By Steve Myers, CEO, Mindtribe
I’m long on hardware.
Every year at Mindtribe, we see more and more companies entering the hardware space and working on the next big thing. We’ve worked with 50 of them in the last 18 months.
Sometimes they’re tech giants, sometimes bootstrapped startups. It runs the gamut. And they’ve all got a great shot at building something amazing.
However, on the back of IoT, VR, and other hardware-related trends, we’re seeing a lot of new entrants into the space who have little to no experience or expertise. And that’s okay — but it means everyone has to do a little more leg work, and a little more research.
Especially VCs and angels.
Over the last couple of years, we’ve seen many software-focused VCs and angels who are investing in, and propelling, a new wave of connected device companies. These VCs have made their name in software, mobile, or e-commerce. But the companies they are investing in have a critical hardware component that is key to their success.
Unfortunately, we’re seeing too many of these VCs invest without the proper due diligence. A kickstarter campaign may prove product-market fit for the idea, but they have little understanding about whether or not the pitched product can be built — and built at scale.
This creates two intertwined problems:
These issues can easily sink a product development effort due to undisciplined feature creep, unanticipated slippage, and unnecessary stress.
For better or worse, hardware is not software. It has a longer lead time, and mistakes can be hard to fix. Typical hardware development methods (and pressure from impatient VCs) also makes it difficult for startups to absorb and enact market changes or learnings into an ongoing development process.
It’s important to get development efforts started on the right foot, and for that we need better informed investors who can better guide companies.
What I’d like to suggest are some due diligence guidelines for investors to see through the veil of a pitch, to then better vet and guide such companies.
Questions investors should ask:
Below are some baseline questions that investors should be asking an early-stage hardware company:
Is there a prototype and can I see it?
A prototype is going to be the first step towards a feasible product. Ask to see it, touch it, and poke holes in it. Companies need a prototype for user research and for speaking to manufacturers. Building prototypes for connected hardware products can range in cost from $5k (re-skinning off-the-shelf hardware and changing the form factor) to $50k (connecting a series of development boards, writing firmware, and a custom enclosure).
If a company does not yet have a prototype, you may want to start by considering a small angel round that covers the development of a prototype. This would allow you to invest a small sum with a very defined goal, and see how the team fares.
What are some of the development challenges?
There is always at least one major technical challenge when building a hardware product that is truly new in some way. The team is either building something new, adding in new features or tech into something old, or building something old into a new — likely smaller — form factor. These challenges need to be identified and understood, not glossed over, as they too often are.
Usually the challenges center around the effort needed to go from prototype hardware to a manufacturable product:
Have you run the prototype by a manufacturer or a manufacturing expert?
Manufacturers are the gatekeepers to whether a product sees the light of day. Many companies do not realize that manufacturers are unlikely to fight over the chance to build their product — in fact, it’s often the task of a company to convince a manufacturer that taking up their production lines will be worth it. Has the manufacturer (or someone with manufacturing expertise) seen the prototype and weighed in with their opinion?
Has your team built hardware before?
If not, you’ll want to make sure they are bringing on the proper technical advisory board, compiled of experts in the necessary hardware fields. Bringing in outside experts is often a key component to success, as they can identify potential pitfalls in advance. Hardware products usually take a number of disciplines, all of which are unlikely to be found in-house.
Major red flags
Red flags can provide some insight into whether or not a company can meet its milestones. These don’t necessarily mean a company will fail, only that expectations around timing and product quality should be adjusted.
A low quality schedule
A high quality schedule for hardware development takes reconciliation across a variety of voices within an organization, including product, business, and engineering. For example, you’ll want to look for product trade-offs that have been made between design, manufacturing needs, and marketing. A product plan with no trade-offs is usually a pipe dream and will eventually hit a wall, sometimes very late in development when sunk costs are huge.
In addition, look for contingencies — like buffers or iteration periods — that are baked into a development calendar. A schedule that is set up for the best case scenario, where everything goes right, is again unlikely to be feasible.
Unproven tech, but no tradeoffs
If the company is working with unproven technology, you’ll want to dig into their plans for productizing that technology. Is the team mitigating technical risk with the most valuable features, by showing two ways it can be built? Are they dependent on a single vendor for specific technologies or is it available from multiple sources, in case the primary source folds or increases its prices, killing your margins?
Tradeoffs are again important here. If a company is building their product into a small form factor, at low cost, with lots of features — well, they are bound to hit obstacles. Sure, the company’s technical team will always convince you that they can do it. They’re prepared for the pitch! But you should keep your skeptic’s hat on. Speak to someone who can do the technical due diligence, either a colleague or a third party engineering firm.
In the end, we often see company success dependent on the leadership having an open attitude. Early investment are about the people, and this is something that VCs have a good eye for.
But product feasibility is not something that should be glossed over.
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