I’ve suspected for some time that hardware, i.e., real life products, are tougher to successfully commercialize than software products.
For one thing, the cost of hardware product development is much higher. Assume that the hardware design cost is roughly equivalent to the development cost of a software product. For hardware, you then need prototype tooling, pilot tooling, and production tooling – all expensive. Real world testing and validation is time-consuming and also expensive. Animal and human clinical testing is complicated and risky. Then there are the costs of inventory and physical distribution as well as warranty and repair. Lastly, the profit margins are much lower than software!
“Starting a venture is hard — actually, if people knew how hard, they wouldn’t do it — but starting a hardware venture is three times as hard,” said angel investor and Txtr CEO Christophe Maire
The premise of this article is that there are a few things one can do to mitigate the risks inherent in hardware commercialization (these mitigations are not limited to medical technology):
- Launch the product online
- Simplify, simplify, simplify
- Combine hardware with a service
Starting with online sales and distribution limits your financial exposure by not having to stock a distribution channel/pipeline (assuming you can find distribution partners as a startup). You can also defer the substantial investment needed for a sales force. The upside is that you still have a global footprint. As demand and revenues grow, you can either bootstrap growth using early revenues or use the growth as evidence of demand to obtain angel or venture funding.
The big challenge with online distribution and sales is creating awareness and demand. Your online marketing skills will be put to the test. Of course, you could hire a freelancer or consultant for a short term project to “prime the pump” and get the product launched.
Creating online stores for physical products has never been easier or less costly. You can set up a store at Amazon.com for example. Amazon will take care of everything related to online sales, for a hefty percentage of the action, of course. You can even drop ship from your warehouse as the orders roll in. Companies like UPS and FedEx will physically store your inventory in strategic locations to minimize shipping time and customs delays to overseas markets.
Simplification is important, especially for a first product. You should select your most likely customer and develop a minimum viable product for that customer type. Extra features can be added later.
The prime objective is to get to market and scale up as quickly as possible. Since seed and angel funding is very difficult to obtain for early stage hardware startups, you will probably be doing a lot of bootstrapping and trying to save money everywhere possible.
Simplification can also be a competitive advantage. For every early customer you acquire, that’s one less customer for your competitors (unless you screw up the relationship with poor quality or unrealistic promises). Once you have established that early relationship, customers are more patient and more likely to wait for the enhancements you showed them on your product roadmap.
Finally, combining hardware with a service puts your startup into a different class altogether. You can create a recurring, high margin revenue stream in addition to ordinary product revenue.
There are obvious services like training, extra warranties, service and maintenance contracts, leases, short-term loaners/rentals and hardware upgrade/refresh cycles. There are new services being created every day like cloud-based storage of the data generated by your hardware. Many companies are developing mobile and desktop apps for remote viewing, control, or manipulation of their products and the data they generate. You may be able to offer data analysis or even offer access to anonymized, pooled data from all of your customers. That could be a strategic advantage for your customers!
Takeaways: Hardware commercialization is hard. Because we still live in a physical world, there will always be a need for tangible products. Because hardware development is expensive and risky, always try to limit your risk and exposure. Startups look a lot bigger online – use that to your advantage. Keep your first product simple. Ruthlessly eliminate any features or functions that are not necessary to get a sale. Lastly, look for alternate ways to generate revenue, especially recurring revenues through value-added services.