I’ve been reading more about entrepreneurship and starting businesses lately. Mostly in auxiliary reading about personal finance, but also in my reading about technology companies. One of my favorite sites, Get Rich Slowly, has lately been talking about a book called “The Millionaire Next Door”. In fact, just today, Robert Brokamp of the Motley Fool interviewed one of the co-authors, Thomas Stanley. In the book, they highlight a large percentage of millionaires are business owners. I’m not using this as a basis for the idea of starting a company (many many companies fail)…I’m just saying that it’s added motivation to take that leap.
So why not start up a technology manufacturing business? Why not go out on my own and make something?
Well, I’d still like to someday. In fact, I already have an incorporated business in the state of Ohio, Analog Life, LLC. However, this is more small time consulting work and I hold no inventory. No, my own reservations are about starting a full blown business that sells a product. A tangible thing. A piece of technology. Something that is a useful device that you can use to improve your life. By some accounts, I would be considered “scared” to start an electronics company this day and age.
I am putting forward that it is more difficult to start a technology manufacturing company these days than it was 20, 40 or even 60 years ago. My reference point for this is a book about Bill and Dave, the HP guys. They started one of the most prolific companies ever and I think it might not be possible for them to do the same today. Let’s have a look at why:
Quick note: I tried to use the book examples where I could, but some of these numbers are VERY made up. I’m trying to give a sense of scale of difference, not necessarily specifics.
- Startup costs are very high.
- NOW: Narrowing this discussion to manufacturing (hey, Bill and Dave did it!), it quickly becomes a sticky situation. Electronics aren’t cheap. Holding inventory alone can run into the hundreds of thousands very very quickly. Imagine a board that you make that has 10 parts at $0.10 a piece. That’s $1 per board. Since you sell such a cheap and awesome product, people want to be able to order a lot of them. Even at 50,000 units, you need to have $50,000 in inventory. Now, get realistic. No new technology uses only 10 parts, and if it does, those parts are not $0.10. Especially in the low quantities you’re using. Oh, you also need to have equipment to run your boards on, and I don’t think your toaster oven is up to the task.
- THEN: No, I’m not saying it was easy back then. Far from it. However, there was quite a bit of available labor. And the technology was exclusively through hole parts. I would wager that a low-ish wage worker and a soldering iron back then were a cheaper solution (even in today’s dollars) than a surface mount reflow machine and an x-ray machine for all those BGA parts.
- China, India, Anywhere Else.
- NOW: Well duh. But it has to be on the list. 10+ years into exporting manufacturing capabilities to lower cost countries, we’re running into a new problem. It’s not just about the cost (though that’s still a component). It’s also about manufacturing knowledge and capability. And the logistics. The truth of the matter is that it’s often easier to be closer to where all of the other products are made.
- THEN: 50 years ago, it was California and Silicon Valley where the electronics were made. And this included locally source components. Or hell, you were making the components yourself. Many of the parts HP used in early years that contributed partially to their success was the custom vacuum tubes. The logistics were different.
- Funding is different.
- NOW: You have an idea. A new machine that prints semiconductors directly onto a substrate. You need $5 million to get started in earnest. You search for VC. You pitch your idea. You get funding. You lose funding. You get more funding. And at the end of it all, because a VC was backing you, you are controlled by them, almost from the beginning.
- THEN: You have an idea for a new oscillator. You make it in your garage with your buddy, using your fiancee’s stove to make your bakelite boards (yes, this is how HP started). You do this with the money you’ve saved, also known as bootstrapping (with $538!…$8,314 in today’s dollars). Once your business begins to make money, you’re in charge. Why is this possible 50 years ago and not now? Because…
- The newest ideas aren’t as simple as they used to be; the highest levels of innovation are increasingly complex.
- NOW: You went to a prodigious research institution, successfully defended your PhD thesis and now are pursuing licensing your technology through your school’s technology transfer office in order to start a business. You have a really great new method for graphene production that could help make the next awesome microchip. You realize you’ll need at least $10 million in startup capital and will require a staff of 20 full time scientists. Even if your new process works, your costs will be significantly higher than the current process, which yours only out-mods by 3%.
- THEN: You discover an interesting system level circuit that you can prototype using a few vacuum tubes and some resistors. Your new circuit has 50% better performance than your competition. You’re using a light bulb as a resistive element in your circuit and this is a novel idea at the time. (Note: I’m not downplaying the brilliance of this idea, just trying to show the difference in technological leaps)
- More mega corporations in place you need to battle against from the beginning.
- NOW: The process you licensed above was actually impinging on a patent that Company XYZ holds and they are willing to go to court. You can either shut down your operation or drop countless dollars and hours trying to fight in court. Say you decide to go to court and win your claim and don’t emerge penniless. Now you are up against a multi-billion dollar competitor who really wants to dominate the business you’re in. Your VCs that gave you the funding in the first place are encouraging you to become an acquisition target. This is a nice payout, from which you can try to start another company, but you wanted to start a company, remember? Now you’re just a part of a really really big company.
- THEN: You’re up against really big competitors as well (General Electric or General Radio, for example). However, you’re entering an industry that is just emerging and you are extremely nimble. You find get some contracts during the war to provide radio equipment that is recognized as crucial and well built. You finally get around to incorporating your business…8 years after starting.
Do I think these differences are a reason to give up the fight? To not try and strike out on my own someday with a product or a service or an idea? Hardly. In fact, it makes the challenge all the more rewarding in the event I succeed. More likely, it means that the electronics industry is a very mature industry and in order to succeed as a new business would mean probing to find a niche sector that could then expand into a large business. It also means that I will continue to research the subject and make an informed decision about how and when to hit the bricks trying to sell my new ideas.
What about you? Do you feel the entrepreneurial bug? Let us know in the comments.
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Did the entrepreneurial thing years ago. During my last year in university, I started a partnership with 3 classmates and sold a computer-based fax system to my own university to replace their leased (and expensive) fax machines. We wrote software from scratch to receive faxes, print faxes, and view faxes on the screen. It also included a voice prompt to allow fax senders to enter info via their touch tone phone so the faxes can be better sorted. We were even stupid enough to write our own database from scratch to store faxes along with the fax sender information and cross reference it against the school’s student database.
We promised delivery in 4 months for $15,000. In retrospect, that was a ridiculously stupid schedule matched with a ridiculously low price. We were late and the product was buggy; we ended up supporting this product for years after graduation. In the end, I think we saved the school more than $15k in leasing costs, but at the expense of us working for less than minimum wage. But looking back, it was a wonderful experience. From product conception to selling to design and implementation to support, we did it all. Learned lots. Tried more ventures that never got us anywhere. Got married. Settled down. Moved to the suburbs. Now work for The Man.
Back in ’95, I was going to start a business with a bunch of friends at Caltech. We were going to do web development for local businesses and call it something like “city pages”. (Because back then, no one had a web page.) Unfortunately, we were all students at the time, and so I made a bunch of arrangements for things to get going (like a space)…and then everyone got busy and bailed. There were supposed to be 4 of us…way too much work for one person to do.
I think that, if we’d had the time to do it, it would’ve worked fairly well (at least until the dot bomb). I did gain a lot of experience with web page design and worked as a contractor for a couple places for a while.
Did for a while when a graduate student. But having your own small company is very hard work, for very low pay, with little job security. Academic research offers exactly the same thing except with more freedom to do what you want, rather than what a client wants to pay for, than a tech company.
In general, I suspect academic researchers are an unlikely source for entrepreneurship. Most start-up people seem to be motivated by either the freedom to be your own boss or the chance to get rich. But academia already lets you be your own boss to a remarkable degree; and if you care deeply about wealth you don’t enter academia in the first place.
Actually, I know quite a few academics who’ve discovered some cool widget and gone on to start their own business selling it.
I did say unlikely, not impossible. My point is that academic researchers are underrepresented as entrepreneurs given the opportunities they have for new ideas to commercialize.
I guess I’m surprised you’d say that. I realize I have a skewed experience, but I’d say it’s half of the people I know who’ve started businesses. But that may be a pitfall of working at a university.
I’m with Cherish, a lot of the *successful* entrepreneurs I’ve known developed their product in academia. With the time, lab space, etc there provided for them they were able to get it to a point where they could launch it on the outside. Strange people don’t think about public universities as free market entrepreneurial breeding grounds anymore.
Quote:
“how and when to hit the bricks trying to sell my new ideas”
I hope you’ll be selling products and not ideas.
Ideas are worth less than a dime a dozen!
Dave.
Go for the smaller niche market. I’d avoid VC like the plague if your intention is to run your own business. If your intention is to be a millionaire, then take the VC money and the buyout 6 months after you’ve proven something great.
Good list, one more thing I’d add is ever increasing government regulations, especially for hardware guys. I always thought it would be nice to try to start small, design a product and use a contract manufacturer to deal with the inventory and production stuff. Realistically though, if you want to sell a commercial product in the US you have to go for FCC approval, if you want to sell in Europe, you need CE, if you are designing anything remotely novel you’re probably violated a dozen or so bogus patents that need to be addressed. To be totally legit, you’ve got to drop 10s of thousands of dollars before you can even start selling the gizmo. When’s the last time you heard of some billionaire hardware guy that started out as a geek in his basement? It seems that the software world, with much less regulation and lower barrier to entry, is more likely to provide such a path to success. Experiments can be tried with little investment risk, which provides a great environment for innovation. I think a lot of over regulation is screwing the little guy, and wish the government would set up some entrepreneurial type programs that would make it easier for small companies to get off the ground. After all, if Maytag is a allowed to produce a dishwasher that spews out an absolute boat load of RF noise (they’re exempt from FCC testing), why does a little company need FCC approval for a small product they may start off selling in the 100s. It pays to have good lobbyists, apparently.
Forget graphene, and everybody does software. Though I am an EE (specializing in analog and power supplies), I really believe the future for the garage shop is in mechatronics.
Mechatronic ideas: A plant leaf moisture sensor (been tried in a university setting, but I could do better in my garage).
A night light that illuminates in response to proximity. This eliminates the need to turn on the (way too bright) room light for a night time bathroom visit.
A truly personal alarm clock that takes the form of a soft bracelet that inaudibly vibrates.
What a great discussion!
I have always been aware of entrepreneurship as something I might be interested in, but the idea really has taken hold in grad school. My father is an entrepreneur, and so I know how tough the life is. But I also know how exciting chasing down an idea and making it a reality can be – and I can’t imagine life working for The Man, and academia doesn’t appeal to me. I definitely plan to work for a startup, or start my own company some day. My minor is Entrepreneurship, so I get to take some really cool classes and come into contact with some relevant people.
One of the classes I took had project teams work on putting lab inventions into business plans for commercialization. One of the teams worked on a better way to make graphene, actually!
I don’t know if it’s harder now than 20 years ago to launch a hardware company – but I will say that it’s underrepresented (and maybe under-appreciated?). Seems like *everyone* who wants to launch a startup automatically means a web company or an iPhone app. I went to a venture capital conference last fall, and when I introduced myself as a machine and product designer, the majority of the time I got the response, “And what are you doing here?” Gees…
@Otto Hunt: The bracelet actually exists – a product like that just launched, I know the lady who launched the company – she’s a student! http://www.ourlark.com/indexa.html
I agree with all the things you’ve laid out Chris. I’ve tried to think about what kinds of businesses would be successful in the US startup market today, and tried to think of the particularly mechanically focused ones. And I run into the same issues, high startup costs due to equipment and manufacturing. Meaning large companies that start a side branch will always be more successful in many arenas over the individual entrepreneur. But then I’m not particularly creative and only do that as a thought exercise as I’m pretty sure I was built/bred/made to be a corporate drone.
[...] of my fellow engineers, Chris Gammel, just wrote a great post on starting a technology manufacturing company- then and now. He looked at the success of the guys who started HP and the relative comparison of startup costs [...]
Great discussion going on here…. and yes things are different THEN vs NOW.
I think there IS one thing that works out for the better. That being the ability to market your product via online resources.
THEN: You had to go to an ad agency, get a corporate identity, a logo. You find venues to advertise which costs money. You MIGHT get a 4% return on your advertising. You needed a store front, be it your own or someone else’s, to sell your product from. More money and a middleman taking some of your profits.
NOW: You post your idea/product on every possible free venue on the internet and reach a world wide audience. You set up an online storefront with much less overhead than brick and mortar and lower the middleman costs.
One thing I must say I’m disappointed about. I’m 51 and in my life I have watched manufacturing disappear from this country… try finding something that’s “Made in the USA”. It’s all about bottom line. To compete you are now forced to out source. At some point though, there won’t be any money to buy the product because the manufacturing jobs are gone! Oh yeah that’s right! We’re in the middle of that now. duh.
I think that what I call “garage tech” will save this country’s economy.
Go get em you entrepreneurs!
Good discussion here.
In this instance, I have to side with most of the commentors over Chris’s arguments against entrepreneurship today.
I’ve written my own response at http://www.siliconfarmers.com/post/2011/02/27/Contrasting-the-mythical-then-versus-Now.aspx
Summary: the advantage is Now. Then only looks good due to selection bias of a pair of great innovators and entrepreneurs.
You have some good points on your site. Also, every time you wrote “Advantage: now”, I read it in Sean Connery’s voice. (ha, just try and read it any other way now)
I have to disagree with almost every point you make. Starting an electronics business just keeps getting easier. We don’t have to make our own tubes because there are so many useful components available. We don’t need to start out with 50,000 of anything, because PCB manufacturing and assembly techniques are now cheap enough that you can realistically test-market only 100 devices and not lose money.
We don’t have to come out with some amazing advance in fundamental semiconductor technology, because there is plenty of market for useful assemblies of available parts. With the communication standards and programmable devices of today, devices can become more than the sum of their parts.
And it doesn’t matter if you don’t perceive your device as truly unique or revolutionary…the fact that you’re building it, and have it for sale as a real physical product, is a huge step. All of my products would be easy for someone else to duplicate, and in fact several of them have…but people will buy an existing product before building their own, and there’s plenty of room down here with the small fish.
That’s what scares of most hardware entrepreneurs…they look at a pile of components on their desk and then skip forward to going toe-to-toe with a giant corporation. You can’t worry about that…it’s 10 years away. Someone will draw the short straw and run afoul of some megacorp’s territory, but that’s why you try to diversify quickly. You can’t be the company that sells one widget, you have to be a steady producer of ideas. Most failures are because someone who doesn’t understand the market thinks up one idea and is impatient to make a billion dollars. They have no time for the small details that are key to success.
Maybe I’m just ignorant, but of the small electronics hardware businesses we’ve seen start up with the plan to keep innovating and building new products…who has failed yet? I see more of these businesses starting up in my sector and I have not seen one throw in the towel after incorporating.
[...] in February 27th, 2011 by Ron Amundson in Operations, Planning, and Vision The blogs of Chris Gammell and Silicon Farmer were going back and forth on the issues of starting a small tech company back [...]
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