The opinions and information shared on this podcast are for informational purposes only. We always recommend that you seek professional advice before taking any action related to your business or personal ventures. Thank you for listening and I hope that you enjoyed the episode. Hello. On today's episode, I have Scott Miller. Scott has an incredible background within manufacturing and hardware development and today on the episode will be diving into topics such as how to set up your manufacturing and production successfully, how to make in-sourced versus outsourcing decisions, how to set up a contract manufacturer from a low leverage position and navigate your supply chain. And we will break for a fund segment where our guests share some of the most outreages or bizarre hardware development stories that they've either heard or experienced where things just went really wrong. And usually they have a happy ending, but it's always fun to hear about what could go wrong. And then we'll wrap up with how to set up manufacturing agreements and some discussion around quality assurance and best practices there. As per usual, the episode will have a too long didn't listen segment at the end where we will get into all of the key takeaways and actionable pieces that were discussed in the episode. And when you have time, you can always come back and listen. Without further ado, I leave you with Scott. Welcome to the Builder Circle. I have today Scott Miller on this episode where we're going to be discussing a lot about setting up manufacturing, making decisions with a small team regarding your production and many other things. So Scott, thank you so much for coming. I'm so excited to have you. I have me. It's going to be a lot of fun. Yes, for sure. And just so our listeners know who you are and what you specialize in and your background, could you give a little elevator pitch of who you are? Of course. Yeah. Well, I trained as a mechanical engineer and was really lucky to be able to work on some cool robotic projects in graduate school, namely a robot of a tuna fish for the Navy, trying to find ways to swim more efficiently for autonomous undersea vehicles. After doing that, I was at Walt Disney Imagineering for a little while building full-size walking dinosaurs. And then I switched from working on one kind of one-off so we could file the corners and file the field to getting into some higher volume stuff. Initially it was that I robot with a project called My Real Baby. We ended up building about 100,000 of them in partnership with Hasbro and then I took that and I'll should apply it to helping to scale the Roomba for the first 4 million or so Roombas. So that was a great 10 years and I was 12 years at my last company, Dragon Innovation, where we had the observation that there was more and more hardware startups than ever before. But it just wasn't a good body of knowledge on how do you take one when make money. So having gone through it the hard way, we thought maybe there's an opportunity to help other companies and that was the kind of the mission behind the last Dragon Innovation. And now I'm a Dragon adventure is doing the same thing, just helping great hardware companies scale. That's really awesome. I've had the privilege of meeting a bunch of people from the Roomba program and it feels like the core team that worked on that gained so much knowledge around the scale up of hardware. And it's just it's a theme that I've seen that they're the people that really know how to get something from a prototype into thousands or millions products. But super excited to have you what you're doing and what you've done in the past is very much in line with what the builder circle is trying to do and educate and inform hardware entrepreneurs to be able to create a concept and then actually get it to be in the world. So one of the I think common threads that come up in hardware development once you have a functioning prototype or you're getting there is getting ahead of setting up your manufacturing. And usually companies at depending on what product they're doing, there's this decision that comes up where it's like how do you successfully make the decision to in source or outsource basically saying, oh, I'm going to build this because I want to have all the institutional knowledge and everything that surrounds it or I don't have the cash right now and I don't have the capabilities to take on this challenge, which is a huge, huge undertaking and go with a contract manufacturer to at least get me to a stage where maybe I can transfer to my own factory after a certain level of revenue. So I'd love to get your thoughts on that when we can like start a discussion on that. Sure. Yeah. So I think a lot of it depends on what you're building and how many of them you want to build. If you're building one of them, I would absolutely just do it in house because we take longer to train somebody else. And then you can imagine a spectrum that if you're building a million of them, you're probably going to work with an outside factory at least for a while. So the trick is, where's that threshold or crossover point? Yeah, where's the cutoff? Where's the cutoff? And for me, a lot of what I've done is consumer electronics. So I'm sort of looking through that lens, but you could apply it if you're building industrial or automotive or something else. The thresholds might be a little different, but the number I usually is typically for the first one to 100 units. I like to build those in house because I find a few things are going on. One, unless the product is really expensive, it's not going to be very interesting for a factory. They typically make their money on volume and with such a low volume, if the cost of goods is $100, like there's really no economic incentive for them. The second thing is you touched on is domain knowledge. So as you're building it, like chances are the design does not very mature that you're iterating and changing. And you want to capture all those lessons so that you can feed that back in and improve the design. The other thing is that low volume, it almost takes more time to go and find a factory that's going to be the right fit and then train the people on how to do it rather than just doing it yourself. There does come a point when the design gets a bit more stable and maybe you get into the low thousands that it's a lot easier to work with the factory. And hopefully you capture the key learnings. I'm a huge fan and I'm sure we'll touch on it later, having feed on the ground in the factory. So as you transition it to them, I think it's still important to capture that knowledge and bring it home. So it's not like you throw something over the wall or write a PO for 10,000 units and you get the perfect part. It's very much a team sport to get there. And when you say factory, you're talking about a contract manufacturer or your own? Yeah, a CM or a contract manufacturer as opposed to an in-house. Right. And the reason I think about this is running a factory is really hard. There's a lot of knowledge you need to know. Whereas if you work with a great CM or contract manufacturer, hopefully they have knowledge and process and procedure. They've hired the labor force and that they can add some value for that rather than trying to go through the learning curve of launching your own product. Like hardware is just insanely hard. 25 years a day. I'm like, man, that is just so hard. It's incredibly rewarding. There's nothing better than locking into a store or seeing somebody use a product you built. Like it's a sweet rush, but it is a lot of effort to get there. So if you take that and then you add on everything you got to do to run a factory, I almost feel like it's biting off more than like a startup probably wants to chew on. Definitely. And I think it's you touched on a very important part of just design maturity because I feel like if you do it early to early where your design is still in this kind of turbulent phase because design is like when there's that I it's this like thought of how teams exist where it's like there's like the turbulent period and then the stabilization period and like the thriving period. I feel like design is very similar to where the very beginning is incredibly turbulent. You're learning so much and you're iterating a bunch and in that process, it's really important to not go into and doing it in in sourcing because change orders are a huge deal. Once you get to training up a contract manufacturer and then potentially changing a entire process or changing a even a single piece of the puzzle could result in a hugely time shift and having to train an entire group and also a lot of money. I feel like when making the risk assessment, that is a very important part to consider of where in the maturity cycle the design is actually at. Yeah, I think you're exactly right. And I like your analogy of teams. If I remember right, it's forming storming, norming and then performing. Thank you. That's what I was thinking of in my mind. I'm thinking turbulent. Yeah, I haven't. It's when I haven't thought about that analogy for a little while, but yeah, it's very true when you do that. And yeah, with the design, if I reflect back on what happened for the first room, but it was really five or six people in one room, all in one spot and they could iterate so quickly. There's one in ME, one E one software person, a couple R&D folks and a business person. So really high bandwidth communication, everybody from a similar educational background and experience. But then the minute you bring other people to the party, even if they're like an hour drive like in Worcester, since we're in Boston or the Boston area, like it's not that far, but you've got to get in the car, you've got to deal with traffic and weather and then it come just from different experiences. So that adds complexity and introduces sources of error. Where's Evie and just go out and hang her up?
own proverbial kitchen table, you can iterate much more quickly in the early stages, but you'll definitely know when you get to the point where you don't want to build it anymore or having a kitchen table like after the pizza parties and your friends have all run away from all the free labor that they've been providing. So it's becomes, I think the point becomes apparent after at some point where it's time to go outside. Yeah, and I think it does differ per product or whatever hardware is being built. Your example fits very well with consumer electronics. There's even in consumer electronics or consumer products, there's a huge spectrum, right? There's ones that the design is very straightforward and there are not that many components. In which case, I think the transition over to a contract manufacturer is quicker because of its lack of complexity. And then as the complexity gets the Roomba where I believe in the office at Bolt, they had a Roomba that was completely just all of the sub components were yanked out of it and put on a, I don't know, like a display where it was all of them. There was maybe like 100 something components, maybe even more. When it gets to that level and it's still a consumer electronics, I feel like at that point, keeping the iteration in-house so that you can make it like somewhat perfect, which I don't like to use that word. It's always the good enough. But at that point, I feel like the kind of when the contract manufacturer handover happens is a little bit further along the product development cycle. Would you say that's true? Yeah, I agree. I think it's volume dependent and then the category of vertical that you're in. So if you're building a very large industrial 3D printer to have those that know how in test machines and ability to assemble heavy things or like parts that come to mind is if you're building freight farms or students that all end up working over there, I think it's their CTO. Like that's a huge shipping and trainer that you're not going to put on your dining table. So at that point, like maybe it makes more sense to engage a CM earlier in the process. But if you're building a consumer electronics product with 3D printing and the ability to test them boards rapidly, then probably make a little bit further progress into higher volume just doing it on your own. It's probably like a way to think about it is when you start to get injection molded parts, not so much from proto labs, but more like need to get production worthy parts, then it's definitely good to have a factory to be able to help you with that. Yeah, yeah, for sure. And I guess to go further down the chain of product development, when do you feel would be a good reason to transfer from a contract manufacturer back to internal because I know that kind of like cycle happens as well, where the contract manufacturer gets you to maybe like thousands or tens of thousands, but then the price per unit, it doesn't decrease as much as you want. And there's some, I guess, a little bit of a conflict of interest where the contract manufacturer is making money off of how many units they're making. I guess depending on the contract that you have with them. But when do you feel like is a good time to reevaluate the decision to go to a outside factory or a contract manufacturer and bring it back in? Yeah, so what I've typically seen is when you're doing about $50 million of business with the CM, so that would be the cost of goods sold, which is how much you pay the factory times your volume or the quantity you build on an angle basis equals 15 million. Then you want to start thinking about dual sourcing or maybe bringing it in-house. And just as a few simple numbers, like if you have one unit and save a dollar, you save a dollar, you have a million units and save a penny, you save $10,000. So there's a lot of leverage as you get to those higher volumes. So I think that started, it would be when I start to think about it. Other considerations are like finances are a big one, as you said, to be able to get your margins more favorable. Also if there's IP that you want to protect. I've always had really good experiences with CMs, but potentially you have a little tighter control over your IP. If it's all within your four walls, you might want to think about that. Or if there's specialized capital equipment you need to build it or test it. Most of what I've done on consumer electronics is all working with outside CMs. I believe and I could be wrong in this, but I believe companies like Dyson actually do own their own factories. And my understanding is that they do that because they've got a lot of IP around very high spinning fans, like 100,000 RPM fans, and that they really want to protect that IP. So they tend to do that in-house. But yeah, those are some of the things you'd weigh. But if you did that, you'd have to know how to run a factory, which brings on additional staff and people in overhead and knowledge. So with anything, there's a trade-off. Yeah, definitely. And I feel like even if you do go down the path of creating your own factory, you have to make that decision well in advance of moving away from your CM and have a pretty decent handover period because spinning up a factory takes time. You need to find a location. You need to get all of your flex-sim models all set up so that you know how much time it's going to take. And it's if it's actually improvement because I feel like if you don't do your due diligence early on, then what's going to happen is you're going to build a factory in the end. And your price per unit is going to shoot up the wall and then you're going to be like, why did I ever do this? Yeah, that's why it was thinking of it in terms of dual-sourced thing because then what was 80% would be from the primary 20% from the secondary. You could have an angle basis, put it out for a quote with the understanding that whoever was awarded the product would get 80% of it. But they always know there's another alternative so I can keep everything in check. It gives you leverage in the situation. It gives you leverage and then if you did, like it's never easy to switch factories, didn't need to switch. It might be easier to work with outside CM because you're not stuck with all the infrastructure and building and tools that you would have if you owned it. For the products that I've built, I've always, if the decision is made to be in a CM, I've always seen them just stay with the CM and not come in-house. But potentially if you get really high volume, then it might make sense. Yeah, or it's the opposite situation where the system is so complex, the best example for this is SpaceX, where they are fully vertically integrated because they have a very complex system and they have a lot of inter-system connections. If one system outgroes the other, then that's a big issue and so on and so forth. So they in-house everything so that they have control over. I think that's another thing that I, when you said, like 80% the contract manufacturing, how do you keep your quality consistent? Yeah, but when you do that, you truly are building two separate products because mostly like, yeah, they're going to come off a different set of tools. Every tool is a little bit different because atoms do that as opposed to bits and you'll want to be able to track that. So in some ways, it almost doubles the amount of work because if you had teams on the ground, you'd need two teams on the ground, different partners to coordinate. So maybe it doesn't double that maybe it's one and one and three quarters the amount of work, which is why I'd say typically, you don't do all sorts until you're doing 50 million or more. And you want to get that extra, it gives you things potentially costing leverage, but also geographic protection so that I've got for bed. There's something that takes out one factory. You at least have a backup plan and not a complete interruption to your business, which fortunately happens fairly infrequently, but it certainly does. It does happen. Yeah, for sure. You made a really good point about leverage, which is a big topic, I think, in startup land, because contract manufacturers are generally used to working with bigger companies. And for example, if you go to a contract manufacturer and say, Hey, I'm from Irobat or Hey, I'm from like Hyundai, like big names. They're going to have the red carpet in front of you and really want to work with you because they see dollar signs when they look at you. So when you're a startup and you're going to these companies, you're basically starting at you're losing to zero where they see you as a huge risk. They feel like you're going to fail any moment and they use that as leverage towards you all the time, being like, Hey, this is risky for us. We don't know if you're good for your money. And so especially at the early stages and also later stages, if you don't do a good job negotiate in the in the early stages, there is this constant tango between the CMs and CMs are, I feel like the ones that I've worked with in the past have been like notoriously add at giving a startup a break, which is I understand its business and they're trying to protect themselves. So I guess my question is for you in your experience and we can discuss this is how do you set up your manufacturing agreements coming from a very low leverage standpoint? Yeah. So you need a lot more finesse. It is money. I'm working with one company right now that's maybe a top like top 100 from revenue and we're doing an RFQ and yeah, it's more like the factories are really competing to work with this. The company sets the payment terms instead of the other way around. It's a very different experience. But I think it's from a startup. It's very doable, but you just have to be a little bit more clever. So the first thing is you've got to get the right factories in your funnel. We call this the RFQ or request for a quote process, which is basically how you pick the factory and how they pick you to go and build your product together. It's really a team sport, but if you don't have the right portfolio of factories in the top of your funnel, it's never going to work. And generally first start up what you, and I love these factories, but they're just not the right fit would be like a flex.
Fox, Jable, and so on. Factories that are maybe 15 to 20 billion plus in revenue. And there's just a mental impedance in this, this match. So that is, and those would be what we call tier ones. The tier is not like got a motive, but just in consumer like as a function of revenue. What I think you really need, and it's not a reflection on quality or anything, it's just a sizing scale. I think really the tier two and the tier three are better. I'd look at a tier two is more than a billion, and a tier three is under a billion in terms of revenue, where you're going to be a much better fit in terms of fish and pond. So you don't want to be like a little tiny fish in a huge pond, which would start up working with Fox. But you also don't want to be a huge fish in a little pond because you can't grow. And you'd have too much influence on the factories. Business, you want them to be diversified. I know the numbers can be debated, but I think the five to 10% of the factories revenue in a couple of years is probably a reasonable starting point or target. So if you think about factories, you can say, all right, in three years from now, I'm going to ship however many units at whatever cost of goods sold, and you get a number, and then say multiply that by 10, and that's the size of the factory that might be a good fit. Now, this is a rough rule with them, but the trick, of course, is how do you find these factories? You could go to Alibaba, and there are some good things in Alibaba, but there's also a lot of bad things. It's kind of a wild west. What I find is best is just talking with people, I'm within the ecosystem that have built products and asking them, who are you working with? What are you building? Because often you want to find factories that have built some more products and just have domain expertise in that. But yeah, so you've got to build up that funnel of the right factories. I think of the factories in a sense a lot like VCs, that there's a cash-shout lay in terms of opportunity cost, because we all know like manufacturing, or getting a product through the MPI, or a new product introduction process takes a long time, and it's always delayed. Everybody's optimistic, and it takes longer. And that's the factory spending cycle is working with you, and they're really banking on the fact that your product is going to take off and grow to higher volume, and they're laying it if I work with this company versus the other one, what's the opportunity cost who is the highest probability? We work with Adirobot. They, we were about two or three years late, which is really bad. Like it's amazing that product came out at all. That's, and it's such a hard product, I guess it's understandable. They stuck with us the whole time, and we're phenomenal partners. But as a result, I don't know how much revenue it would create, but it's probably in the billions of revenue that it, like a portfolio VC approach had paid off for them. There's plenty of other ones that have put their heart and soul the factories have enjoy a product, and it's gone nowhere. So it really is finding that thing. And I think as one does the RFQ process, a lot of it that's really important is sharing with the factory, the bios of the founders, the opportunity, the VCs, if any, what are they, what are they bringing to the table, guts funding for the initial build? Typically for hardware, you need at least $5 million to get out. So if you've only raised or have 150,000, it's probably not going to be that interesting for a factory. Say, all right, we've raised this money from top-tier partners. We've got a team that's done this 10 times before with successful outcomes. Then the factory's going to be excited and they can see the upside. And if you don't have all those things, then it's still very doable, but just a little bit heavier lift. I think that is an excellent point. And I feel like oftentimes entrepreneurs compartmentalize the way that they approach certain things that they need to do for their business, where they're like, okay, for VCs, I have like a pitch deck and I'm going to do the pitch and I have all of this kind of storyline. And then for manufacturers, I'm going to have like my manufacturing engineer take care of that. And it's just going to be this. And however, it's actually, you're so absolutely spot on with that, where it's really important to get contract manufacturers bought into the mission. Like when I was working at Commonwealth Fusion Systems, we would constantly, like we were a very well-funded company. And that was an almost known globally at that point because our raises were huge. However, it would, we still struggled with certain manufacturers because they still wanted to work with the big names. And the stuff that we were building was for like huge, huge quantities. And we had to do a lot of talking about the mission and about the founders and like how, what our plan was to get to that mission because at the end of the day, as you said, they look at the opportunity costs. They're like, I could just work with Phillips that like has had a crazy track record. They've been around for a really long time. They're very well-funded. They have a market like all of this is public information. And I'm going to get my money and I'm going to get it in buckets. Like why would I ever work with you? But one thing I feel like, and if I have any contract manufacturers that are going to listen to this podcast, I think one thing is the true contract manufacturers that want to make a difference should see themselves as playing a very critical role in enabling the next generation of hardware because as much as VCs give money, the makers are the actual main character here. And I think it's really important for contract manufacturers to also see themselves that way of just we're not just building for revenue and just money and the bottom line, but we're building for a better future where we are the enablers of all of these kind of audacious goals that entrepreneurs have. One, I think there needs to be like a little bit of a responsibility acquiring responsibility for that. And then also on the entrepreneur side, treating contract manufacturers as those enablers and not assuming that they know what you're up to or assuming they carry on the passion that you will and making sure that you have that storyline in the back of your pocket alongside with data where it's like fundraising data, planning data, product data, whatever you're willing to share obviously with and bounds. But it's I think really important to start the conversation off like that. And I think at the end of the day, when you have this really well thought out product roadmap or market assessment where there is a understanding that the quantities will increase and whatever you're buying or whatever you're getting built has a future and the future is very lucrative for them. They will be more willing to potentially take on the risk because of the upside. But I think it's so important to tell the right story so they enable that. - Yes, yeah. And I think it goes to the fact that the factory is your partner. It's very much a team's work with shared risk as opposed to a vendor supplier relationship. And it's a really important mindset to do that. I think also factories do look at it as a portfolio. So a big company like they're probably gonna run really high volume but it's probably not gonna double or just harder like for Apple to double in size is a tremendous amount of work. - Oh good point. - So you wanna plant some seeds? One of the ones I love is one of our early customers like the old Dragon is the remarkable. It's an amazing product. So just a piece of smart E ink and it feels like a real pencil rubbing. But we brought it, did an RFQ, it ended up with a phenomenal factory and the volume is just off the charts. So it's one of those where Apple would be doable but hard to double. But with this one it went from zero to many. It gives them some really nice fresh growth. And I don't know that a factory wanted put all of their dreams and hopes and startups just because they're a lot riskier by the nature of it. But I think a portfolio of some established companies with predictable revenue and then planting the seeds for some younger ones that hopefully will grow. Some obviously won't make it some won't. - Yeah, so basically diversifying their portfolio. It's really great to see these examples because I feel like those examples also increase the likelihood of a contract manufacturer to accept the next startup that comes around because they have a great experience. There's also a little bit of responsibility on hardware entrepreneurs to not mess it up so much because the next guy is gonna suffer the consequences if you don't do so well. (laughs) - That's right. Yeah, I think that's really important because yeah, there really is big shared risk on both sides and we don't wanna sour the punch bowl. - Definitely. - This podcast is presented to you by Prateek, a startup advising and coaching company that is geared to help hardware entrepreneurs get their ideas from a napkin sketch into a lab and add into the world. - I like to call this segment the hardware horror stories where we just take a break to share some of the most outrageous or bizarre hardware development. Stories you've heard or experienced yourself where things just went horribly wrong and it was just shocking and what happened after the fact. - Cool, I've got a long list of these, but I'll. - Amazing, you can tell me all of them. - I'm trying to figure out where to start and I love to talk about the Rumba in that it was the product I got to work on firsthand and it was a while ago, so there's not too many secrets that can't be shared now. But I remember our first order was for about 15,000 units which for us at the time seemed like a huge number and it is sort of this a lot of number. It'll fill up that be three shipping containers, three 44 HQ shipping containers, which is a lot of Rumba's. As I noted, working on this thing for three or four years just really hard, something where you'd sleep on the couch at work for three nights in a row, like putting our whole heart into it and we'd finally built these 15,000 units and we're feeling really good. And I just remember,
so vividly sitting in China with my friend Elliot who is the lead mechanical engineer and actually the only mechanical engineer on it. And it was just like, yeah, he was just phenomenal designer. That's a lot of responsibility. Yeah. Yeah. He went through the torture chamber, but yeah, he pulled it off. And it's like this crazy restaurant in China. It's a hotel in a restaurant themed with all sorts of a safari thing. It's full-size stuffed drafts and things in the lobby. And in the restaurant, there's a glass atrium with white tigers running around. Only in China, would you see things like this? So we're watching the tigers and talking about how excited we are. And in discussing it, we realized that we'd only tested the Rumba for about five hours. And this is a consumer product that has to last a lot longer than that. And both of them are like, that seems not like it's long enough. So we should probably test it for a little bit more. And just keeping in mind, we'd already built the 15,000 of them. Yeah. We grabbed a bunch of them and started testing. And I think when we got to eight hours about all of them failed, oh my god, what happened? We worked so hard to this point, not just us, but the whole team had put everything they had in it. And we started taking apart the robots to figure out what was going on. And what happened is in the wheel module, we found there's all sorts of black dust, which was, I guess, through some static force getting stuck on our optical encoder and jammed the optics. So all the robots lost their odometry. And we're just out of their mind. Like they had no idea where they were and just like they they were done. And it happened in 100% of the robots after eight hours. So like, oh my gosh, this is this is not good. And I just remember like the feeling of despair, like, all this work for nothing. Like we blew it at the last minute. But after we've shook that off, right, all right, how can we fix this? And what's going on? So we looked at it in more detail. And what was going on is that on the motor, there's the brass, like the drive pulley. And when they machine the thing, they left it a little bit rough in the V groove. And just due to the nature of a V dry, it's going to scrub the side of the the side of the the O ring that's driving it. That's what was creating all this dust. And that was screwing up the optical encoder. So we're like, all right, we know what's going on. But we built 15,000 of them. The wheel modules are like very, very to the side of the robot. And there just wouldn't be any time to redo the tooling. Or it'd be very difficult to fix. So we're like, all right, what can we do that doesn't involve of any tooling that can contain the problem and we can do it a day. And we ended up taking a film. So if you imagine like when we were in high school, a report binder, just the cover film and creating a die cut, which you can do at about an hour and die cutting a plenum that was really thin. And we could shove in between the gear housing and the main wheel body. And effectively what that did is just contain the dust to the non-side. So it's still created dust, but the belt was thick enough. It was like holding it in place. Yeah, just like the belt wasn't going to we weren't going to choose through the belt, but it just contained it. And then we reworked 15,000 of them shipped them and we never had one return due to that. We had to return to do to other issues. But it's one of those where we just totally didn't pay attention to quality because we had so many other things to do. And as I know, already three years late, but that could have disrailed the whole thing and just I think through just stumble luck. We were able to figure it out and make it work. But it could have gone in any direction. We just got lucky. And you would assume that would have been called out earlier, right? It's just have we done life cycle testing on this design. But when you're so in it, when you're nose deep in it, that sometimes the most obvious like hindsight is 2020 all the time. It's just when you're nose deep, you can miss very critical portions of it. Oh, completely. And in our world, we think of like cost quality and schedule is what I did about the cost, especially for consumer to make sure they've got the margins they need. And then it's almost to consumers driven by the holiday season. So if you're late, it's devastating. So then you're scrambling. And the thing that always gets put off is quality. Yeah. And especially being a young company, we had no clue about quality. Like we did some functional testing and did what it was supposed to, but we didn't understand reliability to life testing abuse testing, transportation testing. And it was the first of its generation that kind of self cleaning robot vacuum cleaner was not a normal thing. It was completely new. It was completely uncharacterized. And it was a very complex system where we had poked one thing and tried to fix it and something else would break that we may or may not discover. So it's definitely if it's not broken, don't fix it. But yeah, it was a wild west. I think the thing that saved us is we had amazing product market fit that people absolutely love the product. And we would be, people would call us like on their fifth return, they got broke again. I get a new one and where I can of course, like I can't imagine any other product that people would put up with five failures, like five complete returns. Like usually I went for me when something fails once it's done. Like it's just and people just love this thing. So that that product market fit. That saved us absolutely. Wow. That is an excellent story. I feel like more of that happens more often than people would give credit to because it's like when you're working on a problem, it's so easy to get sucked into it and forget the whole picture and the kind of everything that you really need to do for it to exist in the world in a consistent manner. Yeah. Yeah. It's easy to move into force through the trees, especially when you're like so sleep deprived for years on end and like just worrying about the details, but you miss a big picture. Definitely did has Roomba released like retro spackdives or something along the line of this. Oh, interesting. I talk about it now and then, but I don't know if there's anything like a formal history. I believe they have a really cool robot museum at iRobot, which should be fun to see like the progression of the Roomba from idea through where it is today. Yeah. I feel like these are such valuable pieces of lessons learned that I feel that's the whole point of my podcast. I just I feel like maybe not right away, but like five, ten years after the fact it's a good time to release like a retrospective book or something of the I don't know the catalog of failures or something along those lines. I feel like that would be a really informative piece of content that people would really latch on to. I don't know. Maybe a robot should consider that. Yeah. Oh, that would be awesome. There's so many great stories that came out of it. Like, the plane was flying really close to the trees at times so that anything could have disrupted it, but yeah, we managed to get really lucky and it worked out. That's awesome. Thank you so much for that story. That's excellent. Shifting gears back into what we were talking about before around kind of contract manufacturers and journal manufacturing and how to set up your supply chain with low leverage. I guess in terms of so getting into a little bit of the nitty-gritty when it comes to setting up contracts with contract manufacturers. Oftentimes because depending on the contract manufacturer, I've seen a lot of a lot of factories that would say, hey, we really want you to pay upfront, which you should never do. But I guess what kind of contractual agreements have you seen that have gone particularly well for both the startup and the contract manufacturer? It's like a win-win-ish situation. Yeah. So typically what we think of this as the MSA or manufacturing service agreement, which is the contract between the company and the factory, I think the trick here is getting a really nice balance to understanding. A lot of we build all around the world, but it's certainly started building in China. When we look at it, there's no just a ground yourself. There's no functioning legal system in China or set another way. Startup is never going to sue Chinese factory. If you get to that point, you've got so many other problems. Absolutely. With these contracts, I feel like that's a very important part to remember. It's only as good as you can actually execute on it. If you can sue, great. But if you can't, then it's just a piece of paper with a bunch of words on it. That's right. I see some companies spending a lot of monthly on lawyers. Many lawyers aren't proficient. They're graded out of their things, but they're not good at MSAs. That's unenforceable. That's not really the point of it. With the disclaimer that I'm not a lawyer, and one should talk to their lawyer to figure out what to do. But in my experience, the MSA does two things. One is it tries to anticipate what could go wrong. If it does, it gives us a blueprint for how do we fix it? So, if a shipments late, this is what happens. There's a massive epidemic quality failure. Then this is what happens. We can all agree on what's the definition of a massive epidemic quality failure, free percent, or something like that. But it starts that conversation with the factory just to set expectations so that people agree on both sides. The, that work into the same thing. That's the first thing. And then the second is for companies that have investors, ultimately the goal goal is to be acquired or go public. And as part of the due diligence process, they're going to want to see what's the MSA. So it's having something that's in place. I know early on that the company I work for, there's one that we downloaded at when she MSA off the web and literally filled in two or three blanks. And that was what it was for the first couple million products. And what would say that's probably not, it needs to be a little more robust. But I think you don't want the pendulum to swing too far. So yeah, we just have the key.
things which are typically like payment terms, which you're getting at IP control, liability and things like that, but not spend an excessive amount of time and use good will, use up good will and go upshading it back and forth, but just get a reasonable thing in place and then focus on building the product. Definitely. And I think it is important in the only enforceable, like the most enforceable part of a manufacturing that an MSA or any type of kind of agreement with a contract manufacturer is the payment terms. And if you have it be phase gated in a strategic way where you say, pay a certain amount upfront because you will have to pay something upfront, usually if they are acquiring materials for you, but like personally have seen this in if you're buying equipment, for example, and it's like custom equipment that you're buying. They need to design stuff and get the supply chain in order. So they definitely need some money to start that project. But then afterwards like you can withhold money if they are not delivering on what was agreed upon. So that is the only in my mind like the most enforceable part of an agreement. Yeah. Yep. And it's certainly something you negotiate back and forth. I mean, exactly what we've seen is for most factories in Asia that in our area, non-recurring engineering is pretty reasonable. And that one is typically an hourly rate or a firm fixed price. That's not a too big a deal. You got the tooling, which can be quite expensive. And typically it's 15% at tool start and then 50% at the MITP2 or when the plastic comes out of the tool and you tool worked. So that's a 50/15. Each one of those, actually the first one is usually do on delivery. The second 50% is net 30 would be standard terms. The other big expense you have is buying the materials. And before 2009, before the first bubble broke, factories typically would get of start-ups net 30. So- Could you describe net 30 for the listeners that don't know what that means? Sure. Yes. So let's say I take delivery of my widget from a factory today. I don't actually need to pay the factory until 30 days later for that. This is a huge deal from cash flow because it means I might be able to sell the product of my customer. Is that mindfully to pay the factory? That really lets you scale your hardware business quickly. But sadly because so many factories got stuck holding the bag, they took much more conservative terms. And what I see now is it's typically 40% to 100% of payment for the materials up front where I think the average is probably 70% and dollar a processor. You'd have to pay $70 when the factory orders it. I mean, six months before you actually get it, given the whole supply chain problems. And then when they shoot it to you, you owe them zero everything else. So that would be their remaining $3 for that processor, the labor and their markup. But they really don't want to be, they don't want to have an overhang or they don't want to have a lot of unsecured material. We can you buy it, you're on the hook to use it, you own it at that time. I think for larger companies, you can get net 30s table stakes and then if they're big enough and the factory sure that they're not going to go bankrupt, you can get 60 to net 120 is huge from a cash management standpoint. But there's no startup that's going to get that. Yeah, definitely because that would be too high of a risk for any factory or manufacturer to take on. So with that, what has been your experience with getting components from from Asia versus the US versus Europe? Yeah, and when you are thinking components, are you looking at an electrical processor or more like an injection molded part or a whole sub assembly or assembly? I would say not assembly. So the actual components that would appear on bill of materials that you would need to either source or like a manufacturer that's going to actually build it, would make it in-house and then go and build it. Yeah. So we find right now a lot of parts, mechanical parts, injection molded, die casted, stamp parts will come out to China and then support other parts of Asia, Mexico or the US at the component level and the craftsmanship in China is just amazing these days, both from a part but also from a tool making standpoint. And anybody's ever built a tool like there's just so much knowledge and engineering but also craft into doing that. Since China's been doing it since 1980. So I guess 43 years, they just built up a really strong expertise. Of course we're really strong in tool making in the US too but it seems like many molded come out of China. One of the key things is just lead times in how quickly can you get everything because it's always a race. You're burning money to start up that you want to go as quick as possible. Maybe there's competitors. Maybe you're trying to pull in the schedule and catch the holidays, shopping season or things like that. So that the quality is obviously key. The lead time pricing is a really big consideration. So usually cost quality schedule I think would apply to all of that. And then sometimes there's just weird things like in China, typically they can do much thinner wall extrusion which is harder. So for some reason you need to have a thin wall extrusion. You might pick China. Japan does a lot of precision parts. It depends on what you want to do to where you look to go and do it. And do you feel like the trade off that you make because a lot of times why people would potentially want to work with US companies is one, they're very reachable. You can always go to the factory floor and actually look at what parts are being done probably much easier to negotiate because of there isn't a language barrier or cultural difference. And it's just if there is a need for iteration, it's just easier because they're closer and not always quicker. But with Asia, Asia, do you feel like it's worth the trouble of the hurdle of kind of building that business relationship and maintaining it and doing the negotiation and working through quality together. That would be a pretty big undertaking by startups where they're cash strapped but they're also very time strapped. Yeah, I mean, my is it's always best to work local if you can find a factory that would do what you need in their right next door. You just can't beat that because the challenge is always communication and you hit the nail in the head that the minute you introduce time change travel, culture, language, it's just it's so hard to build a hardware product and then you've compounded all of that. So yeah, I'd always say look, look, look, look, look, look, there's a great local mold shop or sheet metal shop or factory. That's your best bet. Just go with that. But if that doesn't exist, then you have to start looking for their field. You get off of your tools, I look to China. Taiwan has great exercise equipment, for example, he has their own little and bitch, but always if you can build a little, clearly that's your best bet. And did you learn through those niches through working or is are there resources available to learn more about it? Yeah, that's that's the challenge there at the old dragon we're trying to make this more accessible and building it into our software platform. But best thing now is just to talk to people. And with some of it, maybe similar to building on the factory similar to a VC analogy, being able to get a warm intro to a factory from somebody that's already working there, I think is important as the person just approaching them cold because it's probably a little bit harder to make that work. But yeah, I think it's just a matter of networking right now. I don't know of any big database other than Alibaba where there's a lot of good and a lot of unknown. The signal to noise ratio with Alibaba is I feel like a little difficult to work around. Yeah, no, it's super un favorable. Like you can get some, it's a great tool, but it's not 100%. And I think it also goes to the fact that for any factory you're working with, then any sort of serious fashion you want to go visit them. You are so right. I actually fun, fun little story of a hardware failure on my part. When I was working with my team at Commonwealth Fusion Systems, we were looking to buy a certain equipment and we were essentially looking at different types of shops both in the US and Europe and Turkey and a bunch of different countries. And we found one that was local and we were like excellent. Like it's local, we can go there, we can keep the pulse on how it's being done and we will have more control over the quality and everything's great. And then we went through a lot of conversation. The person that we were talking to was incredibly capable. He knew exactly what he was doing. He was answering the questions perfectly. He was telling us like, oh, you didn't ask me about this. This is super important because we were all, it was the first time we were working with this very particular type of equipment. We didn't know what we were doing and we didn't know what to ask at times. And he was very helpful in educating us. So we were like, this is great. He's awesome. He knows exactly what he's doing. He gave us a quote, it was cheaper quote than the other places and we were like, this is really great. Things are just really lining up for us. And then someone from the manufacturing team was like, we should probably go and visit the place just to see what it looks like. And it was the middle of COVID. There was a lot of issues with being able to be near people. So we said, hey, do you mind giving us a tour of your facilities via Zoom? Just so we see what it looks like. And it was a garage. It was tiny. It was not a factory. It was not anything sophisticated. This guy was super passionate about this very particular type of equipment. Very had worked in industries where they built this equipment. The facility was basically nonexistent. There was a car in there. It was just horrible. And we had already asked for the money from the executives and we had to really like pedal and say, like we had a tour of this place. It's not going to be a good fit. We had to put pictures of the place so that
we were not just like making this up, which is they was truly a garage. So definitely go and visit the factories that you work with before signing any documents or asking your CEO for money for it. Don't do what I did. Yeah, that's something. Yeah, it's I think I'm picking a factory. It was a lot like getting married that you really want to know your partner and build up that relationship over time, just because it's really, if you've got a great partner, you can do anything you want. But if it's not quite the right fit, it's just it's very hard to succeed. Definitely. I completely agree with that. Okay. And then I guess final topic I wanted to discuss with you is regarding quality assurance, where I feel like in the minimum viable product realm, quality usually ends up taking kind of a backseat. But and it's also because quality is something that not a lot of people are super interested in because it's not this like super exciting thing. It's like making something that's good. Great. And there's a lot of documentation involved and a lot of testing involved and a lot of people find that very boring. I find it fascinating, but I'm definitely not a part of the majority. But I guess like in your experience, what have been the common pitfalls when it comes to quality assurance early on when people are doing product design, if you have any fun stories, feel free to tell them. But also like what you would recommend for hardware startups and how they should approach quality. Yeah. So I think with these a couple of things, early decisions cast along the shadows. So that what you decide now may stick with you for years to come. So you can want to get that right and that can impact quality. And then the unknown unknowns, they're really dangerous. If you know that you don't know something, you're going to go figure it out. But it's just the things that you're blindsided by. And when I think of quality, there's a lot of different aspects to it. A lot of people just think of functional quality. So does the thing turn on? Does it make an noise? Does it do what it's supposed to? And that's important. It's going to do that. But from there, there's things like, is it going to survive the shipping from the factory to the customer? Because that's a pretty brutal world. You may be if you're on a like I'm pressurized, unheated playing, you might be hot somewhere and then you get really cold and dry and then you're back and hot again. Or maybe you're on the back of a truck on a bumpy road and you're getting vibrated. So something there's a spec called ISTA 1A2A3A, which is the International Safe Transition Authority. And it will help you understand like the crush strength for your box, the drop test, stuff like that. There's abuse testing. So we think of like tension twerk. You can imagine like some sit in the Disney Toy Story with his vice grips and a fish scale, like pulling on things to see if they can survive 21 pounds of force before they rip off. Pinch points, lead paint or heavy metals is a big deal. So there's a lot of things you can do. One of the toughest ones I think is reliability. So if you want your product to last 2,000 hours, like that's a long time. It's sit around and wait. So how did you get confidence that it's going to last as long as it is? And I think also being engineers, many to just get the thing working and like, all right, it works. We're done. But there's a long road to get from that one working thing to something that's going to last. Like in the real world where people are brutal, it's going to get dropped. It's going to like just get beat up until last hour hours. And I feel like quality is something that is very interwoven with reputation of a company. And I like whenever I'm mentoring the startups that I work with, I always say you're building a product, you're building a company and you're building a reputation. And those three things are very different problems that you need to address separately. But the kind of the product that you're building it like, they're all attached to each other at the same time. When it comes to quality, as you said, like, Rumba was such a cutting edge and needed technology for so many people that are lazy and don't like doing vacuuming like myself. And so people were able to tolerate the lack of reliability that the first few were giving. But then again, what happens is not every product has that perfect product market fit. There is sometimes, sometimes people don't know what they want or need. And oftentimes companies through reliable technology have to prove that a bit. There's like a period of proof. And I feel like if you put quality in a back burner, then what's going to happen there is people are going to buy this. And it's not going to work. And then they're going to just throw it in the corner. And not only does your company suffer and your product suffers from that, but also the technology. If it's something that's cutting edge and people are not used to it, but they actually do desperately need it, they just don't know. Then you also lose that in that process. Yeah, I know. I think you're exactly right. Yeah, that with quality, there's so many parts to it. But I think it's the most important. If we think of cost quality in the schedule, it should be per first. And the thing that I came to learn too is it's one thing if a product breaks and it just doesn't work, disappoints the customer. And maybe you can make it up with great customer service and sending him a new one or there's a whole way you can handle that. But also with anything with the battery or plugs in the wall, this is a chance you could catch up and fire and really hurt somebody in a devastating way, which it didn't occur to me until until it did. Like the responsibility that hardware companies have and putting products and people's homes. Because the challenge is where tight unschedule the cost of goods all has to be low and you're using components that aren't like going in space X. So how do you guarantee that you're not going to hurt somebody? And that's again, it's one thing if it breaks and people are disappointed and go bankrupt, which seems horrible, but it's a thousand times worse if you actually hurt someone. And just knowing you can sleep at night, like building in whatever, for volume, you build that your product is going to be safe for humans. So there's a lot of responsibility, which might not be apparent because everybody's worried about running out of money or just getting the thing done. There's a latent responsibility that goes there. So yeah, especially I feel in that is such an important point. I feel like that is engineering ethics mindset that everyone should employ. I have my my engineers order ring that I wear all the time and for those who don't know what this is. It's a trend that started, I think, in Canadian universities and engineering schools where at the end of your engineering degree, you would essentially take an oath saying that you will be an ethical engineer. And basically the reason that they put this in the first place was because there was a huge bridge failure that happened and a lot of people died and it was due to an engineering oversight. So they decided to make rings out of the steel of the bridge so that engineers would take this oath. That's a big Canadian friends always have the ringing. You can see how old they are by how worn down it is. Yeah, exactly. If it's like pretty smooth, which mine is like pretty smooth, it means that you've been in the ringer or worked at a machine shop a bunch. Yes. Especially with safety. I feel like safety related products also have a huge responsibility because oftentimes people might take risks more because they have the product. And so if the product doesn't function properly, whether within its lifetime or just even if it's a one off like it functions and then you throw it out or something, like it needs to work well. Otherwise, it could actually instead of helping people, it could jeopardize people's health and wellness even more. Yeah, safety and quality is just a huge topic that I wish there's more formal practical education. One of the things that I think is so cool is the halt testing. So the halt is for highly accelerated life test. So if we imagine our product that wants to last for 2000 hours, like nobody is time to sit around for 2000 hours. Or at least most people don't know what the whole you basically shake and bake it. So it's an environmental chamber with a like a paint shaker. Yeah. And that tends to create all sorts of failures and they're not they will happen, but at least for me, they are not intuitive. So one of the great ones and there's a YouTube video of it out there is a printed circuit board with just a capacitor stuck on there like it's a big tall cap. And ordinarily, yeah, it is what it is. But when they shake it, that capacitor hits residents because they do a bunch of different frequencies and it's dancing all over the place. And then it finally fatigues off its lead. It's leads and goes flying. And when I look at it, like even though I'm a mechanical engineer, it's not the first thing that pops to mind and what's going to fail enough word. So it's yes, I like all testing, especially with high frame rate capture video is just fascinating to see what breaks and ways that you just wouldn't anticipate. Yeah, I think that's so true. I think some level of life cycle testing is should be an necessity. And I think one of the biggest issues with quality engineering right now is that the barrier of entry is pretty high in my opinion, because there's just so much documentation. And oftentimes people have to pay attention to it, especially if they're in highly regulated product spaces like medical, but it's not something that is very clearly taught and it's usually fly off the seat of your pants and do your best. But it is a really critical component. And even if you are trying to get to market fast, I feel like there is like a minimum viable quality assurance that you should do whether it be just a destructive test, see what breaks the thing and like increasing the severity of the destruction. So you see like where it actually fails because if you just do a destructive test, you're going to be like, okay, failed, but what made it fail. And any type of kind of I remember I worked at a company that was building this like electronic jewelry and I built a robot that was like slamming it against a metal table for days on end. and it was trying to simulate if someone put it down.
on a table when at the end of the day in a more aggressive manner to see when it would stop working. So these are important things and people sometimes forget to do them and then they launch it and then it becomes a big issue later on. It talks to the early decisions cast long shadows because it's really easy to change the thing you had. It's more painful to change it once the tools made and it's incredibly painful and it's in a customer's hands. So it's one of those you almost have to slow down before you can speed up. But once you've got it locked in, you know the product market fits there. You're at the right quality cost and schedule. Then you can just pour gas on it and excel and scale quickly. But you just want to have confidence. Definitely with that I will end this podcast. This was such a informative conversation Scott. Thank you so much. I feel like a lot of people would get a lot of value. And I wish that when I was working at these startups, I had someone like you to mentor me to do the right thing because I had to learn it the hard way. So thank you so much for being here and joining this podcast. Oh, thank you for having me. These are amazing questions and I'm grateful and thankful that you're hosting this to share knowledge with the next generation. Oh, thank you so much. And we'll definitely have you back if you'll come back. Absolutely. I'd be honored. Okay. Thank you so much. Thank you. Hello, welcome to the too long didn't listen segment where I will go through the general key takeaways and actionable pieces of the episode for those that did not have time to listen to the full episode. So let's dive right into it. So the decision to outsource or in source depends on a few metrics. So here they are. How many want to build and the potential for its scalability? How much of the quality want control over how novel the tech is and how if the skill set outside of your organization will be able to take on the novel technology and has already existing skill sets to be able to start the production. Your IP protection risk tolerance. So for example, Dyson had their own factories from the start because they were very concerned about their IP. This is something that's very personal to companies and should be thought about when making the decision to insource or outsource. Obviously cost comparing what it would cost to do in house versus outsource. Just doing a pretty preliminary budget exercise will give you a sense of where you which one would just be a better fiscal decision to make capacity comparing demand versus how much can be produce in house versus outsourced and time to market. So how quickly you would be able to get to market usually outsourcing will be faster. So these are metrics to think about when you're in the process of deciding if you're ready to outsource or you want to continue in sourcing. General rule of thumb is that the first 100 units should most of the time be built in house to build up institutional knowledge and really understand the product. This will enable you to be the expert of your product which in turn will give you leverage when working with contract manufacturers. So before you go to a contract manufacturer it's I think very critical for you to know what raw materials you're getting. Having that entire supply and chain setup or at least something close to it so that you can offload that to a contract manufacturer to manage later on. But also really be the expert of the process of creating your product so that when you are spinning up a contract manufacturer. You'd be able to articulate what it takes to build the product and also have estimations on how long each of the processes actually take because contract manufacturers will estimate how long certain processes will take and that will. Get you your price per unit so if you know more you'll be able to negotiate more. Make sure to always have people on the factory floor and. When you're even in the process of selecting which contract manufacturer or CM which CM you're planning on choosing it's really important to see their facilities so make sure to definitely pay a visit before you sign any documents. And specifically when starting off but even when production continues having regular visits is critical to improve domain knowledge it will enable you to continue to be the expert on your product. Keeping the CM accountable and then catching any quality issues early on. So definitely make sure to put it in your schedule and have dedicated staff members that can visit the factory floor consistently throughout the course of your production. And when outsourcing make sure that you're good you're at a good place with your design if you anticipate that the design is going to change or revisions need to be made in the first few months. It's a good idea to wait until you're beyond that kind of turbulent design phase so that your design can spin out to your production because design change orders are a hassle and require a lot of operational overhead getting to a point where you feel good about your design. And small changes here and there are very reasonable specifically as you do your testing in parallel you'll find out and learn things and that's a very reasonable a request to make from a contract manufacturer but make sure that you're coming at it from a balanced angle where you've already done some testing and you already know a little bit about your product before going in and getting it produced in higher volumes. For complex products keeping the team relatively small keeps the bandwidth of communication high so a tiger team has the ability to move faster and more efficiently. So when you're deciding on your hiring strategy, this is something to really consider. A good point for transitioning back to in house. So once you made the decision you're outsourcing your first. A few and you decide okay like I actually eventually want this to be in house then you have to have a point in which that transition needs to happen. So a good rule of thumb is when you have made 50 million of business with the CM and once you hit that you can either consider bringing it in house or dual sourcing that's obviously adjust a number that is a reasonable target but every business is different. So make sure to determine what that target business you want to do with a CM is and plan accordingly. And if you have plans to return back to an in house manufacturing that decision needs to be made on your roadmap and a handover period should stretch out to be at least eight months to a year. Depending on the complexity of the product if it less complex it could be potentially quicker but making sure that you're setting yourself up and your internal manufacturing up for success having a pretty overlapping transition period where you spin up your own production and you're already producing and getting product and the hands consumers or your deploying systems while your contract manufacturers also doing so and then slowly tapering off is a good strategy there. If you choose to do dual sourcing it's a good method to keep everyone in check and have leverage in the price per unit negotiations. However, it is important to note that when you have to contract manufacturers you basically have to treat it as if you are producing two separate products because the quality will vary and individual contract manufacturers will have their own kind of management overhead internally you'll probably have to have two program managers or a program manager will have to work on both accounts. Since atoms are different from bits the quality and the output of both of those are going to look different so those are very reasonable but just having that expectation in your mind will set you up for success. When you're a small business you approach the M's from a low leverage standpoint because you don't have a reputation to back you usually no one knows of your name yet because you're still in the process of slowly launching your company and your product so coming into the conversations in the highest position you can is very important so you should consider doing the following when engaging with contract manufacturers number one make sure that you evaluate the factory start up fit so what that means is depending on the amount of business you're going to bring to the contract manufacturer that entire conversation is going to go very differently so highly recommend not going for big players but starting off with smaller players and have as many conversations as you can and really evaluate the landscape so rule of thumb is to choose a factory that you make up approximately 5 to 10% of yearly revenue at super super early stages that might sound like a very scary number so don't be alarmed by that it can be smaller than that that will just be an easier conversation to have if you are the 5 to 10% if not still it's okay and do the following to make sure that you're setting your that entire conversation up well so be technically prepared know your product process and have very good documentation so that they know that who they're dealing with is on top of it treats the M's like investors get them bought into your product goals and your team and your mission share bios of founders the opportunity so what the upside could be and then also what the C's you have in your pipeline and who you have as supporters and partners because that can really change the conversation quite a bit and then when trying to find these contract manufacturers that's a pretty hard part to write because you're trying to really find this good fit and most of the factories out there are huge their annual revenue is much more than what you would mean to them so talking with people in the startup ecosystem to be connected to the right C'ms is a very good strategy where you could talk to founders or you could talk to manufacturing experts like Scott himself actually forge F O R G E out of green town labs is also really good nonprofit that helps startups and connects them to manufacturers so just really do a lot of things and
lot of networking there to find that good fit. And then next point of a key takeaway is that don't forget about life cycle testing. If your product is supposed to work for eight hours on end at a safety factor of two at least and tested for at least 16 hours. So whatever your safety factor is, you multiply the amount of time that is going to work and then you do that test for a few cycles. That depends on your risk tolerance. Every company works differently. I have a lower risk tolerance when it comes to life cycle testing because quality is really important. So it's really up to you and what other trade-offs you're considering, but definitely do it before you set off or get it into the hands of hands of whoever is going to use it. Because the hardware horror story segment, Scott tells us about how the Rumba project only tested the product for five hours and it stopped working at eight and they had to do a very creative factory solution to fix it. They got very lucky, but you really shouldn't try your chances with that one. And then we talked about manufacturing service agreements, manufacturing service agreements basically do two things. One, it tries to anticipate what could go wrong and then if it does, it gives a blueprint of how to fix it. And it's also important to note that there is strong is where you can actually execute on them where you can press charges. So it matters where the factory is located. If you're outside of the US, you might not have as much leverage. So do not say it as an end all be all. VCs also look into when you're when you're fundraising venture capital, a capitalists look into your manufacturing service agreements sometimes when they're doing due diligence. So setting it up well is very critical. So standard terms can be 50% up front so that the contract manufacturer can buy materials and start up the production. And then the next 50% is usually at a net 30 and net 30 means if you receive the parts from the factory, you have about 30 days after you see them to actually pay for large equipment. Good terms could be 50% at startup, 30% at factory acceptance testing and then 20% at site acceptance acceptance. I've also seen kind of 60, 30, 10 depending on who how big of a company you're working with, it will range from conservative to a little bit more lost. I fair. And then also make sure to negotiate shipping conditions as well. Some cms will be a little bit more conservative and sometimes they'll ask for 100% of the materials up front while it's usually about 70% of the materials. And it can be up to six months before you actually get anything in hand due to supply chain problem. So setting yourself up for that expectation and ordering early and long lead items early is very critical. And then the final two bullet points that we discuss is that for injection molding components and tooling China and Taiwan are very good options. Other components can be sourced from the US and Mexico as alternatives. And again, we kind of finished off with qualities of very important piece of the system, but especially for consumer electronics, the way that you're able to de-risk before it gets into consumer hands is critical. And it's interwoven to the reputation of the company. Roomba was able to get away with a lot of failed units because they had a perfect product market fit. However, that's not always the case. Sometimes you need to prove your product market fit and sometimes people don't know what they need. So that might not work every time. So doing lifecycle testing and buttoning up quality should be a critical part of your product development strategy. And with that, this was a very content heavy episode. I hope that some of those bullet points and some of those key takeaways really help you determine your next steps in your product development journey. Thank you so much for listening. And feel free to share the podcast, share your comments and reviews of the podcast. If there were any pieces of this that you really wanted to hear more insight on and you didn't get answers to the questions that you had, please leave comments on either our LinkedIn posts or on the reviews. And I will make sure to cater our next episode so that we get some answers for you. Thank you so much. The music for this podcast was brought to you by my friend and incredible musician Joel Caffey. The builder circle is actively looking for people in the hardware industry and serving hardware entrepreneurs. Please reach out to
[email protected]. That is pratikdev.com to inquire about getting featured on this podcast. Thank you so much. And I hope you enjoyed the episode.
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