Hardware Startups 101: Tips for "career engineers" (NESOSA 2015; Favalora)

Client Confidential
Hardware Startups 101
for “Career Engineers”
March 2014 to NES-OSA
Gregg Favalora
CTO – VisionScope Technologies, LLC
Favalora@gmail.com
Visit http://bit.ly/hwstartupsbos
for links to the cited meeting calendars,
pitch deck fundamentals, books, etc.

http://bit.ly/hwstartupsbos
Lightning-fast HW Startup Survey Course
• What will you learn tonight?
• Case Study: Actuality Systems searching for a market
• Nine critical factors: “Traversing Gregg’s Tripod of
Tripods”
• The 10-step path for aspiring entrepreneurs

Product Customer Development (Prod. Def’n.)
Affordable Manufacturability
Patents
Admin /
Legal
Financing / Legal / Accounting / Taxes
Board of Directors: Bosses, Allies
Quality Systems, Design Ctrl. (med dev)
Psychology Outbound Marketing, Sales
Attracting and Retaining Talent
Seeing & dealing w/ stress, bozos

Lightning-fast HW Startup Survey Course
• What will you learn tonight?
• Case Study: Actuality Systems searching for a market
• Nine critical factors: “Traversing Gregg’s Tripod of
Tripods”
• The 10-step path for aspiring entrepreneurs

A Company’s Lifecycle [Ideal versus actuals]
Startup
Profitable
M&A or
IPO
“Lifestyle Business”
Dissolution

Client Confidential
You Can’t Predict the Ride’s Result or Duration
10
Actuality
Systems
Actuality
Medical
Series A
$1.5M
Note
$0.8M
Series B
$3M
Series C
$6.5M
Notes
$2.5M
1997 2004 2009
PerspectaRad
Acquisition
By OFH
Sold
Patents
2011
Vision
Scope

Client Confidential
1997 – 1999: *Huge* initial struggle for $$
Persisted tenaciously...
ka-ching!

2000 – 2004 – Actually, a ton of fun
• 6 full-time employees
• Tiny office in Reading (128)
• Engineering
• Ship betas & product
• Rounds of funding
• Winning awards, getting grants
& customers
• Bringing in seasoned exec team
• ...a whole new set of challenges
& excitement
Build it, baby!

Client Confidential
Phase 1: $1.5M, Proof-of-concept
1997-2001
• 100 million pixel display
• grad-school dropout
• ** three years ** to $
• undocumented sole-
sourced stuff (DLP)
• only 6 people
Gregg Favalora, re: Actuality Systems

Client Confidential
1997-2001
sourced stuff (DLP)
• only 6 people
Phase 2: $8M, Look for Market
2002 – 2006
• Started selling prototypes
• For “whole product” added an API for
standard 3D graphics (OpenGL)
• Selling products vs. components
• Failed to identify segment with
sufficient ROI for a $100k product

Client Confidential
1997-2001
sourced stuff (DLP)
• only 6 people
2002 – 2006
Phase 3: $2M, Pivot out of HW
2007 – 2009
• Good clinical studies, but no VC
interest. PIVOT: became a medical
software company for prostate cancer
• Attend procedures in OR, understand
reimbursement, hire VP Clinical, study
successful competitors... * recession *

Client Confidential
1997-2001
sourced stuff (DLP)
• only 6 people
2002 – 2006
Phase 3: $2M, Pivot out of HW
2007 – 2009
Good clinical studies, but no VC
interest. PIVOT: became a medical
software company for prostate cancer
• Attend procedures in OR, understand
reimbursement, hire VP Clinical, study
successful competitors... * recession *
Phase 4: Wind down, asset “sale”
2009
• ~70 shareholders (!) approve sale to
my new employer, OFH
• Became wind-down CEO 2009
• Patent broker, 150 prospects
• Almost-sale in 2010; depressing!
• Actual sale in 2011, gave some $
back to investors

Key Lesson
• Step outside your “engineer hubris” and give deadly-
serious thought and sales experimentation towards
answering this question as soon as minimally viable:
HOW MANY OF THESE CAN WE SELL
AND AT WHAT PRICE
• Disregard “build it and they will come.” Only trust $$$.

Product Customer Development (Prod. Def’n.)
Affordable Manufacturability
Patents
Admin /
Legal
Financing / Legal / Accounting / Taxes
Board of Directors: Bosses, Allies
Quality Systems, Design Ctrl. (med dev)
Psychology Outbound Marketing, Sales
Attracting and Retaining Talent
Seeing & dealing w/ stress, bozos
What Will Be On My Mind as a Startup CEO?

Client Confidential
Avoid My 12-year Fishing Expedition
Gregg
The Elusive
“Market”

Client Confidential
The Chasm
http://www.disrupthealthcare.org/2013/03/selling-hospital-based-incubator-idea.html

Client Confidential
Want to Sell More than 100 of your Widget?
Source: Crossing the Chasm
Product must:
provide value
be “whole”

Customer Development
• Key lesson – buy these books
– The Four Steps to the Epiphany: Successful Strategies for
Products that Win (Steven Blank)
– Crossing the Chasm: Marketing and Selling Disruptive Products
to Mainstream Customers (Geoffrey Moore)
– (Free e-book) Bringing a Hardware Product to Market (Elaine
Chen)
• These are listed in the Online Handout

Cheap Prototypes & Affordable Production Runs
• In this audience, you’re the experts.
• Avail yourselves of Maker Spaces, pay univ. shops, …
• Read Ben Einstein’s “Hardware by the Numbers” (online)
– Typical costs for contract manufacturing runs
– Seek affordable packaging
– You’ll learn the basics of financing, too
• New England-based contract manufacturers, box builds
– E.g. Cirtronics is fast, careful, quality, friendly
Remember there’s an Online Handout with references:

Client Confidential
Use makerspaces
Artisan’s Asylum
Somerville, MA

“Boring but important”
(as The Week magazine likes to call it)

Money, Money, and Legalities
• Legal
– Network into an affordable, startup-smart attorney
– Get a good NDA early, as to help to not-trash some patent rights
• Taxes
• Accounting
• Financing your Startup
– (A) Write your BUSINESS PLAN & make a PITCH DECK
– (B) Raise the money
– (C) Execute towards the goals in (A)
– (D) Repeat to A; if you’ve missed the goals, your own stake will
take a big hit.

Fundamental Constants of Financing
• Unless you’re a recent Stanford dropout with a software
startup concept in Palo Alto, the Constants are:
• Financing-to-financing period (T):
18 months
• First call-to-closed round (t[financing]):
9-12 months
• % of founder time chasing $:
75% (in my opinion)

Client Confidential
The Pitch Deck: see the online handout
• Customer Problem
• Product Overview
• Key Players (team)
• Market Opportunity
• Competitive
Landscape
• Go-to-market
Strategy
• Stage of
Development
• Critical Risks
• Financial Projections
• Exit Options
• Funding
Requirements
Source: Christopher Mirabile’s Inc. piece

A one-slide visualization of “dilution”
Source: http://www.bothsidesofthetable.com/2011/10/14/understanding-how-dilution-affects-you-at-a-startup/

Actuality’s financing rounds (1999-2008)
Series A ($1/share) (2000) $ 1,500,000
“2001 Note” 807,500
Series B ($0.2826/share) 3,499,996
Series C ($0.35/share) 6,499,998
Note 1 (Mar 2006) 1,445,134
Note 2 611,206
Note 3 (2008) 536,356
$14,900,189
70%
Gregg’s Equity
at Start-up
0.7%
Gregg’s Equity
at Last Round

Client Confidential
Board of Directors
Great core
technology! Have
you considered this
other market?
Happy to help you
raise money for
your next round.
I bet the founders don’t
suspect the evil lurking
within this particular
Board Member…
MUAHAHAHA

Characters to be Wary Of
• GOOD consultants are great;
– Get references, and then work with them on well-defined tasks
– [Lens design example]
• TRICKY consultants are hard to spot. Watch out for:
– Racking up a lot of deferred fees with little to show for it
– [Business development example]
– [“Not actually nice mentor” example]

Client Confidential
Regulated market? Think carefully…
Some topics required for compliance with 21 CFR 820 (cGMP), for example:
general provisions
quality system requirements
design controls
document controls
purchasing controls
identification and
traceability
production and process
controls
inspection, measuring, and
test equipment
acceptance activities
nonconforming product
CAPAs
labeling and package
control
handling, storage,
distribution, and
installation
records
servicing
statistical techniques
It demands organization-wide mind for Quality, plus the costs for certifications, etc.

Client Confidential
Sales for Engineers
• One-paragraph, iPhone-
friendly email intro. Take as
much time on the subject line
as on the very brief contents.
• Explicitly respect people’s time
• In demos, “you” not “I”:
– NO: “With our feature-rich
software, I can click here…”
– YES: “You can learn about your
customers with ClientSort 2.0…”
• Use less techno-jargon.
• The two best words are “for
example.”
• Smile, use first names, talk
about happy things
• Email their PR people
• Email one of their VCs
• Try to Shopify it – sell
prototypes (FCC / UL though)
• Don’t use gimmicks, e.g. don’t
use Re: unless it really is
• READ SOME ACTUAL
BOOKS ON SELLING

0 0
00
0 0
stretch break
you’re doing great, almost done
The Bourne Identity

Launchpad: Steps 1-5
1. Enter the waters, pick cofounders. [ cite: Greenhorn ]
2. Quickly find MVP, try for POs. [ cite: Blank, Chen ]
3. Get a good NDA, find startup-friendly att’y
4. Prototype [ cite: HW by the Numbers; HW-friendly
makerspaces ]
5. Enter competitions & startup accelerators [ cite ]

Client Confidential
ASIDE: Bplan Competitions, Accelerators
• MassChallenge
• MIT $100k
• MITX Awards
• Babson
• Dartmouth (Tuck)
• HBS Alumni
• Hellenic Business
Network
• WPI Venture Forum
• Yale Entrepreneurial
Society
• MassChallenge
• TechStars
• Bolt
• Blade
• LearnLaunch x
• Greentown Labs
• Rock Health
• Healthbox
• […]
Business Plan competitions Accelerators, Funds

Client Confidential
Two big well-regarded competitions
• MassChallenge
• Global (really!)
• APPLY BY APR 1 (2015)
• 4 months
• Office space
• Mentorship
• Network
• $2 million cash awards
• $10 million in-kind
• “…128 winners…”
• No equity taken
• Three contests / rounds:
• Pitch
• Accelerate
• Launch (Mar 13 2015)
• $350k cash + prizes
• In-kind prizes

Launchpad: Steps 6-10
6. Try like heck to sell it & market it.
7. Get a mentor; get your ducks in a row about financing.
8. Open a 100-row investor-tracking sheet, try to get 18
months of money for your 12-month milestone
9. Accept or select Board Members with great care
10.Launch, publicize, & ramp!

Good luck! Email me any time!
Gregg Favalora
VisionScope Technologies, LLC
favalora@gmail.com

Hardware Startups 101: Tips for "career engineers" (NESOSA 2015; Favalora)

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