Starting a Hardware Company: A Roadmap to (Hopefully) Not Failing

The Myth of “We’ll Worry About Costs Later”

Founders tend to significantly underestimate cost and time for a number of reasons, which include: 

• Not knowing the impact of early design decisions on late stage costs

• Lack of identifying, managing and mitigating market, financial and technical risks

• Underestimate of the complexity of building one to many of something

• Misunderstanding of associated manufacturing costs, and timing of costs

• Misconception of how to build and work with the right supply chain

A better understanding of costs is necessary for building a funding strategy along the product development journey. In addition to navigating the difficult product development journey, founders also need to be selling the dream to investors, with the right data along the way to show progress. For example, if proof of concept prototype delivery lines up with a fundraise, a founding team may want to have proof of concepts created and tested, along with getting some market feedback from key users to validate the opportunity.

This article will outline where money goes during proof of concept, development and manufacturing ramp. A template for building out costs will also be provided.

Where the Money Goes in Product Development

Even when things are going well, product development hides costs in places that seem harmless at the time. This section breaks down each stage of the journey through a financial lens - common cost traps, and how to reduce the risk of falling into them.

Product Definition

Product Definition sets the foundation of the process. Early decisions here lock in assumptions that can snowball into rework or misalignment later.

Common Cost Traps:

• Undocumented product requirements → costly scope changes later

• No early financial model → unclear COGS targets during development and no tie in to funding strategy

• Unvalidated customer problem → risk of building the wrong thing

How to Reduce Risk:

• Document the product definition clearly, including the problem, solution and business case

• Get early feedback from target users on the problem before defining the solution

• Tie product requirements to early financial assumptions

Proof of Concept

Proof of concept (POC) is often where teams make design decisions without mitigating risks, which leads to expensive redesign later.

Common Cost Traps:

• Too much customization before reducing risks → expensive to back track and redesign

• No development or manufacturing plan created → costs unknown, fundraising plan unknown

• Skipping user feedback → risk of building something no one wants

How to Reduce Risk:

• Only build what’s needed to test and reduce technical, market and financial risks

• Allow engineering and industrial design to operate in parallel

• Use minimum viable proof of concepts to test with key user personas

Development

Development is where costs start to increase quickly. It’s also where the impact of design decisions in proof of concept become difficult to undo.

Common Cost Traps:

• Prototypes designed without manufacturability in mind → expensive redesign after engaging with manufacturing partners

• Not tracking COGS → design not optimized for cost

• Supply chain not developed early → design for manufacturability mismatches

How to Reduce Risk:

• Incorporate DFx early, to guard rail the design process (design for x, where x is manufacturability, assembly, test, supply chain, quality, cost, etc)

• Use COGS estimates to help with tradeoff analysis

• Test prototypes with key user personas, and begin planning go to market strategy

Design Transfer

Design Transfer is where your manufacturing partner gets involved. 

Common Cost Traps:

• Inadequate design package → inaccurate quote and production timelines

• No owner for CM relationship → poor business relationship set up

• Underestimating operations team needs → slow or blocked design transfer process

How to Reduce Risk:

• Appoint technical owners for manufacturing to develop a request for proposal package with engineers, and develop a functional requirements document

• Work with a manufacturing engineer for design handoffs to accelerate quoting process

• Align on factory test plans and sourcing strategy

Manufacturing Ramp

This is where past mistakes become realized as costs. Pilot builds surface manufacturing challenges, with any design changes here costing 2x-10x what it would have early in development.

Common Cost Traps:

• Too few builds → issues show up in production

• No functional test plan → inconsistent output and quality challenges

• Underestimating or incorrectly defining manufacturing costs and payment terms → run out of cash

How to Reduce Risk:

• Plan for multiple pilot builds to validate line readiness

• Further refine “what comes out of the factory” with functional requirements

• Set up clear manufacturing budgets with all the right inputs

Production

Production is where you finally ship to customers, but it’s also where small misalignments in earlier stages show up again.

Common Cost Traps:

• Undetected engineering design or manufacturing process flaws → low production yield

• Forecasting errors → too much cash in inventory or missed sales

• Overpromising timelines → expensive rush logistics or lost customers

How to Reduce Risk:

• Incorporate learnings from manufacturing ramp builds into production process

• Pilot test customer experience early (packaging, setup, usage)

• Align finance, ops, and sales on realistic production and sales forecast scenarios (e.g. best/worst case)

What to do about it

Product development is all about trading off decision designs with risk mitigation, through the process. Focusing on the right things early can help to better control costs and timelines along the journey. 

Start with a COGS target - having a target helps to understand the business opportunity, and provides a data point for tradeoffs to product, engineering and operations teams.

Use Proof of Concepts to De-risk - Jumping into development too quickly could rapidly inflate design costs - backing out of design decisions later in development is expensive to undo. Approach proof of concepts as whatever needs to be minimally made to reduce technical, financial and market risks.

Constantly test with real users, early and often - Real users buying your product will make or break your business. Obsess over your user needs being satisfied, and try to find opportunities to validate your users are willing to buy your solution to solve their problem.

Engage manufacturers early - treat your supply chain like business partners, especially your CM. The earlier you involve these partners, the more bought in and supportive they will be in a business relationship, and the more guardrails you can set for development (incorporating all the right DFx early).

Build Financial Flexibility into your plan - timelines shift, tradeoffs are constantly surfacing during the journey. Keep aligning your fundraising strategy with where you are in the process and your forecasted costs to production, and always overestimate how much you need to get to your first unit sale.

The cost planning tool is designed to help you model your costs through production.

Conclusion

Most hardware startups have cost and schedule overruns due to poor cost planning and product development processes. Costs stack up quietly with early design decisions, which impact later stages. With the right planning, you can keep financial flexibility intact to increase your chance to get to production.

Use the Hardware Cost Planner to model costs from concept to production, to support your fundraising strategy, hiring plan, development strategy and manufacturing strategy.

Questions about how to apply it to your own roadmap? Reach out below, always happy to help.

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