Hey makers and entrepreneurs, I have good news and bad news.
The good news: IoT haters are going to hate, but the world does need that IoT toaster you made.
The bad news: They do not need it right now.
And probably not for the next 10 years. But in 50 years you might find yourself upset that your toaster is not connected much like people today complain that their Netflix is too slow on their phone.
The art of timing in innovation
We can do a lot of incredible things today. At MiLA Capital, we see thousands of founders annually and we are often floored by people’s creativity. However, we often have to ask, “Why Now?”, and get hung up on that question. Facebook was not the first social network, and they were able to wedge in when Myspace had scaling issues. Youtube was not the first streaming company but figured out the advertising model to make the unit economics work.
The IoT Toaster can do a lot of incredible things. It can sync to your light or motion sensors. It can track your carb consumption. It can detect burning and ramp down. We can do these things today and it’s amazing. We can affordably produce the hardware. We just can’t affordably sell the IoT Toaster today.
We tell hardware founders to find a big future market yet chase a smaller and more approachable niche market in case the rest of the world is not ready to buy. This balance is tricky and perhaps some numbers will help. Let’s look at this hypothetical IoT Toaster.
The cost to make 1 unit with 3D printers and Raspberry Pi: $80
Non Recurring Engineering (NRE) Cost to get to Mass Manufacturing: $800,000
Estimated Niche Addressable Market: 100,000 units
Future Cost: $40
Customer Acquisition Cost of Niche: $10
Customer Acquisition Cost of Mass Market: $50
If you make bespoke hardware at $80 COGS and sell for $100, you are making money gross but not net. If that sell price is $200, you can sell direct but not through distributors. Ideally, you can sell at $350+ and you are surviving with each sale without risking a lot of upfront capital. $350 is a lot to pay for a toaster.
If you decide to mass manufacture, then you risk significant capital up front, in this case $800k, to save $40 per unit. Your investment is made whole only after you have sold 20,000 units. Hopefully you get there without a redesign, but that is not always the case. Many founders decide to either grow out of the niche or try to create new revenue streams through dashboards, analytics, subscriptions, etc. However moving into mass market may erode your profit, forcing you to trim staff when you should be making a bigger push.
Indicators that you are too early
If you find yourself paying too much today to buy customers, you may be too early. Maybe one day they would be more affordable. And if there are not enough customers to profitably recoup your non-recurring engineering (NRE) costs at engineering and manufacturing, then for sure the product is too early.
The IoT toaster is not right for today, but I guarantee you there will be a time in the future when you are cursing your IoT Toaster for something silly like latency or pairing issues, but relieved that you are not living in a non-IoT toaster world.