PCH Access gives hardware startups access to capabilities normally exclusive to Fortune 500 companies. It’s part of PCH International, which works with some of the hottest hardware companies around the world in every stage of their business. We sat down with PCH Access VP David Austin to discuss the future of retail, the Internet of Things and why Kickstarter might not be your best option.
PCH Access helps hardware startups with all things post-incubation. If you really believe you’re ready to go to manufacturing, that’s what PCH Access is all about.
PCH Access was formerly known as PCH Accelerator. PCH has been working the last several years on helping hardware startups grow and flourish with the goal of seeing innovation at the speed of software startups. PCH’s primary business has been around Fortune 500 companies, but we’ve been
expanding into the startup space for a few years.
PCH started PCH Access for startups, and realized they also needed to help these companies with their manufacturing and distribution. That’s why they hired me. We help to develop the final design for manufacturing as well as the tooling, package planning, and engineering required to actually manufacture at scale.
We give a credit line to the companies we work with so they can produce and manufacture the product, something startups would not normally have access to. We do this in exchange for a small amount of equity, so the startup can get going, last as long as possible on their existing cash flow, and ship product while paying less money out-of-pocket. This way, they can start having a revenue stream from customers paying for their product, versus having to raise a bunch of money at the beginning.
Our PCH Access startups still need to be able to pay their bills as a company, but they don’t have to pay for things like tooling and the initial engineering efforts—or non-recurring engineering as it’s called—as well as all the component purchases that can eat up their capital. Typically, to do a manufacturing run of your first thousand or tens of thousands of units means you have to go buy all the parts and pieces in advance. We give startups a credit line so they don’t have to pay for these components until after the product ships, which is a pretty sweet deal for startups, and can make a real difference to their initial success.
I get to select startups, bring them into the program and work with them. Think of it like an investor perspective on startups. We look at the team, the product, where the company is going, whether we think it’s going to be able to scale—especially in China where we’re doing our manufacturing. We look at all that to make sure we can help build a really great company that will hopefully be a long-term relationship with PCH as the company grows.
In addition to all that manufacturing, we also work on the distribution side. We help the startups work through ShopLocket and TheBlueprint.com, as well as through brick and mortar retail channels. We have relationships such as with RadioShack through a deal announced, in June 2014 where startups get amazing terms.
One of the main things generally that hurts startups is that they don’t have enough room for margin. They can’t handle all the inventory demands, they can’t deal with all the returns, and the credit risk is just way too high. The payment terms are usually 90 days or longer before you actually get paid, and usually it’s on consignment. In other words, if the retailer doesn’t sell, the product gets returned to the startup. The startup has to deal with taking that product and trying to find another place to sell it, and they have to sit on all that inventory.
What we’re doing with RadioShack has amazing terms: no returns unless it’s actually a defective product. There’s shorter payment terms versus waiting the 90 days to get paid. In addition, it’s very lean in terms of inventory. We ship directly to RadioShack stores from PCH in China, so you don’t have to maintain a large inventory in a bunch of distribution centers and warehouses. Again, that’s a huge cost savings for a startup.
It’s as close as you can get to having ecommerce through a brick and mortar retailer. Plus, your product is in a store where consumers can actually touch the product and interact with it, which is really important for hardware, and new products generally. You’ll always have early adopters, who will buy things off ecommerce sites. After a product gets enough of a reputation, it’ll do well online. But retail is that midpoint where people can actually touch it, interact with it, and that’s where you can get large-scale interest. Having two channels — retail and ecommerce gives startups two channels to sell and expand their product.
“Over-promising and under-delivering is a huge problem in the hardware startup space.”
It’s a strange, convoluted path. I started way back—it feels like many lifetimes ago—as a software engineer. Back in the mid ’80s I graduated from college with a computer science and math degree. I’ll date myself a little bit: I started working initially as an engineer on small handheld computers, mainly for the meter-reading and field-service industries. I was doing these small handhelds back when PCs were barely
existent. It was 1984. The Mac had just come out. PCs were big chunky boxes, and that was about it. That was really fun. I got to learn a lot about doing small, embedded devices.
I think the biggest thing that happened to me was in 1990, when I was living in Seattle working for a database company. This will tell you how things were different back then: I sent my resume to a newspaper ad in the Seattle Post Intelligencer, which was the main Seattle newspaper. It was for this company down in the valley called Apple.
Out of all that, they called me and flew me down for an interview. I interviewed for a day. I think the strange part of that interview was sitting in a room with, at one point, 10 people interviewing me simultaneously. It was a very strange interview.
Somehow I survived that, and they hired me. I moved to California to work for Apple because I was a total Mac fanatic. I had bought my first Mac in 1984 using my first credit card out of college, and was just completely enamored with the Mac and where it was going.
Amazing things happened at Apple. In 1990 I started as a line engineer, just myself as a coder. Within a year I was managing a group of 15 to 20 people and working on a brand new, kind of skunkworks project. I was working on system software at the time, and I was working on new system stuff. The ’90s was a crazy time. These were the days of Sculley, Spindler and Amelio as CEOs. The last thing I was doing before Steve came back was I was running Newton engineering.
That was an amazing time because for the most part Apple was very segregated: you were either in hardware or you were in software on the OS side. Newton was the only part of the company where you actually got to do everything, so I had both hardware and software engineers working for me and QAing projects—everything but marketing for these products. That was an amazing experience for me. I learned a huge amount. That’s one of the things about me: I always want to learn something new and do something different.
Then Steve came back and said, “I don’t think we want to do Newton anymore.” I shut down the Newton business, which taught me something very interesting. I learned how to shutdown a business, which is not something you learn that often, unless you’re a startup. But this was shutting something down within a large corporation. I had a warehouses full of small green pellets for the translucent eMate case. I had to find somebody to buy it.
Then I went and did a startup. I left Apple in ’98, just because I didn’t know what I was going to do next. I figured I’d been at Apple eight years. I need to go try the startup thing or I was never going to leave. I left, did a startup with a friend of mine and got some initial seed funding. We did our first prototype product. The product was about helping the workflow for people doing business dev and their lawyers. It was like Salesforce.com, but for biz dev and before Salesforce existed.
We were trying to raise money in the spring of 2000 when the bubble burst, so we didn’t raise. I shut down the business and went to work for one of my angel investors for about a year. That’s where I learned about how venture capital works. I spent a lot of time doing deal-flow analysis, looking at companies in our existing portfolio and trying to figure out how to help them survive. Sitting in board meetings with a bunch of the luminary venture capitalists, was really enlightening. I learned a huge amount. Like I said, I always like learning things.
But then my old boss at Apple called me and said, “You ready to come back yet?” I said, “Yeah, I think I am.” I went back to Apple in April of 2001. My first day back, I didn’t know what my job was. I went back with the idea that I would do whatever my boss wanted me to do. His name is Sina Tamaddon. He was Senior VP of Applications.
He said, “I decided to give you the fun job.”
I said, “What is that?”
He said, “Come to this meeting this afternoon.” Okay. Where at? He said, “Fourth floor, IL1.”
I know who’s up there. I had my first meeting with Steve Jobs on my first day back, and he said, “I want you to do a presentation package.” We didn’t have a name for it then. We started building Keynote from scratch.
I did Keynote, Pages, Numbers, and a bunch of software products. I did iDVD for a while, DVD Studio Pro, ran .Mac for a while, as well as all the backend infrastructure support, the iTunes store, and the Apple online store. Sometimes I was running groups of hundreds. At other times, it was just me doing deals and acquiring companies. Last thing I was doing there was running Final Cut and the professional editing stuff around that. I did lots of different things at Apple for a really fun run from 2001 to 2009. I learned a huge amount.
I left in 2009 to play with startups and play with my kids. My kids were young, so I wanted to play with them, and Apple was changing. Steve was there less. My boss had left. It was a good time to go.
I spent a couple years doing angel investing, sitting on some boards. But once both my kids were old enough to go to school full-time, I realized I was getting bored, and I’m not good at bored. I need to have something going on.
I found this interesting job opportunity to help start an office in San Francisco for Turner Broadcasting, one of the big parts of Time Warner. They wanted to do a bunch of innovative stuff on the tech side for media. One of the thoughts they had was to run some accelerator type thing. We started an office here in San Francisco, did it for two and a half years, started an accelerator called Media Camp, and expanded it down to LA with Warner Brothers. We ran two classes, one in San Francisco and one down in LA. Again, I learned a lot. I got to leverage all my knowledge of doing deals and helping startups. It was fun playing in the media space, working with big brands like CNN and TNT and Warner Brothers.
I knew this year, in 2014, that I wanted to change things up; I wanted to get a lot closer to making things and being more involved in the core business. Media Camp was part of the business, but it was always a side thing. I met Brady Forrest, who runs Highway1, at SXSW. We started chatting, and I talked about how I’d been looking for something different. We agreed that PCH Accelerator needed to be reinvented and relaunched to focus on scaling startups and that this would be an interesting opportunity for me. I came in and met with Liam Casey and Tom Kitt. We hit it off very quickly. We knew all the exact same people at Apple, so reference checks were quick and easy.
What I loved about talking with Liam and Tom was they had the same passion for helping startups that I have. I thought, “Okay, great. I can work with this group of people. They want to do the right things. They want to try to grow amazing companies and leverage what they have from working with Fortune 500s to help small companies grow.” To me, that’s a recipe for wonderful things to happen. That’s how I ended up doing PCH Access.
I love the fact that I come in here every day and use every single thing I’ve ever learned, and I get to learn some new things. That combination, to me, is extremely powerful, it’s very fulfilling, and it gives me a chance to help founders do really amazing stuff.
It’s really weird. There have been a couple times in my career where I’ve tried to manage my career, and every one of those times, I failed miserably. But if I’m open and let serendipity take its course and have interesting conversations with interesting people, then I get to do amazing things.
It’s like meeting Brady at SXSW. I’d been going for a couple years. I didn’t believe in it so much. Meeting Brady this past year was just happenstance—we were both plus-ones at a dinner. We ran into each other and things just happened.
“Repeat entrepreneurs can use Kickstarter as a validation or something like that, because they have more innate knowledge. But for first-timers it’s really dangerous unless you’re getting really good advice.”
One of the main mistakes I’ve seen over and over again is prematurely going to market. In other words, going out and doing crowdfunding, doing fundraising, setting a price and setting an expectation in the market before you know what you’re doing, and then finding, “All these people want this product, but I can’t actually produce it for this price or in this timeframe.” Surprise, surprise. Over-promising and under-delivering is a huge problem in the hardware startup space. It’s very damaging. Over time, it could cause a lack of trust in the whole space.
There are lots of ways to get around that. You can get around that by working in an accelerator or incubator. Highway1 or any of the others can help you. That’s one of the reasons why at PCH Access we’re trying to do all this stuff to help people extend their dollars by doing things with NRE and doing convertible notes.
Think about your go-to-market strategy and when you should fundraise, how much to fundraise, and how to fundraise. Repeat entrepreneurs can use Kickstarter as a validation or something like that, because they have more innate knowledge. But for first-timers it’s really dangerous unless you’re getting really good advice.
The other thing that I look at as a challenge for startups is advice. If you’re an entrepreneur in a startup, it’s like making a ham-and-egg breakfast. In a ham-and-egg breakfast, you, the entrepreneur, are the pig. You are fully committed to this breakfast. Your investors, your advisors, everyone else are chickens. They lay the eggs. They’re involved, they’re contributing, but their life isn’t over with this breakfast. They’re going to lay eggs at other breakfasts. Realize you as the entrepreneur own this breakfast. You are committed. Realize the advice you’re getting from everyone is never going to be the same as what you get internally. Realize that if your investors’ advice doesn’t quite work out, the worst they’re out is maybe some cash. That’s it. It’s not their baby. It’s not their breakfast. Think about that when you are taking advice.
Obviously, the people who are more involved and have more cash in or more percentage, that advice you might want to take a little more seriously, versus, “I’m giving you this advice because I like giving advice.” I do this a lot too. I love giving feedback on a product. But when I’m giving that advice, you’re getting what you pay for. You’re asking for free advice, I’m giving you free advice.
Past ones I’ve seen that did amazing jobs are very obvious ones.
Tony Fadell at Nest. He knew what he was doing. I know him from Apple—he’s a very smart guy. He approached the problem well. He built an amazing team. He built a great product and leveraged it into an amazing business that then got acquired.
The folks at GoPro did an amazing job. They built a community. They built a great product. They pandered to that community; they built what the community wanted. They did it efficiently and they weren’t afraid to take a high price and get the value for what they provided, versus trying to go in cheap, which I see happen with a lot in startup plans.
Those are two perfect examples, which is Monday-morning quarterbacking: you can tell they did great because the market has proven they did great.
The startups I’m working with on a daily basis are doing really great things, but they aren’t completely proven yet. They haven’t been market-validated yet. I’m not even going to name names. Just watch what comes out.
“The number-one company you’re buying hardware IoT devices from today will not be who you’re buying from in five years. It will be entirely different companies.”
Retail is the main thing that will be disrupted. Hardware, how it gets produced and gets to market, is changing distribution and channels and how you interact with things. Ecommerce is one part of that, but hardware wants to be touched. It wants to be interacted with. I think retail across the board—all the big-box guys—are going to have to change their model slightly to deal with the reality of the amazingly innovative products coming out the door.
It’s been said before, but I’ll repeat it: there is a hardware renaissance going on. Hardware is hot again. You can do things in hardware now that you could not do 10 years ago. It’s becoming more like when AWS first came out for software. It’s becoming more like that for hardware, at least to get to prototype and to get to multiple prototypes. You can do that much easier now, and much more cheaply.
Software engineers are starting to become hardware engineers because it’s interesting. You’re getting a lot of people who think differently about hardware. That’s both a challenge and a good thing, because they don’t know what they don’t know. But they’re taking much more innovative approaches into how you think about hardware. Hardware now has an inherent software component. That’s huge. I think retail is the primary thing that will be disrupted by that.
In terms of other markets, home manufacturing is going to change dramatically. We have a lot of people doing home products that are basically home automation, IoT products that are patches onto current systems. It’s transitional because homes aren’t being built to include these things. I think that’s going to change over the next few years. It won’t happen overnight. Software is disruptive faster because it’s just bits. Once you’re dealing with atoms, the transitions are harder.
We have a lot of major players trying to own portions of the space. Name any large, multibillion-dollar software/hardware company. Everybody who’s doing software is starting to do hardware. Like I said, it’s hot. I think what’s going to be interesting about the space is that people have really high expectations now for products. They’ve been trained. They buy an iPhone and they expect it to be amazing. They expect products to just work.
In the short-term we’re going to see a lot of products that will ship and then won’t do very well because they’re not aesthetically beautiful enough. They don’t provide enough value per dollar. They don’t have the level of quality that people demand. I see the smartwatch space and, I’m sorry, these watches are all ugly. I don’t want to wear any of these, and they don’t do that much that’s interesting. They’re not there yet. I think that’s going to be a lot of churn and a lot of iteration, which is great. Being a gadget guy in the space is really great. Unfortunately, what that also means is a lot of failures as well in the startup space. Surviving through those is going to be the challenge.
What I like about what’s happening in the next five years is you can put your stake in the ground. The number-one company you’re buying hardware IoT devices from today will not be who you’re buying from in five years. It will be entirely different companies.
What’s your current state of mind?
When and where were you happiest?
When I'm doing something that I think matters.
What is your idea of misery?
Not doing what I think matters.
What is your greatest fear?
What do you consider your greatest achievement?
My two kids.
What is your greatest extravagance?
Buying whatever gadget I want to buy.
Which words or phrases do you most overuse?
Which talent would you most like to have?
To analyze financials and spreadsheets quickly and to do aerobatics, not necessarily at the same time.
What’s your favorite quote?
“In theory, there's no difference between theory and practice. But in practice, there is.”
What book are you reading right now?
Reamde by Neal Stephenson
I think having a clear plan for IP is critical. Any IP and patents while working with a manufacturer should be clearly specified within the contracts as either owned 100% by the startup/company or at a minimum the startup/company should have a irrevocable license to the IP and perhaps exclusive. It really depends on two factors: who was the primary creator and is the IP unique to the startup/company or a more generic IP that happens to apply to the startup/company.
I’m a firm believer in protecting IP with patents as a defensive mechanism. The actual value beyond that is minimal and I’m not a big fan of using IP as an offensive weapon, especially as a startup. It’s just too expensive.
What question would you ask the next founder or influencer that we interview?
Why do you think what you’re doing right now matters?