Session Recap: Brady Forrest - Highway1.io

Brady runs Highway1, PCH’s Hardware Accelerator, and is always on the lookout for the next hardware startup. He co-founded Ignite Talks.
He is also an advisor at 500 Startups, and previously worked at Khosla Ventures and Microsoft.

In the last SupplyFX AMA session, he answered questions about: hardware startups, fundraising, accelerators and manufacturing.

“One of the biggest issue I have with sourcing parts is trust. China is typically the only option if you want to be competitive in consumer electronics. Searching other contract manufacturing sites is pretty much a shot in the dark. How do you plan on improving that first transaction with a new vendor?”

We have a network of vetted suppliers and factories that we work with. I think that for your *first* couple of runs it often makes sense to go local. If you’re in Europe, then look in Europe. If you’re in the US, then look in the US. For your V1 having some close by, with no language barrier is often a good starting place.

“Highway1’s program includes a visit to China. Does that mean that there is no way to scale in the Western world?”

It’s not the only place to scale, but it depends on what type of relationships/BOM/pricing/business model you’ve developed as a business. Certainly for many companies China has served them very well. It’s important for them to have a perspective of what’s possible in China vs/ your local.

“I am curious how you see the investment landscape in the next 6–12 months. Do you think there will be a decline in Series A investment, and how will that impact the HW startups?”

I think that there will continue to be funding for hw startups that are developing products with a software service. There will be more attention paid to the early fundamentals though. I think that you’ll have to be able to demonstrate a true customer need vs. a theoretical one.

“What is the market research process on a proposed product at Highway1, or do you accept on gut instinct?…

Great question! During the Business Review phase of our application process, should an applicant progress that far, we look at the competitive landscape of their proposed business model.

… and how much research do you put in and how is that research done…with the competitive landscape?”

It depends on the existing competition and how unique a product really is. If it’s truly the first product in a category, that’s impressive at this point in hardware development. If there is competition, we will obviously find everything we can online and even follow-up with people from that industry to understand the localized competitive landscape and what aspects that industry really competes on.

“What are ways to find alternative/less expensive Chinese parts? I usually design with parts from Western suppliers but they are often pricey compared with something that a Chinese manufacturer or designer can find. For example the SMSC LAN9514 USB hub in my Pi Platter is a good part but expensive. I’d like to see if there is a Chinese equivalent that I could design in (find samples, source ​*and*​ documentation in English).”

Often times the cheaper Chinese sources can be at the very least a compromise of quality or are even sometimes just the leftovers from the production run of the original parts. It’s best to start designing with the parts you can reliably access, and then look at cost-down and scale when you are producing enough units to justify the change. By that point, you should have a partner factory that will have better access to local supply chains and understand which cheaper sources you can trust.

“It seems like a lot of advice I see is that I should move to China, but I’m not ready for that step. What is a good in between when I’m doing manufacturing? How do I find suppliers where I live (Pennsylvania).”

You may have to look outside of Pennsylvania depending on what parts go into your product. You can start your search at local incubators, tech shops, and universities for connections. There are plenty of PCB assembly houses (EMS) in the mid-west and west coast. There are a few places in the mid-west for plastics. Protomold is in Minnesota and they can help with some low volume tooling. I suggest you to a search online and then visit the manufacturing facility.

“How is HW1 different/better than YC?”

We have a lot of respect for YC and we have co-invested in 3 companies, but there are some distinct differences. Hardware takes longer than software. It requires more people and the companies are prone to failing due to small execution errors very early on. We started Highway1 because we felt that hw requires a special touch. We have engineers on staff devoted to working on your product goals. We have a large space that allows you to work on that project with a shop. Our classes focus on retail, mfg plus marketing, bd, investment, software.

“I have device that I made 10 of and sold a few on Tindie. What is the next step for me? Is that a time to apply to Highway1? I realize it’s probably not going to China on my own, but what kind of considerations should I make when building up the next step of my product?”

That’s a great sign! We are big on getting validation from the users themselves, so you’ve taken the best first step possible towards validation. The best thing to do now is to start to understand why people are buying your project on Tindie and how they are using it. This will allow you to start to hone in on your “minimum viable product” and make the hard trade-offs between feature set, price point, and overall experience of the product. If you can optimize your product even further with feedback from your Tindie customers, that will make you an even stronger applicant to Highway1. I think that you should definitely apply.

“I always get confused about the difference between an incubator and an accelerator, what’s the difference?”

It’s all in the eye of the beholder ;-) BUT often incubators are just about ideas. We require a prototype and a team. We need to see tangible proof that you have built something worthwhile and that you have the team to do it. We want to accelerate those teams.

“I always wonder how you decide between one idea and the next”

We receive hundreds of applications from all around the world, and have about 3 weeks to select 8–10 teams. The Highway1 staff runs through several phases in selecting our final teams. Phase I weeds out all the applicants that aren’t qualified — they have not developed a prototype yet, their product is not a hardware product, the team is a single person, the product has existing competitors who are much more advanced, etc. Those teams who pass this Phase move to our Business Review process, where we look at the applicant from the lens of the market, fundraising, and team. Applicants who pass Business Review progress to Technical Review where we look at their technical validity and progress, and user validation and progress. We also assess the strength of their team on technical fronts. Applicants passing Technical Review receive a Final Review meeting with our decision makers. From this pool of finalists, we select our 8–10 teams and give them $50k-100K in cash (with no program fee).

We require a full team of 2+ people to fully utilize Highway1. That can be 2 co-founders, a founder and an employee, or whatever works at your stage of development. For skill sets, it usually makes the most sense at the 2-person level to have one person focused on tech and one person focused on business, but the reality is that the most important thing is to be able and willing to learn new skills since no 2 people will already have all the skills you need to build a company.

“Do you help companies at highway1 take any specific preventive measures to eliminate the risks of sourcing counterfeit parts when dealing with Chinese suppliers?”

We always encourage our startups to go through trusted distributors (e.g. Arrow, Future Electronics, Avnet) that sell to Chinese factories. Work with the distributors early on in the development phase. Once you go to China for manufacturing, be sure that your manufacturer orders your parts from the distributor specified by you. You can always follow up with the distributor to ensure that the parts were properly ordered.

“What is the expectation for a founder’s salary during the first infusion of investor money? I understand the need to put money back into the business but I am not sure how some people pay rent without taking salary for months to years.”

It’s a real issue. We have founders in our program that have families. We have founders who are renting a room in a shared house. We have startups that all share a single house (and live on air mattresses!) One of our companies currently lives a longterm care facility to be near their customers.
In other words an early stage, unproven startup can require a lot of dedication and hardship. Founder’s salaries are often negotiated with your investors. Pre-funding I know many founders that don’t take any money. Most of our founders pay them themselves $3–5K — depending on financial stability. Pre-revenue $60–80K is a good ballpark once you’re further down the line and you’ve received more investment.

“If you’ve a product on Tindie (or other) and you’re selling a few at a time, how do you find total market for the product?”

First you need to define your target market. Can you clearly describe the person that would purchase your product? The description of this person needs to be very specific and not generalized like “everyone with a smart phone”. Once you know whose is buying your product you can use other published market research data to estimate what’s the entire market size.

“To build a successful hw startup, would you say that developing a core innovative technology is more important than identifying market needs, or is it the other way round?”

Investors are always looking for the trifecta of team, tech, and market, so it really is impossible to divorce tech from market or place more importance on one. If your tech is really that innovative, you should have plenty of markets you can start with, and if the market is that ripe for disruption, you can probably solve those market problems with multiple technologies. It’s about finding the team that puts together the correct tech for a timely market that really proves you are the best team to carry that startup forward as a business.

“Do you encourage or discourage Highway1 companies to open source their hardware? What about using existing open source hardware in their design?”

We do not discourage H1 companies from open sourcing their hardware, but it rarely happens. It’s unclear how advantageous it is for a company to OS their designs & supply chain. Many who have were then beset by competitors who did not have to pay for R&D and did not contribute back.
In terms of using OS hardware, yes! Almost all of our companies have used Arduino at some point. Particle is another great example.

“Which of the HW1 alumni would you say has the highest chance at becoming a Nest-like company?”

Lots of our alumni are going after big markets. Given long time cycles, it’s probably still too early to tell. Some examples are: Modbot in robotics, Cue in medical testing, Ringly in fashion, Molekule in air filtering, Navdy in automotive, quite a few others. Ask me again in 5 years. ;-)

“What do you think would be the key success factor of a B2B Industrial HW factor? Also what are the elements investors would look into such a startup for a potential investment, considering the fact that this kind of startups take longer to IPO.”

B2B hardware focuses much more on the core technology and IP than other factors like design or the user experience since the market fit will be limited to specific markets that will likely be identified earlier in the development cycle. In these markets, investors will want something that has a recurring revenue element since these startups are more likely to create cash flow than singular launches of consumer products. Margins can also be higher in B2B which attracts investors.

“What is the right mix of a starting team? I design electronics, should I hire an ME next? A business person? A designer?” Suppose that means after the business person? What is the mix of teams bigger than 2?”

It depends entirely what you are making. At the minimum we recommend a technical hw engineer to build the physical product, a software developer to code the web/phone app and a business person to take care of the marketing, fundraising, ect. From there, it depends entirely on what you are building. Prioritize needs and major risks that can kill your company first, and hire to address those needs accordingly.

“My last question would be just a general feel for how big hardware companies can get. Are you seeing the overblown valuations like other types of startups?”

Apple is a hardware company. ;-)

“What are some good resources for mentorship for those who don’t make it to an incubator?”

Supplyframe seems to have great resources :wink:. I recommend checking out the hardware meetups in your local area. The communities are typically incredibly supportive. The books we recommend you read are: The Hardware Startup; The Hot Seat (by Dan Shapiro); Venture Deals (by Brad Feld). Good luck!