The 3 Major Hardware Startup Killers: Part 1 – The Market

Launching a hardware startup is building a three-legged stool: you need to get product, market, and funding right. If any leg is too weak, your venture will probably collapse!

This three-part series explores each major category of hardware startup killers, starting with the most common market-related mistakes.

 

 

Understanding your target market and developing something they want before committing to large investments is essential. We suggest some tips and a methodology to achieve those objectives.

 

Very Early Stage – Identifying Your Target Market

Before finalizing your product concept, you need to plan ahead and identify what important information you are missing.

Here are some critical questions to ask yourself:

• Is there a defined group of potential customers seeking solutions to problems your product addresses?
• Is it a sizeable market or a niche opportunity?
• Is it a vertical market (easier to identify) or horizontal (requiring broader strategy)?
• How urgent is the need for your solution—is it an “aspirin” (must-have-now) or a “vitamin” (nice-to-have)?
• Do potential customers communicate with each other about their challenges?
• What sales channels work effectively in this market?
• What’s the competitive landscape like?
• Is the market growing, and are there positive underlying trends?

The approach defined in the next section will help gather important information.

Note: Demonstrating market traction dramatically reduces perceived risk for potential investors. They’ll understandably be far more interested if customers are actively purchasing your product even before full-scale delivery.

 

Early Stage – Discovering the Market’s Problems and Needs

To balance all the attention given by startups to ‘product development’ at the detriment of customer-facing activities, Steve Blank coined the term ‘customer development’. And step 1 in the ‘customer development’ process is market discovery.

Disciplined customer development is the most effective way to ensure a market will pay for your product, and it includes these steps:

1. Engage directly with potential users about their challenges
2. Explore how they currently solve these issues
3. Get feedback on your initial product concept (notice, this only comes steps 1 and 2)
4. Refine your design based on user input
5. Based on all the learning, make a short list of what feature(s) really are critical to solving the main challenge/problem

(Note, this is not sales work. The objective at this early stage is learning. It is not selling. The product’s features are not fully confirmed yet.)

This process not only reduces the risk of developing a product nobody wants, but also shows investors you’ve done your homework. Even without preliminary designs, you can gather valuable feedback using creative approaches like using cardboard mockups, showing AI-generated photos & videos, combining competitor products, etc.

 

Two examples of the ways outstanding founders reduced risk in this early phase

Here are two examples of the ways outstanding founders reduced risk in this early phase:

1. Understanding the problem: in the 1980s, Michael Bloomberg often turned up early with donuts & coffee in big banks in NYC, and some of the employees were happy to answer his questions about their main objectives, their frustrations with the IT systems and data sources they were using. It helped him design his famous Bloomberg terminals in a way that suited his target users’ needs much better than their current solutions.
2. Noticing unmet needs: Akio Morita of Sony saw how people were taking music with them out of their homes, even though the whole setup was way too heavy. It was clearly a painful workaround. His solution was the Walkman, for which they had to miniaturize or remove some elements of tape recorders, and they had to invent light-weight headphones.

 

POC Stage – Validating the Product, as Planned, Really Solves the Problem, and a Market Is Willing to Pay for It.

Once initial design work and an initial proof-of-concept (POC) semi-functional prototype are complete, you may follow these steps:

1. Estimate the cost of the bill of materials, the landed cost in your target market, and the product price
2. Demonstrate the POC prototype to target customers/users
3. Gather feedback on price points from target users, ideally by asking them for a commitment rather than through a survey
4. Adjust the list of must-have features based on feedback

A book we often recommend is The Right It by Alberto Savoia. We wrote a summary about his approach for product idea validation.

 

Typical validation steps for B2C companies

For B2C companies, typical validation steps are listed below:

1. A pre-launch email list of interested people, mostly potential buyers
2. A list of people/companies that have put some money down, even if it is just 1 USD, to reserve an option to buy the product at a certain price when it launches (usually in exchange for a sizable rebate)
3. A list of actual customers who pre-ordered (usually in exchange for a rebate, and often on a crowdfunding site such as Kickstarter)
4. A list of actual customers who ordered without using a rebate

Reservations, pre-sales, and sales provide crucial metrics like cost-per-lead and cost-per-sale that help refine the business model. They also demonstrate market traction, which dramatically reduces perceived risk for potential investors and for potential hires.

 

Now, what if validation is not successful? You need to go back to the discovery stage. Do not keep working on a product if you don’t have evidence that there is a market for it. If you are still at the POC (Proof Of Concept) stage, you haven’t invested massively in product design & development yet, so hopefully you can still pivot.

 

Two extreme examples of the approaches of brilliant founders

1. Collecting a large reservation list – in 2016, Tesla secured nearly 10 billion USD of sales in 2 days for their upcoming Model 3. Each buyer put a 1,000 USD deposit down. That’s how Elon Musk and his team validated that the solution (the new car at a price point around 40,000 USD) solvec the problem and a sufficient number of users were ready to put “skin in the game”.
2. Being clear about the must-have features – in 2007, Steve Jobs was in a hurry to get to market with the iPhone’s first generation. He insisted on important features, such as a glass display, at the risk of throwing the entire project badly behind schedule. At the same time, he correctly assumed that certain basic features such as ‘copy & paste’ were not critical for the first version of the product and he accepted to skip those. Jobs was famous for NOT conducting traditional market research, however he was spending a lot of time talking to people individually and observing the way they used various devices.

 

Should You Worry Much about Competition?

Investors tend to look at competitors and can get a founding team to worry excessively about competition.

Investor Marc Andreessen notes in his blog “When the VCs say no” that he tends to ask these questions:

Are there too many other startups already doing this? Is this startup sufficiently differentiated from the other startups, and also differentiated from any large incumbents?

 

However, in our observations, the risk of developing something people don’t want to pay for kills many more startups than the presence of somewhat-similar competition on the same market.

Most markets allow different competitors to pursue different strategies and go after different segments of customers. A small minority of markets have a ‘winner take all’ dynamic.

Now, you will need to have a plan to somehow reassure investors if you need to ‘sell’ your project to them. However, you also need to keep your company’s interest in mind. If you keep doing everything potential investors ask, such as registering a lot of intellectual property very early on, it may be detrimental to your company. When it comes to patents, our general advice is to invest only after you have evidence of market traction and only once you are >95% sure your product design is frozen. Otherwise, you may spend a lot of money that may be put to better use in your business.

 

Takeaway

Work systematically on validating that your product will be met favorably by your target market before committing too many resources to product design and transferring that design to production. Following the ‘customer development’ framework (discovery, validation, and return to discovery if validation fails) will improve your odds of success greatly.

It will make your business more appealing to investors and new hires. And it will provide market intelligence and feedback to the product development team. In the end, it will also make your product better!