Build it and they will come! Not quite.

1. WHY MAKERS
FAIL AT RETAIL
LEAN HARDWARE
BY @HAXLR8R
BENJAMIN JOFFE
CYRIL EBERSWEILER

2. WHAT THIS IS ABOUT
How do hardware startups scale?
How to finance growth?
Should you target WalMart?
What are the pitfalls when scaling?

3. TWO RETAIL MYTHS
LET’S DO WAL-MART ASAP!
PUT IT ON SHELVES AND IT WILL SELL

4. REALITY
RETAIL CAN KILL YOU

5. 1.
SCALING

6. YOU SHIPPED TO YOUR BACKERS, NOW WHAT?
• KickStarter backers are (very) early adopters
– They are high tolerance innovators
– They pre-pay and buy direct from you
– Best cash flow ever!
The second batch is the hardest
– Have you created enough demand?
– How will you finance it?

7. BEWARE OF PREMATURE SCALING
#1 cause of startup failure
– See Startup Genome report
– Even more true for hardware
Scale too fast and you’ll burn your cash
– Retail can cost a lot
– It might not even be a good idea

8. BEWARE OF PREMATURE SCALING
Startups should
know their
return and
defect rates
before they try
to scale.
“They can learn this via online sales or small
boutique store sales.
Returns and price protection alone can run up
to 20% for some products that were rushed to
the market.
Maybe the second version is when the scaling
should happen.”
Charles Huang
Co-Founder, Guitar Hero
Co-founder, Green Throttle Games

9. BEWARE OF PREMATURE SCALING
Retail is not
a sprint but
a long slow
build, so take
one step
at a time.
“Before market fit startups should only be
selling online and with select specialty retail.
This way you learn what is and isn't working to
get a new customer.
Once you have reached market fit, know what
works to reach new customers, and people are
asking for your brand, you can build out retail.”
Marc Barros, Founder, Contour Cameras
Co-Founder, Moment ($280,000 on KickStarter)
Author, How to Build a Hardware Startup
Hardware Blogger, MarcBarros.com

10. 2.
THE RETAIL CHASM
ALSO CALLED BRIDGE OF DEATH
How’s cash flow?

11. CROSSING THE CHASM
The Long March post-crowdfunding
– Monthly sales might drop to 1/20th of your KickStarter raise
– Got $200,000? Now you’re clocking $10,000 per month
Get paid last
– People are not paying you first anymore
– Now you need to front the cost of production
Scaling
– You need to sort out operations
– …and be able to finance inventory for several months!

12. TIMEFRAME
$
PROTOTYPING
PRODUCTION
SCALING
ARE YOU REALISTIC? SOME THINGS TAKE TIME
ARE YOU TOO SLOW? MAYBE YOU NEED HELP
3 months ~ 2 years
3 months ~ 2 years
1+ year
TIME

13. THE CLASSIC CHASM

14. THE RETAIL CHASM
$
PROTOTYPING
Accelerators
Founders
Angels
Friends
Family
Fools
PRODUCTION
SCALING
RETAIL CHASM
Crowdfunding
Sales
Factoring
Banks
VCs
Pre-orders
Bridge of Dea
th
TIME

15. 3.
TIMING FOR SCALING

16. WHEN TO DO WHAT?
Online
– Selling direct offers the highest margin
– Against other e-tailers, offer service (e.g. personalization)
– Amazon can reach millions
– Many e-stores = only marketing. No service
Offline
– Avoid big box retailers until they come to you
– Specialty retailers have to be serviced properly
• They are your test markets. Find your Peoria.
• Research personas, find the right demo, location or channel.
• You can test prices too!

17. SCALING STEP BY STEP
$
Big box
retailers
Specialty
stores
Online
retailers
Bridge of Death
Direct
TIME

18. RETAIL CHANNELS
If you cannot get
factory credit,
do a year of sales
online or with
distributors to
build sales history.
Then get credit
and do retail.
“Online still leaves you exposed but offer much
higher margins and control over the customer
service experience.
Distributors are a way to get paid sooner and
scale more smoothly. Some might avoid
distributors altogether until they can take the
credit hit and do retail.”
Daniel Cowen
Co-founder, 3Doodler
$2.3M on KickStarter

19. RETAIL CHANNELS
Demand for
your brand
has to be
greater than
the number
of points of
distribution.
“Get to the point where people are walking into
the retailer, asking for your product.
And don’t think online is small: Amazon has way
more customers than Best Buy or Target. You just
have to work really hard to make sure people know
who you are and go buy your product.”
Marc Barros, Founder, Contour Cameras
Co-Founder, Moment ($280,000 on KickStarter)
Author, How to Build a Hardware Startup
Hardware Blogger, MarcBarros.com

20. HARDWARE HERO: XIAOMI
• China’s “Apple”
– Founded April 2010 by Jun LEI (Lei Jun)
– 18.7 million phones sold online only in 2013
– Hired Hugo Barra, VP PM for Android in August 2013
• Latest valuation is over $10 billion
The
MI3
sold
100,000
units
in
90
seconds

21. 4.
DISTRIBUTORS

22. THE CASE FOR DISTRIBUTORS
Benefits
– Reach wider distribution
– Scale more smoothly
– Shed some financial risk
Drawbacks
– An extra layer
– Lower margins
– Less control over customer experience

23. DISTRIBUTORS
This is about
building a
relationship
and knowing
as much as
you can
about your
future partner
“Can we work with them as people?
Are they financially stable?
Do they have good references?
Can they ramp up to our expected minimum orders?
Can they grow their scale/reach over time?
Are they able to take the payment terms we are requiring?
Do they understand the product and what we are trying to
do as a business?
Are there specific sectors in that country that we want
tackled and can they do it?”
Daniel Cowen
Co-founder, 3Doodler
$2.3M on KickStarter

24. DISTRIBUTORS
Distributors
probably know
the 'big box'
retailers
already, so its
very much a
two-way (push
pull) activity.
“Making 'friends' with your dream distributor from the
outset is worthwhile. Distributors DO offer ways to test
products (regionally, demographically, volume related).
If the startup researches among customers and store
managers on the ground, then it is much easier to
leverage that at HQ, and then with the distributor.
It is always worth stalking buyers etc. using social media
or LinkedIn groups and asking for advice.”
Alan Clayton
Roaming mentor
SOS Ventures

25. 5.
BIG BOX RETAILERS

26. WHAT BIG BOX RETAIL IS
Retailers profit on margins, selling fast
(inventory velocity) paying you last
Retailers are order takers.
You create demand.
Proper in-store placement is critical

27. HIDDEN COSTS
Registration fee with purchasing department
Catalog placement
In-store placement costs
Marketing materials
Custom demo products
Training fees
Discounts for special events
Mandatory media plan
Price Protection
Returns

28. MORE RETAIL PAIN
Can you finance and deliver large
volumes across many stores?
– e.g. 100 products x 200 stores
– Penalty for late delivery!
Return of unsold inventory
If your first product does not sell,
forget about the second

29. 6.
FINANCING RETAIL

30. CASH FLOW MATTERS MOST
Generally, factories get paid first (by you),
retailers second (by their customers),
you get
paid last
– Keep it this way and you might dig your own grave
– More money will not solve this
– The Bridge of Death can be a Long March…
Positive cash flow is much better
– Can your factory get paid after delivery?
– Can the retailer pay you upon order or delivery?

31. SAVE YOUR CASH FLOW!
Pre-sales (best!)
Credit from supplier (it’s like a bank loan!)
Factoring (purchase order financing)
Bank credit lines
Revenue-based financing
VC (most expensive money!)

32. SAVE YOUR CASH FLOW!
Our supplier was a
large toy factory in
Guangdong that let
us pay them 60
days after shipping.
Nabaztag “rabbit”
150,000 units sold
I think they were used to work
with guys like WalMart and
being paid last.
Olivier Mevel
IOT Pioneer
Co-founder, Violet (maker of Nabaztag)
Co-founder, 23 de Enero (IOT Agency)

33. SAVE YOUR CASH FLOW!
“Direct sales bring much higher
margins, but with less reach.
How elastic is your demand?”
Omate TrueSmart
$1M on KickStarter
ROCKI Music System
$220,000 on KickStarter
As a startup never offer
credit terms to your
customer until you fix
your financing.
Nick Yap
Co-founder, Omate
Co-founder, ROCKI

34. FUNDRAISING RULE OF THUMB
When you get offered a good deal, take it
– Fundraising can be a full-time job for months
VC
– $1m+ on KickStarter + profitable on paper
– Or $3m+ yearly sales
Angel / Seed
– Pre-KS based on Prototype (is it necessary?)
– Over $100k on KickStarter
Do you really need to fundraise?

35. SUMMARY

36. LEAN RETAIL RULES
Keep demand higher than distribution
Your customers are your best investors
Retail is not a sprint. Learn at each step
Cash flow is king

37. ABOUT HAXLR8R

38. Your Hardware Startup Accelerator
From a prototype to a real businesss
In SF Shenzhen (hardware capital of the world)

40. LEAN HARDWARE RULES
“NO HARDWARE PLAN SURVIVES CONTACT WITH A FACTORY”
Cyril Ebersweiler, Founder of HAXLR8R
1.
2.
3.
4.
5.
Design with the right components
A prototype is ready when it can be manufactured
Your factory is your most important partner
Pick the right business models
Be memorable

41. GREAT MAKERS SHIP!
APPLY
WWW.HAXLR8R.COM
benjamin@haxlr8r.com
@benjaminjoffe
cyril@haxlr8r.com
@cebersweiler