2 Minutes 2 Launch Video Series - Episode 4: Financial Mistakes Hardware Startups Often Make
Welcome to another edition of 2 Minutes 2 Launch. My name is Terry and today I'll be talking about financial mistakes that hardware start-ups make.
As many as 80 - 90% of hardware startups fail and I'm going to talk about a few of the reasons why today.
First, just in terms of your general fundraising effort to get you all of the way to production. Quite often what we see is companies not raising enough funds whether this comes from overly optimistic projections saying well if everything goes perfectly, we're only going to need this much money to get to production.
Other times it might be from just a lack of experience - really not knowing what you need the money for or how much you might need that is unexpected.
Other times it's from a successful crowdfunding campaign that's raised a certain amount of money that feels like it should be enough to get there, in any case, only having enough funds to get 60, 70, or 80% of the way through the new production introduction phase.
It's a recipe for disaster and it's where many hardware startups fail.
My recommendation here is making sure you are working with investors and advisors and partners that really know hardware that can help make sure you are setting the proper fundraising goals and expectations to get you all the way to production.
Second, in terms of the product cost itself. In manufacturing, they say you can have speed, quality, and cost but you can only pick 2 of them.
A lot of hardware startups focus on speed and quality because they have to get something done quickly and its got to work reliably. The assumption is, we can cost-reduce later. Quite often that cost reduction effort, in order to be significant, really can be time consuming and expensive to get there. It's much more involved than just swapping out a couple of cheaper components.
My recommendation in this phase is that you focus on the product cost itself - to make sure you're designing for cost up front. Even if it takes a little bit longer early, it's going to pay dividends down the road.
Lastly, as a startup, you'll likely not going to get a credit line from your manufacturing partner. Really planning for costs of ramping up production is really, really important. You are probably going to be required to put down some deposit against components or production even before materials are ordered.
When you throw in the lead time for materials and the lead time for production, you're already cash out for quite a long time. On the flip side, your customers are going to expect, from the time they receive finished goods, that they aren't going to pay you for at least 30, 60 or 90 days.
The recommendation here is making sure you are planning for a really long cash cycle, especially on these initial production units is really, really important. Especially for a startup.
Thanks for watching - that's been 2 Minutes to Launch for today. Please follow SEACOMP on LinkedIn. Leave your questions in the comments below and we'll make sure to get to them.
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