Challenges and Opportunities for Hardware Startups in Silicon Valley

Dec 13, 2016

Nathan Donato-Weinstein

Business Development Officer, City of San Jose

Localization of manufacturing is a hot topic these days. So, it’s no surprise that it took center stage at a recent convening of the Silicon Valley Manufacturing Roundtable. As moderator, I had the chance to engage with four growing players in the local hardware scene: Type A Machines, Kaptivo, Product Realization Group, and BriteLab. The punch line? The dynamics fueling this hardware Renaissance are as transformative as the digital revolution that preceded it. Each story below explains why.

Tim Holmes is something of a Renaissance man. He’s been an Apple evangelist, a coffee entrepreneur, and most recently, the founder of Type A Machines, a 3D printer startup focused on enterprise customers. Holmes is quick to point out that the product itself isn’t revolutionary. “We are one of 700 companies that make 3D printers,” he said. What interests him is the business model that underlies 3D printers — specifically, the ability to fulfill orders locally, sustainably, and without overproduction. While Type A first tried doing manufacturing in-house, the company quickly discovered it was more efficient to work with a contract manufacturer (CM). His partnership with BriteLab (below) is as much about collaboration and strategy as it is about supply chain management. He also acknowledged that after years of instant gratification — think quick-hit app development — both VCs and entrepreneurs may need to adjust expectations when it comes to returns in the slower-percolating hardware industry.

Shirish Joshi is also a veteran entrepreneur, and his latest smart whiteboard startup, Kaptivo, just shipped its first product. The company designs and manufactures an accessory that turns any whiteboard into a “smart” board, recording the pen strokes and sending them to a mobile app for playback later. Kaptivo has benefitted from new funding models such as Kickstarter, which allowed for proof of concept, leading to additional VC investment. However, he cautions young entrepreneurs that there are “many small steps involved in running a successful business — it takes time and experience.” For this reason, stories like the Pebble acquisition — announced in early December — are “inevitable, and not necessarily a bad thing.” He agrees that finding the right CM is more art than science. “Your product must fit into the portfolio of your partner.”

Mike Keer started his career in “big hardware” and now through his consulting business, Product Realization Group, he helps smaller companies to scale. His focus is on concept-to-market execution, which includes supply chain management, financing, and manufacturing strategy to move from the early stage to scale. Keer’s advice to hardware startups is to “treat your CM as an investor in your company,” complete with a well-thought-out pitch that covers everything from team dynamics to “realistic expectations on timing.” Keer is bullish on the Internet of Things (IoT), noting that “hardware products without software won’t garner much investment.” Regarding intellectual property (IP), Keer recommends integrating unique features into the product that can’t be easily replicated, because “your product will get copied, regardless.”

Robert de Neve, CEO of BriteLab, is a contract manufacturer with an enviable list of clients that includes Tesla. Startups inside his facility — which includes a full suite of business and design services — include the high-tech skateboard company OneWheel and “personal avatar” maker Anybots. Despite the market seeing some successes and setbacks in 2016, he believes that we are experiencing a “new golden age of hardware.” While de Neve acknowledges that IoT has generated excitement for a younger batch of entrepreneurs, he also notes that building things is hard, requiring a balance of skills and manufacturing know-how. “It’s difficult to be innovative and to execute at the same time,” he said. The decision about where things are made often comes from financial partners, says de Neve. “The fresher the intellectual property, the closer it (manufacturing) needs to be” to avoid IP diffusion (read: theft). “The best scenario is that the design engineers and the manufacturing engineers are together under one roof.” De Neve suggested using the total cost of ownership (TCO) model as a way to factor things like travel, freight, and IP diffusion costs into the unit cost for production.

All four experts engaged in a healthy discussion on the complicated calculus of deciding when a product has scaled to the point that it needs to go overseas. While there is no magic number, there are characteristics that favor local manufacturing, including more complex advanced machines, and products that change more quickly.

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Welcome to our blog – Takes from Silicon Valley East! Our view is slightly different here on the east side of the bay – from the Mission Peak backdrop to the advanced manufacturing companies that dot our boulevards. As we become more urban and strive to interpret the business issues affecting our innovation economy, we want to share with you our observations, insights, photos, arguments, agreements, inspirations and CEO interviews – and here on our blog is exactly where we plan to do this.

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