The Next Big Thing discusses topics that other hardware entrepreneurs will find useful, such as prototyping and manufacturing, tools the companies use to keep them moving forward, sales channels that have been effective (as well as others that have been complete failures), and managing cash flow.
In episode 2 of The Next Big Thing, we chat with Trung Pham, the Founder and CEO of Axis Labs. Axis make a smart device that allows you to motorize and automate your existing window shades.
Company: Axis Labs
Product: AXIS Gear, a consumer electronic device that allows you to motorize and automate your existing window shades
Revenue: $170k / month (double during Prime Day and Black Friday / Cyber Monday)
Sales channels: 100% online (⅔ own site, ⅓ Amazon)
Location: HQ – Toronto; Fulfillment – California; Factory – China
Can you give us an overview of what Axis does?
Axis is a smart shades company. We designed and developed a retrofit device that allows you to motorize and automate your existing window shades. You mount them on a window frame and you loop your existing chains or cords through our device and you’re able to automate control of the shades with our mobile app that is integrated with the wider smart-home ecosystem, including Samsung Smart Things, Alexa and we’re working on a wide variety of other integrations.
You’ve not always been involved with the creation and manufacturing of Smart products, but you have been involved in technology. How did your career start off?
I graduated in ‘09 during the market crash and I don’t have an engineering background. I studied finance and if you graduated in ’09 with a background in finance it was very, very hard to get a job. They were firing people left, right and center in the investment banking world. I took some time off, did my CFA, went to Nicaragua to build a school and was really enjoying life because I’d just graduated and really had nothing to do because of the crisis that was going on.
This was before the iPhone actually launched, when Blackberry was still the dominant platform and I was approached by a friend who was an engineer to start working on a startup. I had a lot of friends in the night-life entertainment space and they always came up to me with these challenges about managing their clients, teams and ticket sales. This was before the Eventbrites of the world. So we created a lightweight solution on the web and Blackberry platform that allowed the nightclubs and concert promoters to sell tickets online, and through their teams so they could manage commission to their team members. Back in 2010 – 2012 we closed a bunch of clients in Toronto but towards the end of the life of the company the iPhone came out and destroyed Blackberry. Everyone was coming out with iPhone apps but we stuck with Blackberry. We made the wrong bet on Blackberry back then.
We decided to merge with an iPhone first solution that was doing something very similar. We essentially did a revenue share since we already had a huge amount of clients, but they had the technology. That experience actually led me to my real passion for startups and entrepreneurship in general. I can safely say I’d never had a corporate job in my life.
“Indiegogo was used as a customer validation and feedback tool.”
What was the inspiration to create a “smart home” product?
I moved into a condo in downtown Toronto in 2014. I didn’t have an unlimited budget but I really liked design. I bought new furniture, a new couch, a new TV, but didn’t have the budget for motorized window shades. I was kind of a gadget freak back then. So I opted for regular manual shades but then a couple months later when the summer rolled around I noticed it was too hot so I went back to the same designer and asked if he could motorize the standard shades for me.
And that’s when I learned that you couldn’t motorize and automate your shades once they’ve been installed. You had to replace them with shades that have the motors built in. I thought, that was silly, isn’t there some gadget you can buy and retrofit? It turns out there wasn’t a solution like that. So I saw this massive opportunity where I thought if I’m experiencing this, maybe other people are.
I asked how big the market for motorized shades is. The existing players in the market are large, billion dollar companies. The comps in the market proved there was a big market for it. 95% of the shades are manual so there is a huge opportunity to go direct to consumer and underprice the existing competitors in the market.
Axis leveraged crowd funding sites like Indiegogo. How did that help get the business off the ground?
So Indiegogo was used as a customer validation and feedback tool. A lot of the crowd funding campaigns found it tough to deliver. We didn’t want to make the same mistake so we actually had a working prototype that was ready for production when we went through the campaign. This meant we had pretty firm timelines of when we expected to ship and we essentially used the campaign to validate what price point we could charge, where we could be profitable and what features customers wanted to see, and if there was any real demand.
I believe we raised about $120,000 (US) on Indiegogo during the worst holiday months. People are spending a lot of money on holiday gifts but we still managed to pull in enough to help us validate the market. Indiegogo actually provided a lot of credibility and PR that I used as a traction point to raise our seed round.
“One thing I did learn was if you make a modification and you do a prototype in North America, make sure the factory also does it in China…”
What is the process you used to create the initial prototypes and how has that evolved over time as the company has grown?
When we started with the idea for Axis in early 2015 we spent a whole year on developing prototypes that actually worked. And then once you have that prototype working, you have to be able to reengineer it to fit inside a form factor that also has to be prototyped. So you had prototypes that actually functioned but looked like garbage and then you have prototypes that looked really beautiful but didn’t work at all. So the first 12 months was just coming up with ways to merge both aspects together.
In 2016 we went through production but this is still prototyping because you’re modifying the hardware and industrial design to be able to be manufactured.
From 2017 to today every time we do a prototype or an iteration we’re really just testing components and not really changing the form factor much. A lot of it is testing the vendors and suppliers of components to make sure they work within the same form factor.
You’ve had a lot of experience with the prototyping and manufacturing process now. Is there anything that you’ve learned that you wish you knew back in the early days of 2015?
Murphy’s Law – what can go wrong will go wrong. Every time we did a production we had to fly to China. We couldn’t trust the factory even though they were Tier-1. We had to implement our own [quality control] checks.
One thing I did learn was if you make a modification and you do a prototype in North America, make sure the factory also does it in China because the same components that we use in North America might be slightly different than the ones they are procuring in China and that can cause a huge difference in quality.
Another thing is you have to budget a lot more time. Factories will give you three to five month lead times; budget an extra two to three months’ buffer. Also account for when they actually go on vacation because they have these two periods during the year. Chinese New Year’s is one of them and they have one in October called Golden Week where they just shut down and nothing gets done leading up to and coming out of it.
What have been the biggest challenges of the business?
Having enough capital in the bank. One of the primary reasons a startup fails is that you don’t have enough capital the bank. So you need to make sure you’re continually raising and meeting investors.
You really have to have strong processes and build a team that really understands production. If you’re trying to do this for the first time, hire someone that has done production specifically in China.
“The hardware side took twice as long and twice as much [capital].”
One of the things we hear a lot from hardware companies is just how expensive it is. What was your initial estimate on how much you thought it would take to get product to market and how much (and how long) did it actually take you?
The hardware side took twice as long and twice as much [capital]. So the famous saying of always budget for twice as long and twice as much is actually very true. Our initial round was just half a million dollars and we needed another half a million to get us to market. Indiegogo helped with that and it helped us raise our seed round.
On the inventory side, we raised about two million in inventory financing and I think we needed more than that. Inventory is tricky because it’s all about cash flow. You’re paying for the product up front, but you don’t get the cash back until you start selling the product. So that’s where the finance has to come in and you should really have someone on the team that understands cash flow.
Even for the software side of things we thought we could start integrating with all these platforms quickly. Little did we know you’re relying on these third parties. Big corporations that have their own timelines and agendas and they don’t give you the time of day for certifications and integrations. When we first launched we had a prototype that worked on a standalone basis and we were always marketing the ability to integrate with these platforms but we knew we couldn’t really do it (integrate with the platform) off the bat because the third parties were taking their sweet ass time.
“…Companies such as Kickpay, are very creative. It makes sense… It’s like buying inventory on consignment.”
How did you go about solving the challenges of financing and hiring in China?
Because we’re a direct to consumer company we don’t qualify for traditional [purchase order] financing. So it’s very tough to go to a bank or even any private lender and say, ‘Hey, I need money for inventory.’ They want to see a track record. The simple thing we did in 2016 / 2017 was to start selling in batches but you could really only target the early adopters. You would say, ‘I have 500 units at this price point with a discount.’ The company gets the money up front but the customer will have to wait three to nine months for delivery. We did that for 2016 and 2017 but it’s not sustainable.
You do the preorder on your website for a month or two. You get that money and place your order with the factory. It takes them three to five months for production and then they ship to your customers. That’s not a scalable or sustainable business model. You can do that to prove traction but once you have proven traction, you need to start raising money.
We proved a lot of traction and that’s what allowed us to raise our angel round as well as venture debt. After that stage, and you have proven some more traction, and you have data points from Shopify and other platforms, you can start looking to these interesting lenders.
There’s a technology bank called Clearbanc and they’ll fund up to certain amounts based on your customer acquisition costs.
Paypal Capital and Shopify Capital are other ones that just popped up. They’re investing in your ability to market the product and earn three times your marketing spend. So they’ll give you some initial boost for marketing and growing sales.
On the inventory side, besides venture debt and private lending, companies such as Kickpay are very creative. It makes sense. They have claim on the inventory and full visibility to your sales and inventory levels. It’s like buying inventory on consignment (you pay for inventory after you sell the goods).
Interesting new businesses and business models are popping up for [direct to consumer] companies and I think a lot of startups should take advantage of them.
For a company producing their first product, how do they go about hiring a team in China?
I think this applies to startups in general, but you really have to sell the vision of the product and your team members have to really believe in it. If they’re just there to earn $150K a year they may not be the best fit. You really want people that have skin in the game that are willing to make sacrifices for you, that can work for a lower salary with more equity because they believe in the product vision. People that can fly to China next week because there’s an emergency. A lot of team members can’t do that because of commitments at home if they’re married or have children. You really have to have the flexibility of team members that can do that. And at the same time they need to have experience and connections in China.
You really need to have someone on your team or a very strong advisor that can introduce you to people in China.
“Voice is going to be the dominant platform or method of control of the home in the next few years.“
How do you see the smart home market evolving in the next two to five years?
Voice is going to be the dominant platform or method of control of the home in the next few years. Obviously, that’s going to be Amazon Alexa and Google Home, and Apple might enter the race a little later. When you’re thinking about a smart home, a lot of customers already have smart home platforms, but in the future to control these devices, they’re going to be adding a Google Home with Amazon Alexa. So for all these existing smart home owners, they’re just going to add a voice speaker and you’re going to have to be able to work with it. You’re going to have to be able to create routines that allow the speaker to control whatever product you are building.
For those consumers that don’t already have a smart home platform, Google Home and Amazon Alexa will be that platform. They’re already making initiatives in that direction; Alexa launched a Zigbee smart home hub to connect with other Zigbee devices, which is what we use, and rumor has it that Google will be opening up their Bluetooth platform to be able to speak to other smart home devices that use Bluetooth. Those are the two schools of thought when it comes to the smart home. You have Alexa and SmartThings with Zigbee, and you have Google, and I believe Apple, with Bluetooth, but all of them are going to have a voice element built into them.
What’s been your most successful customer acquisition channel?
Definitely Facebook and Instagram. It’s because Facebook and Instagram are very much a platform for people going and discovering new content and products. Google is not good initially because it is more driven by intent. People go on Google and search for products that they want to learn about versus Facebook and Instagram where users first discover the product.
“Influencer marketing was a failure mainly because influencers are great on targeting for lifestyle businesses where you’re talking about fashion, beauty brands, things of that nature, but not really consumer electronics.”
What conversion rate are you seeing in your most successful Facebook and Instagram ads?
It varies on industry and price point. The higher your price point, the lower your conversion rates. When you run sales or you lower your price points, you’re going to get a lot more conversions. Click through rates are very similar across the board depending on what your ad is saying. Conversion rates for something like our product within our price point is around 1%.
Have you had any customer acquisition channels that were complete failures?
Influencer marketing was a failure mainly because influencers are great on targeting for lifestyle businesses where you’re talking about fashion, beauty brands, things of that nature, but not really consumer electronics. Instead of influencers on Instagram, getting Youtube reviews would have been a lot more effective. With consumer electronics people want to know how the product works and how it integrates with their other products. It’s more of a review driven business compared to a fashion item where a consumer is just trying to imagine how it looks on them.
What sort of tools do you use and how do you use them?
Slack – It essentially eliminates emails between team members. It prevents a lot of interruptions if you’re working away, coding hard. You don’t want to be disrupting someone all the time, just Slack them. It’s actually been a game changer communication-wise.
Google Drive – For storing information in the cloud.
Asana – Is what we use for task and project management. We’ve been using it since they first launched. Their improvements over the last few years have been great. They launched a Gantt Chart feature and have more tags, so it’s a lot more user friendly.
collage.co – For employee onboarding, time off policy, performance reviews, etc.
Zendesk – Customer support.
Jira – Engineering team.
What is next for the business? What are the things you’re trying to accomplish in the next one to two years?
We actually just launched the ability to sell internationally and this was possible because our fulfillment center, Shipmonk, has an integration with something called Passport. And that allows a customer to see and pay the custom and shipping fees upfront. We’re also waiting for Shopify to launch their multi-currency feature that allows customers to see the price of the product in their own currency rather than US dollars.
We’re at the stage where we’re moving beyond the early adopters and we want to start attacking the early majority. To do that we’re going to be tapping into a service called B8ta. They are similar to a pop-up shop concept where the products are displayed and demo’d. Customers can walk through and experience different consumer devices but will still buy online. The great thing about this is that it allows you to test your retail concept. Before going to Best Buy or Lowe’s, you know how customers interact with your product.
Is there anything outside of having someone on the ground in China you wish you knew at the start?
Especially with hardware, capital is very important because even after you budget specific costs for manufacturing, and you might add a 20% or 30% buffer, things can get delayed and you have to budget even more capital to cover these delays. Team members have to be paid, if there’s a three month delay, that means three months in additional salaries have to be paid.
“Make sure you have a good financing plan in place and it’s not just trying to raise a bunch of venture capital for building your product inventory.”
What has been your unfair advantage in the market?
It’s really about building that brand. I think a brand is defensible in itself. When you think of vacuum cleaners, you go to Dyson. When you think of Thermostats, you might think of Nest or Ecobee. When you think of doorbells, you think of Ring. You really have to own that word or that concept in the consumer’s mind. That’s gonna help you build a sense of defensibility. You have those traditional methods like patents and trademarks and that can help you to some extent. But having a brand can actually influence a buyer’s decision. I could buy a more affordable vacuum cleaner, but I’m going to buy a Dyson. It’s twice as expensive, but it’s a reliable brand that people trust. Our goal in the long run is to build a brand that customers trust. They’ll pay a premium price point, but they’ll know that when they buy our product it’s going to work.
What advice would you give to people either thinking about starting a hardware business or in the very initial stages of getting a hardware business up and running?
It goes back to the funding. Just make sure you have a good financing plan in place and it’s not just trying to raise a bunch of venture capital for building your product inventory. It has to be smart because VCs will want to see this. They want to see that you’re raising $5 million in VC funding, but you also have a plan to raise a debt for inventory or come up with a very creative method to delay payments to your factory.
They’re going to want to see some type of advantage on that side since they don’t want to be financing inventory. So make sure you have a good financing plan where you can go to an angel investor and say, ‘Hey, I’m raising $2 million in equity. It’s going to get us up to a prototype, and then we’re going to be able to leverage other services to be able to fund our inventory.’