have a conflict. And even if they do have a conflict in many cases, they can keep their mouth shut. I've been in that situation where I’ve explained, hey, I have a conflict here, but I'm going to keep this between us, it’s up to you if we proceed, and I've never revealed anything. And I feel most investors would follow suit. So really it all comes down to the people you're talking to and remembering – it comes down to trust and reputation, and realizing that the reason that you are seeking other people out is because you need help, and they are not going to help you, if they don't believe in you and if you don’t believe in them.