The 6 Parts of a Hardware Startup You Must Conquer to Succeed

Even though I’m an electrical engineer that specializes in product development, I still think that most entrepreneurs tend to over-focus on product development.

One of the biggest mistakes I see entrepreneurs and startups make, is they spend years on product development without thinking about any other parts of the business.

In the mind of many entrepreneurs bringing a new product to market is a two-step process. First they make it, then they sell it. Oh, if only it were that simple!

This article was originally published on PredictableDesigns.com. Download their free cheat sheet 15 Steps to Develop Your New Electronic Hardware Product.

NOTE: This is a long, very detailed article so here’s a free PDF version of it for easy reading and future reference.

But product development is only one part of a hardware business. If you neglect any of the other parts of the business, there’s no way you’re going to ever succeed.

Of course, you need to focus on product development, but you can’t focus solely on it.

In this article, I’m going to discuss the six different parts of a hardware startup that you need to focus on, and when you need to focus on them.

The first three parts of the business that should be an early priority for you include marketing, product development, and finances.

The other three parts come into play once you have a product ready to actually sell. This includes sales, operations, and customer support.

Part #1 — Marketing

Marketing should receive your attention on day one. I find this to be an area that most people neglect. They may eventually get to it, but if you wait too long to start marketing you will encounter problems.

Instead, focus on marketing simultaneously while working on product development.

A lot of people confuse sales and marketing, and in fact the two commonly get grouped together. But they are fundamentally very different parts of the business and need to be treated separately.

Marketing is the process of making people aware of your product or your company. Once they are aware of your company and products, then sales comes into play. Sales converts these potential customers into actual customers.

The two steps have to be treated separately. You follow very different steps for marketing versus sales, and they happen at different times.

You need to begin the process of making people aware of your product and your company starting on day one.

Whereas, the selling process won’t begin until you, at the very least, have a prototype that you can present to potential customers.

You really can’t begin the sales process until you have a high quality prototype to present, but you can and you should begin marketing as soon as possible.

From my experience, your best shot at marketing is online marketing, or more specifically content marketing.

Once you decide you want to pursue your product idea, you need to first of all set up a website and a blog. Begin creating lots of high quality content that appeals to people who would be interested in your product.

This is the main marketing strategy that I follow for Predictable Designs — creating useful content. You need to do the same thing for your own specific audience.

Creating relevant content is one way to begin building up your audience and awareness of your product. In fact, you can do this well before you are ready to even reveal the product details to the public.

You want to create content that will gradually bring more and more people to your website. Then you collect their email address typically in exchange for something useful, like a helpful PDF checklist, cheat sheet or article.

Asking them to just signup for your newsletter doesn’t work very well, and you need to give them something of value.

For example, if your product is a child safety device, then you could start writing about various topics related to child safety and parenting.

Begin collecting email addresses to build up an audience that you can contact and reach out to at any time. You don’t have to wait until you are ready to sell though, and this audience can provide you valuable feedback to help you fine-tune your product concept.

The thing to keep in mind, and why you have to start on this as early as possible, is building an online audience takes a long, long time.

In fact, it takes years to build up a sizable online audience. For example, it took me over three years to build up my email list to 20,000 subscribers. You may read stories online of people building audiences of tens of thousands of people in only a few months, but that is exceptionally rare.

You can probably expect to get around 2,000 to 5,000 subscribers within a year, if you generate regular content and follow solid SEO principles.

The second year you may get up to 5,000 to 10,000 subscribers, then maybe by the third year you’re up to potentially 10,000+ new subscribers per year.

It’s a really slow process, and it takes a lot of sustained effort and time. You have to create a lot of content. Writing a blog post every month or two is just not going to cut it. Search engines recognize and value websites with original content posted once a week or more.

This allows you to eventually get noticed by Google, and that’s what’s going to drive people to your website. But this too is a slow process. You should see some early increases in Google traffic, but from my experience it takes 12–18 months of regular blogging before Google begins sending you major traffic.

Once there, you can collect reader’s email addresses so you can stay in contact with them. Now you have a targeted audience that you don’t have to pay for through online advertising.

If you start this process early, then by the time your product is ready to actually launch you should be able to have at least several thousand subscribers.

Having this audience will also be extremely critical for crowdfunding. You will not have a successful crowdfunding campaign if you do not have an online audience beforehand.

It takes your audience of people that already know you, trust you, and have a relationship with you, to get the ball rolling on a crowdfunding campaign.

No one wants to be one of the very first investors, especially if they have no history or relationship with you. Focus on the people that you have a relationship with already. Focus on getting that audience to invest first in your crowdfunding campaign.

Having an email list to send to your campaign can be the catalyst that gets things started. Pebble is a great example of this effect.

They were a hardware startup that develops smartwatches. During product development, which took them years, they set up a website and slowly built up their online audience. By the time they had a prototype and were ready to run a crowdfunding campaign, they had a few thousand subscribers.

They sent all their subscribers to their crowdfunding campaign, and that got the ball rolling. They ended up having the most successful crowdfunding campaign in the history of Kickstarter.

The founders of Pebble have said that having this online audience was fundamental for the success of their crowdfunding campaign.

#2 — Product Development

Product development is a major part of bringing a new product to market. Of course, if you don’t have a developed product, you have nothing to sell.

Product development is a massive obstacle for anyone launching their first product. For some people, it’s technically overwhelming. If you don’t do the development yourself, it can also be financially overwhelming.

There is no such thing as a simple product. Even developing a widget to bring to market is a challenging process. However, the complexity (and cost) of product development increases with the product complexity.

But it’s never cheap or easy to develop a new product, even a simple one.

In my experience most people new to product development already know this step is critical. In fact, too many people think product development is the only step they should focus on.

Product development tends to be the first major obstacle that most entrepreneurs are going to face, mainly just because of the cost and the complexity involved.

Because it’s the most obvious first step, so many people focus solely on it.

Unless you are developing a product just for fun with unlimited funds, you need to focus on all the parts that comprise a successful hardware company.

Since most people over focus on product development, and because it’s a topic I write about frequently I’m not going to go into great depth in this article. The emphasis of this article is really the other five critical parts of a hardware company that are commonly neglected.

#3 — Finances

Early on you will need to focus, unfortunately, on finances. Money is, of course, important regardless of the stage of your business. In the early days, you will need to fund your product development and some of your marketing activities.

As your business grows past product development, funding your inventory becomes an issue. Cash flow to fund inventory is going to be the main focus of your business once you get past a certain point.

You’re going to have to either fund this yourself or through friends or family. Later, once you have a working prototype and ideally some successful sales under your belt, you can try raising outside funding.

It’s really hard to raise money from anyone without at least having a high-quality working prototype. In most cases, an Arduino-based proof of concept prototype isn’t going to cut it for getting any significant outside funding.

Managing your finances is going to be a huge part of your business from day one to 10 years. To be successful, you have to be in control of the finances and be able to manage all the expenses.

To be able to do that you need an understanding of all the expenses and costs that lie ahead. One of the most important things financially is just having a plan. Don’t wait until you run out of money to figure out what you need to do.

You need to develop a financial forecast so you know exactly when you need to have money available.

Keep in mind it is always more expensive to do things faster. If you do it slowly, it allows you to spread out the cost over a longer period of time. This is especially critical if you’re bootstrapping your business.

In regards to cash flow, let’s look at the example of selling to retail stores. After you ship retail stores your product, you’re going to have to wait 30 days or more before you get paid. It may not seem fair, but this is the way it is done.

Yet your manufacturer is almost surely going to want you to pay upfront before manufacturing can begin. This means you have to fund the inventory for at least three months. This assumes it takes a month to manufacture the order, a month to ship it by sea vessel, and another month before your customer pays you.

You will have to be able to fund the inventory for these three months, and often longer. Fortunately, if you get an order from a large customer, other funding possibilities open up.

PO financing and invoice factoring are two of the better ways to finance your inventory. You are essentially able to get a loan with proof you have a purchase order or an invoice for a large customer. Instead of this loan being based on your credit, it’s based on your customer’s credit. This can be a great funding strategy if you sell to large retailers or distributors.

You need to understand all of your financial obstacles well in advance. You will need to constantly formulate and adapt, trying to figure out how to get past any financial obstacles.

Now, we move past the three parts that you need to focus on from day one which are product development, marketing, and finances.

Up until now you have only been spending money. Finally, it’s time to focus on bringing money into your company!

#4 — Sales (and Pre-Sales)

Once you have a prototype, then you can begin selling through a crowdfunding campaign. In this case it would be pre-sales because you don’t really have a product to ship but you do have a prototype.

If you want to go after large retailers or other large companies, you can begin that process once you have a prototype. You don’t have to wait until you have product ready to ship.

Retailers would prefer you have inventory ready to ship, but in general, the earlier you start on things the better. It’s a really long process to sell to retailers and get them interested in placing an actual order. So it’s best if you can start as early as possible.

The first sales for most startups are going to be through your website. You can’t wait until this point to build a website for online sales. As I’ve already explained, it takes a long time to build up website traffic.

At the very least, it takes six months before Google will send any significant traffic to your site, and even then it’s going to be pretty minimal.

There are several main benefits to focusing on sales through your website. The first one is you get the highest possible profit margin. There’s no one else to take a cut out of your sales. You don’t have distributors or a retailer taking a cut of the profit. It’s just your manufacturer and you.

This allows you to have higher margins which you’re going to need. You will be running at a very low manufacturing volume in your early days, especially for your first few orders. You won’t be getting the greatest pricing at low volumes, so you may end up having to sell your product at a loss until you get things going.

If you sell through your website, then you may actually make some profit on your early sales units. If you make some profit, you can reinvest it towards filling your next orders. This is really critical when growing your company. The higher your profit margins, the faster your company can grow.

Crowdfunding is a first way to sell a product, but its more of a pre-sale. I’m a huge fan of pre-selling your product. The earlier you can start selling and getting feedback the better.

Pre-sales help you find out if people really are going to buy this product. Knowing that is like striking gold. Remember, the opinions of others don’t really matter unless they are willing to put their money down to purchase your product.

You will drastically lower your risks by getting sales feedback and marketing data as early as possible.

Unless you’re going to focus purely on doing sales through your website, you’ll eventually want to bring on a team of sales people.

I recommend bringing on independent sales representatives once you are ready to sell through distributors and retailers. They won’t be your employees. Instead, they just get paid a commission on their sales.

A sales representative will have a much better shot at getting your product into a retailer than you would on your own. This is because they already know who the decision makers are and what they like to hear. They also already have relationships with these decision makers.

One of the biggest benefits to independent sales reps is if they don’t sell anything, you don’t pay them anything. You also don’t have to pay them until you get paid by the customer, so you don’t have cash flow issues.

My last comment on sales is for those of you who, like me, who are intimidated by sales. I know that sales is something that terrifies a lot of people, especially if you’re a technical founder, or an engineer. It was intimidating for me.

I’m an engineer and definitely an introverted person. I’m not a big phone talker so making sales calls was not easy for me, but it was something I knew I had to do to make the business a success.

To succeed as an entrepreneur, there are going to be a lot of things you have to do that don’t necessarily line up with what you like to do. Being a founder of a startup definitely takes you out if your comfort zone. You have to be willing to go outside of that comfort zone to have any chance of success.

#5 — Operations

As you transition from development to sales, operations becomes an important area that will need your attention.

Product development will never go away because you can’t just sell one product forever. But for now, development may need to take a back burner while you set up operations for your first product.

Operations becomes a major part of your business once you start selling. You now have to manage all the logistics associated with the manufacturing, warehousing, and shipping of orders.

At some point you will probably have your product manufactured in China. You have to arrange transportation from the factory to a Chinese sea port, where it will be loaded onto a sea cargo ship.

You then need to arrange for the product to be trucked from the arrival port, say Los Angeles, to wherever you have paid for warehousing. Once in your warehouse in the U.S., you have to take care of shipping it from the warehouse to your customers.

You’ve also got to monitor the quality of the products, which falls under operations as well.

#6 — Customer Support

Finally, the last part of a hardware startup is customer support. Once you start selling you will have customers that need support. You can’t just sell a product and think, “Okay. I’m done with the customer, I don’t need to deal with them.”

A big part of customer support is managing any product returns or complaints. Every hardware company must deal with returns regardless of how great the product may be.

Because of online reviews customers today especially hold considerable power, and a bad review on Amazon for example can be a real problem for a startup.

But it is equally important to gather feedback from your customers. This is how you tune into the people that have purchased your product and know it well. The feedback that you get from them is going to be critical for improving the product or developing future products.

You also want to take care of your customers so they’ll help spread the word about your product. And remember, it can be the death of a company to have a bunch of ticked off customers venting online.

In general it is easier to sell something to an existing customer than to sell to a completely new customer. Stay in touch with the customers you already have, so you can sell to them once you have a product line with new products, or upgrades.

Hopefully your first customers will keep coming back to buy your products while recommending your company to others.

Conclusion

You can’t afford to ignore any of the six parts of a hardware startup. In the beginning, you need to focus on product development, marketing and finances.

Once your company is up and running and you have a product to sell, you need to also focus on sales, operations and customer support. If you ignore any of these parts of the business, you will not be successful. All of these are equally critical to the success of a business.

When they come into play, and when they are critical, varies for each one. But in the end, you need all six of these parts to have a successful hardware startup that generates a profit.

The key to success is knowledge of the obstacles that lie in your path and a realistic plan on how to overcome those obstacles. Helping you accomplish this is the goal of the Predictable Hardware Report.

Originally published at predictabledesigns.com.