Hasta La Gadget!

2014 is starting off with a bang for hardware. The $3.2B acquisition of Nest, a four year old company, is great news for makers. The question is, then, should you be starting a hardware company rather than the next mobile app? In previous columns we covered the first steps: from prototype to production as well as early stage financing. Let’s now look into another trap: distribution.

Software vs. Hardware

When you get traction with software, you fire up new servers and scale your infrastructure. It is fast and cheap. And traction alone can get you funding. With hardware, traction is sales, or at least demand. Unfortunately, sales of physical things happen months after production. How do you finance it? How many units should you build? Can you afford to lose money or time?

There are two persistent myths for hardware startups. The first is that the end game is selling at big box retailers like Wal-Mart or Best Buy. The second is that once your amazing gizmo is on the shelves it will sell itself. Those two ideas are dangerous.

Wal-Mart is a problem because servicing retailers is not easy. And the bigger they are, the more cash and time you will need. The Startup Genome project documented that the number one cause of failure for startups was premature scaling. This is even truer for hardware. So before working with larger chains, startups had better get their act together on a smaller scale. It is also questionable whether your product is suitable at all for big box retailers, where your margins are lower and costs higher.

The second is a variation of “build it and they will come.” Sadly, retailers are not in the business of creating demand. You are. If your distribution exceeds the demand you created, it will result in unsold inventory. And we all know what that means.

Crossing the retail chasm

Hardware projects on Kickstarter belong to the “technology” and “design” categories. By the end of last year, 3,009 of them had been successfully funded. 384 (13%) were between $100,000 and one million dollars, and only 16 (0.5%) were above a million. And that is among projects funded successfully! If you can’t demonstrate demand with the novelty and tech-hungry kickstarted crowd, it is questionable if your product will have enough demand, and if you’re the right team to sell it (we’re not even talking about building it). Some say you can sell a thousand of anything on Kickstarter, but even that is easier said than done.

Now let’s assume your kickstarted project succeeded (over $100k). Once it’s over, your monthly pre-sales are likely to be in the range of 1/20th of your crowdfunding total. That means if you got $200,000 on Kickstarter now your sales are at $10,000/month. Obviously not enough to support a team long term. You are thus entering the “retail chasm” or “bridge of death” until demand and distribution pick up. Financing this gap is difficult as innovators (the Kickstarter crowd) bought your product but you are still far from the mainstream. Early adopters might be waiting for your product to be ready but will only pay later, if they hear about it.

Two key aspects of crossing the chasm between a crowdfunding campaign (where you get paid up to a a year before shipping) to retail (where you might need to finance up to 6 months of inventory) is demand creation and distribution.

Positioning and demand creation

Demand creation is a result of your positioning (which covers your target user profile, pricing and branding) as well as your media, community and marketing activities. If your products are consistently in demand and fly off the shelves (even if you have limited shelf space), you will find ways to finance growth.

Venture funding will not solve the problem of selling products at a loss, it will just dig a bigger grave faster. Learn how to sell profitably before you scale.

Once you’ve crossed the bridge and demonstrated demand, financing becomes a lot easier. From factoring to bank loans or venture capital, money will beat a path to your door!

Distribution: when and how to scale?

You need distribution, but not any distribution. And not in any order. Among the options are direct sales online and selling via others either online or offline. Each channel has to be evaluated carefully and larger retailers might have to wait for a later phase. Build your retail skills and more demand first.

According to Charles Huang, co-founder of Red Octane, creators of the Guitar Hero franchise and of the gaming hardware startup Green Throttle: “Startups should know their return and defect rates before they try to scale. They can learn this through online sales or small boutique store sales. Maybe the second version is when the scaling should happen.”

So the advice is to learn about retail by doing it first on a small scale. This will give you enough time to learn the ropes, maybe until you get the second version of your product ready.

As Marc Barros, co-creator of the Moment mobile lens (currently on Kickstarter) and founder of Contour Cameras says: “Retail is not a sprint but a long slow build, so take one step at a time.”

Possible steps along the way are: direct sales online, specialty retailers (online and offline), Amazon and other large online retailers, then big box retailers. You need to understand the hidden costs of servicing each of them. In the case of offline retailers, it includes a laundry list of expenses related to in-store marketing, demo products, sales events and more.

The key points to remember are: keep demand higher than distribution, remember that your customers are your best investors, take one step at a time, and keep cash flow healthy.

If you can do that, you might become the next Nest, Square, GoPro or Xiaomi, or a flourishing hardware SME!

 Cyril Ebersweiler is the founder of the hardware startup accelerator HAXLR8R (apply here) and Partner at SOS Ventures. Benjamin Joffe is an expert on startup ecosystems, angel investor and Advisor at HAXLR8R. Both spent over a decade in China and Japan and invest in startups around the world. This is the third part of a series on Lean Hardware.

Ouya’s original hardware featured just 8GB of storage onboard, but a temporary Limited Edition all-white version launched during the holidays doubled that to 16GB. Now, the game console startup is making that a permanent feature of its newest hardware, an Ouya console with a solid matte black finish that also offers better Wi-Fi connectivity and a “refined” controller design.

The new 16GB version adds $30 to the MSRP of the original, coming in at a total of $129 for the console and one controller. It goes on sale at Ouya.tv, as well as Amazon and Amazon.ca starting immediately, and the original 8GB model will continue to be sold as well at its original $99 price point (which is discounted to $69.99 currently on Amazon.ca)

As for what’s been improved about the controller, Ouya says that the joysticks and buttons are “better” and that the controller has less lag time overall. We’ve asked for more specifics around the improved Wi-Fi, but have yet to hear back with any details. The new console also ships with the latest Ouya firmware, which is said to improve all-around performance for the Android-powered hardware.

Ouya has faced some challenges lately, including the departure of one of its key founding team members, VP of Product Muffi Ghadiali. The company has not released any sales data recently, so there’s no telling how it’s performing, but the introduction of a new SKU seems a little unusual given the relatively modest nature of the tweaks.

Developers on the platform recently shared some numbers regarding their software sales on the console with Gamespot, which could be an indicator of hardware sales strength. Feedback was mixed, but overall the impression given was that sales by no means represent runaway success. Ouya has raised $23.6 million in funding to date, including its initial crowdfunding campaign and a Series A round led by Kleiner Perkins.

The new Pebble Steel (which starts shipping today) has a lot in common with its predecessor, but it also comes with a software update that makes any and all Pebbles into essentially new devices, so the overall experience of owning one is actually quite different, and (spoiler alert) much improved.

Basics

• 5-7 day battery
• 144×168 e-ink display
• 56g (1.97 oz)
• Waterproof to 5ATM
• RGB LED
• Metal case with leather and metal band
• MSRP: $249
• Product info page

Pros

• Glass-covered display
• Improved looks
• LED light has lots of potential uses

Cons

• Expensive, given functionality is the same as the $149 original Pebble
• Proprietary lug design, incompatible with standard watchbands

Design

There’s no question in my mind: The Pebble Steel is heads and tails a better designed device than the original Pebble. The steel construction feels much more durable and substantial when worn, and yet also manages not to add too much weight to the device overall. Both color options are attractive (though I prefer the PVD-treated matte black colorway) and the decision to include both steel link and leather bands (only the leather was included with the review device) in the box is a very nice touch that provides options for dressing the Steel up or down depending on your needs.

Both bands are comfortable and have a quality feel, and the case for the Pebble is much-improved too, thanks to a smaller surrounding bezel and the upgrade to materials, including a Gorilla Glass face that makes the display easier to read and also better protects the screen itself. Also, the LED is completely hidden on the bottom left of the bezel when not in use, which makes for a nice and clean look.

If there’s a failing to the design, it’s that Pebble has opted to go with a proprietary three-pronged lug design to hold the watchstrap, which means that you can’t use off-the-shelf standard bands. Swiss watchmaker Swatch does the same thing, which limits your choice to only what they offer. It’s annoying, but it also provides a potential revenue source for Pebble down the road so I can understand why they opted to go that route.

The vaguely eighties retro vibe the watch gives off is reminiscent of Braun and Sony ID from a heyday of steel and angles, however, and it marks the first time I can honestly say I’d wear a Pebble without the smart features, which is no light praise since I’m a bit of a watch snob.

Features And Software

Users of the original Pebble won’t find much new here in terms of features, but the addition of the Pebble appstore with SDK 2.0 marks a huge improvement in the software ecosystem. Many of the apps available were out before, but now they’re centralized in the appstore, which appears on both the iOS and Android Pebble companion apps.

Browsing and discoverability in the software store reminds me of what it was like to find apps for iOS and Android in the early days of both of those software marketplaces: there’s a lot of scrolling, and some limitations in terms of organization of content, but overall it’s still much better than the process has been. An app manager for shuffling software to and from your device, and for inputting login credentials and altering other settings also makes a big difference in terms of improving usability of third-party software.

The new method for viewing past notifications is excellent, and the archive strikes a good balance between fitting a number of updates on screen and providing enough info that you recall the full missive. Apps are listed under the main menu, which isn’t entirely painless in terms of navigation, but the limit of eight apps/custom watchfaces means you never have to scroll too far to find any. That eight app limit is a pain, however: It’s like Sophie’s Choice trying to figure out whether you want the app that controls your Philips Hue lighting system or the one that offers on-wrist package tracking.

It doesn’t help that there are new partner apps making their debut today, too. The Foursquare, Yelp, GoPro and ESPN apps were available for testing, and while I don’t have a GoPro and I don’t care all that much about sports (which is good because I couldn’t get the ESPN app to load anything beyond a sample screen), the other two location-aware apps really demonstrated how much potential Pebble has for app developers.

Click to view slideshow.

Foursquare allows you to view nearby spots and check-in directly from your wrist, with a refresh feature triggered by flicking your wrist. The Yelp app uses a wrist flip to trigger discovery of a single local spot to recommend, but it also provides listings of nearby places organized by venue type, complete with star ratings and up to three reviews you can actually read through on your wrist. Both are great examples of how to intelligently build software for Pebble (or any smartwatch), by focusing on features that make sense on the wrist and leaving the rest to the smartphone.

Other highlight apps for me include Huebble, which provides wrist-based control over your Philips Hue lighting system, and Twebble, which is a full-featured Twitter client on your wrist. The Pebble appstore has around 1,000 apps currently, with over 6,000 devs registered, and overall I was impressed at the quality of software. Other platforms have launched with an abundance of throwaway apps, but those in Pebble’s marketplace seem to at least mostly attempt to provide genuine utility.

Performance

The Pebble Steel had performed well, basically as I’ve come to expect from my original Kickstarter edition Pebble. Sometimes the Pebble pre-release software and appstore crashed, but that’s to be expected, and it’s probably the reason Pebble says the appstore is still “coming very soon” rather than launching today. It’s early to tell with absolute certainty, but battery life seems to be in keeping with its predecessor as well.

If you haven’t picked up a Pebble in a while and you’re an iOS user, you’ll be pleasantly surprised by how infrequently it asks for renewed permission to communicate with your phone. The LED notification light isn’t currently being used for much, but it does change from orange or red to green while connected to the power cable to let you know when the device is fully charged. The cable is another minor annoyance, since it’s proprietary and magnetic like the one that shipped with the first version, but also features a different connector design that nullifies any chance at backwards compatibility.

Overall, though, the Pebble Steel improves on the original in all the hardware aspects where it felt like it could’ve used a bit more time in the oven, and leaves relatively untouched the software stuff that the startup got right.

Bottom Line

The Pebble is most definitely an evolutionary product; in many ways, it’s like the iPhone 5c to the iPhone 5, except with an upgrade to materials rather than a move somewhat down market. But that might also be just what Pebble needs in terms of spurring more mass market interest, while avoiding the perception that they’re punishing early adopters by putting out massively updated hardware.

In the end, the Pebble (Steel or otherwise) is still the best smartwatch available. After using the Steel, it takes the crown as my new favorite device in that category, however, since the materials used and the construction quality really make it feel like a brand new piece of equipment. Pair that with the appstore and quality software from marquee partners, and I’m confident Pebble can keep its smartwatch crown for at least a little while longer.

Personal fitness trackers and sleep trackers are officially mainstream, but deciding between the various devices out there can be tough.

That said, let me direct your attention to the Fitbit Force, the latest and most full-featured product from the quantified-self makers.

The Fitbit Force, unlike the lower-end Flex, has a nice little display on it that shows steps taken, flights climbed, calories burned, as well as sleep information.

It even shows the time of day.

Even better, the Force pairs with Fitbit’s nutrition app, letting you input food-intake information to track your health over time.

In our experience, there’s nothing on the market that is more accurate or robust.

However, the band isn’t my favorite. It’s caused skin irritation for some users, whom Fitbit refunded. Plus, it’s simply not as well-designed as something like the FuelBand.

But hey, you win some and you lose some.

The Fitbit Force goes for $129 and comes in slate blue and black.

Toronto-based startup ShopLocket, an e-commerce platform originally designed to let anyone sell anything from a single item to a line of goods quickly and easily via their existing presence on the web, has been acquired by an unusual suitor: PCH International, the company founded by Irish entrepreneur Liam Casey that has made its name operating as the go-between for major electronics brands and their Asian supply partners and manufacturers.

The exact terms of the deal, under which ShopLocket will continue to operate under as a sub-brand, are undisclosed. “It’s a good deal,” said Casey. “Everyone’s really happy.”

The match seems odd at first, but makes sense in light of recent developments at both companies: ShopLocket, run by TC Hardware Battlefield judge Katherine Hague, recently launched its own pre-order sales platform to help hardware startups capitalize on the inertia generated by crowdfunding campaigns, before they reach the stage where they’re able to sell shipping product. There’s a lot of interest coming out of successful Kickstarter campaigns, after all, but often nowhere for that interest to go as startups rarely have the means in place to continue collecting orders after their crowdfunding drive has ended. Perhaps more importantly, ShopLocket also provides a full-fledged alternative to a Kickstarter or Indiegogo-hosted crowdfunding campaign if a startup was interested in going it alone. Casey said the company “closes the loop” that begins at his hardware accelerator, Highway1, giving startups a complete solution for creation, development and sales of their products.

“I picked them for the passion they have for what they do,” Casey said. “They have a passion for the entrepreneur’s journey and an ability to build an authentic relationship with the community.”

Companies are often interested in building their own hardware Kickstarter projects, Casey told us, but they lack the ability to continuously provide accurate and authentic updates about where products are at in the development cycle, and that’s a huge challenge for these startups. PCH and ShopLocket can use their combined expertise to help on that front, which will hopefully result in stronger, more satisfying crowdfunding experiences for the people actually buying the products.

PCH International has recently shone a spotlight on its interest in hardware startups in other ways, too. The company is showing off the first cohort of its new early-stage hardware startup accelerator called Highway1 at a demo day next week in San Francisco. Highway1 offers classes of around 10 startups $20,000 in seed capital as well as engineering and design advice in exchange for between 3 and 6 percent of equity, as well as the relationships PCH has made with key suppliers in China. It also provides support for later stage companies through its existing PCH Accelerator program.

Casey outlined some outcomes tied to those efforts made possible by the ShopLocket acquisition, like the ability to create exclusive products for people and the chance to provide membership-based early access to particular products created by its startup partners. Since it already has factories “queuing up” to get a chance to work with it, PCH has big advantages on the supply side for those looking to crowdfund hardware projects, too.

The ShopLocket addition to the team provides yet another advantage PCH can offer its new target market of emerging hardware companies, and might be a considerable value incentive for those startups evaluating the worth of its accelerator help. So while it’s still an acquisition that on the surface seems a little out of left field, there remains a clear logic to what amounts to a shrewd strategic pick-up. PCH has mostly been an under-the-radar friend to tech hardware companies in the past, but it could be on the brink of stepping into the spotlight as a major contributor the gadget startup movement that’s been growing for the past couple of years now.