Why Developing Hardware Is Challenging For A Business, But Worth It

Michael Tamblyn – CEO of Rakuten Kobo.

More than a decade ago when my company was still in the process of regularly presenting to venture capitalists, our fundraising team had a rule: Stick the hardware slides in the back of the pitch deck.

Sure, we had been designing and manufacturing e-readers since almost day one to complement our reading experience in apps. And, yes, in the early days, they accounted for most of our revenue. But we were there to woo investors, and we found that nothing made VCs shift more uncomfortably in their boardroom chairs than the thought of having to physically make things. Software was the ideal investment, especially if it could be affordably and efficiently launched by a few people who could achieve scale with as few things as possible.

As fears go, this was pretty understandable. After all, a lot of work goes into making a physical device — more if you want it to contain a great software experience. It requires plenty of upfront investment into research and design, not to mention materials, inventory and tooling. Manufacturing and logistics partners have to be found. Then, you have to convince customers why they need it. To an investor, that all looks a lot harder than shipping software. And they’re right.

So many things need to go right to get a hardware product to market. If people like it, you have to build more, which requires more working capital and additional investment. In some cases, you might need a lot more than expected when it turns out all of those suppliers want their cash before you sell. And if you get the product wrong, you can’t just upload an update. It sits there — expensively unsold.

If you want a sense of the highs and lows of making your own stuff in a perfect microcosm, just look at the past year: Stay-at-home orders were driving unprecedented demand for our product, but almost every retailer we worked with was locked down; every factory was at least temporarily shuttered; supply chains were disrupted; ships and containers were scarce; and there was (and still is) a worldwide semiconductor shortage. We figured it out thanks to a lot of hard work and solid relationships with vendors and partners that spanned continents, languages and time zones. But it goes to show that, even if you have the “perfect” product at the right time, the path to profit isn’t easy.

That said, I have learned a few lessons on how to make that path a bit easier — and why that path is one worth taking.

Own your hardware as ecosystem insurance.

Although app businesses are invariably faster to market, they have to pass through some gates owned by very powerful gatekeepers. Owning your own hardware experience creates control and independence. For my company, creating our own hardware allows us to connect with our most valuable customers on a daily basis, thus building future-proof loyalty inside a user experience we can optimize and refine to meet their changing needs. Owning your hardware and IP are key pieces of the puzzle in retaining as much control over your business as possible.

Foster strong relationships with manufacturing partners and retailers.

Building a new product these days means building long-term relationships with partners, including manufacturers, component vendors, supply chain and shipping providers, distributors and retailers. The closer you work with your manufacturing partner, the easier it gets to have quality hardware built, approved and shipped on time, and the more collaborative you can become.

Where possible, push past intermediaries and brokers and connect directly to the companies doing the work. In our case, our partners are instrumental in proposing solutions for blockers that come up, and they advise us on new materials and component solutions. The same goes when you’re working with retailers, too. In my experience, the more you demonstrate how your company supports its products through sales strategies and marketing, the deeper your conversations with retailers and the better the positioning of your products on their physical shelves and/or online stores.

Don’t be distracted by the competition.

Developing hardware is a 20-mile cross-country run across broken rubble. Without a doubt, a similar product will pop up while yours is in development. Great design and marketing attract interest, but excellent manufacturing, supply chains and logistics get your product into people’s hands. Know that more competitors will be knocked out by lack of working capital or partners who don’t deliver than your ability to squeeze one more feature into your product.

Similarly, copycat products after you launch are certainly possible, but jumping on a sudden surge of demand like the one we experienced during the pandemic isn’t easy. It takes about 12 to 18 months to go from the spark of an idea to a finished product, and that’s just getting it built. Hardware development is getting faster, but not that much faster.

While you can’t control all the variables when making hardware, once you get it right, it’s magic. You are adding something tangible to your customers’ lives, earning a physical place in their homes or offices or backpacks. Those customers don’t get swept away with the change of an algorithm or a new clause in a tech ecosystem’s user agreement. So, yes, hardware is hard. Anything worthwhile is.


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