why makers fail at retail
DESCRIPTION
Build it and they will come! Not quite.TRANSCRIPT
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WHY MAKERS ���FAIL AT RETAIL ���
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LEAN HARDWARE ���BY @HAXLR8R ���
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BENJAMIN JOFFE CYRIL EBERSWEILER
WHAT THIS IS ABOUT
How do hardware startups scale? How to finance growth? Should you target WalMart? What are the pitfalls when scaling?
TWO RETAIL MYTHS
LET’S DO WAL-MART ASAP! PUT IT ON SHELVES AND IT WILL SELL
REALITY ������
RETAIL CAN KILL YOU ���������
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1. SCALING
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?
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
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
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
How’s cash flow?
2. THE RETAIL CHASM ALSO CALLED BRIDGE OF DEATH
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!
CROSSING THE CHASM
TIMEFRAME $
PROTOTYPING
PRODUCTION
SCALING
3 months ~ 2 years
3 months ~ 2 years
1+ year TIME
ARE YOU REALISTIC? SOME THINGS TAKE TIME ARE YOU TOO SLOW? MAYBE YOU NEED HELP
THE CLASSIC CHASM
THE RETAIL CHASM
PROTOTYPING
PRODUCTION
SCALING
$
Founders Friends Family Fools
Crowdfunding
Accelerators Angels
Sales Factoring Banks VCs
Bridge of Death
Pre-orders
RETAIL CHASM
TIME
3. TIMING FOR SCALING
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!
SCALING STEP BY STEP $
Bridge of Death TIME
Specialty stores
Big box retailers
Online retailers
Direct
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
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
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
4. DISTRIBUTORS
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
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
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
5. BIG BOX RETAILERS
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
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
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
6. FINANCING RETAIL
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?
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!)
SAVE YOUR CASH FLOW!
Our supplier was a large toy factory in Guangdong that let us pay them 60 days after shipping.
Olivier Mevel IOT Pioneer Co-founder, Violet (maker of Nabaztag) Co-founder, 23 de Enero (IOT Agency)
I think they were used to work with guys like WalMart and being paid last.
Nabaztag “rabbit” 150,000 units sold
SAVE YOUR CASH FLOW!
As a startup never offer���credit terms to your customer until you fix your financing.
Nick Yap Co-founder, Omate Co-founder, ROCKI
Omate TrueSmart $1M on KickStarter
ROCKI Music System $220,000 on KickStarter
“Direct sales bring much higher margins, but with less reach.
How elastic is your demand?”
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?
SUMMARY
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
ABOUT HAXLR8R
Your Hardware Startup Accelerator From a prototype to a real businesss
In SF & Shenzhen (hardware capital of the world)
LEAN HARDWARE RULES “NO HARDWARE PLAN SURVIVES CONTACT WITH A FACTORY”
Cyril Ebersweiler, Founder of HAXLR8R
1. Design with the right components 2. A prototype is ready when it can be manufactured 3. Your factory is your most important partner 4. Pick the right business models 5. Be memorable
APPLY ���WWW.HAXLR8R.COM
[email protected]���@benjaminjoffe
[email protected]���@cebersweiler
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