Starting a Hardware Company: A Roadmap to (Hopefully) Not Failing
Part I: Start With a Problem, Not a Product
March 24, 2025
By: Mike Pica
Hardware Velocity is thrilled to share a new three part series - Starting a Hardware Company: A Roadmap to (Hopefully) Not Failing. The series will cover developing and documenting the foundation of your process - product definition. Armed with an understanding of the problem, a potential solution, and a viable business case, you will be in a better position to navigate the incredibly expensive, long and difficult journey of hardware.
The Starting a Hardware Company: A Roadmap to (Hopefully) Not Failing series will be broken down as follows:
Part I - The Product Definition Overview: Start with a problem, not a product.
Part II - The Hardware and Manufacturing Costs Primer: Where money goes to die (unless you plan right)
Part III - The Financial Model: Burning money or breaking even?
Why is the Hardware Journey so Difficult?
Hardware is notoriously difficult. It demands significant capital, long development timelines, and even with both, success is anything but guaranteed. A CBInsights report found that 97% of hardware startups fail, often before they ever bring a product to market.
Many founders assume they can bootstrap or raise minimal capital, believing they’ve found a shortcut: whether through pre-sale campaigns, offshore manufacturing, licensing patents, or small tweaks to existing products. But without substantial capital and a proven product development process, they’ll likely hit a wall, unable to scale or even reach production.
So, how do hardware startups increase their odds of success?
A scalable business model - not just hardware sales, but recurring revenue streams like subscriptions, software, or services - to attract investors despite long ROI timelines.
A realistic funding strategy - a clear understanding of exactly how much cash is needed to reach production and a plan to secure it.
Product differentiation - a unique but familiar solution that stands out from competitors while offering real value at a price customers are willing to pay.
A disciplined product development process - one that carefully balances risk and design decisions to move as efficiently as possible toward production.
One critical yet often overlooked challenge? Most product costs are locked in early. The design decisions made in the earliest stages can determine long-term financial viability. The key to survival: holistic, strategic thinking from day one.
Figure 1. How early decisions affect long term costs [1]
Figure 1 illustrates how product lifecycle costs are locked in early, even when little is known about product performance—technically, financially, or in terms of market demand.
For example, if the total lifecycle cost is $10M, nearly $6M (60%) is committed by the end of the concept design phase (purple line). However, that $6M isn’t actually spent until manufacturing (blue line). This means early design decisions determine costs much later, often when it's too late to adjust.
To avoid overcommitting too soon, teams should delay irreversible design decisions if there are further opportunities to reduce market, technical, and financial risks. The goal is to narrow the gap between costs committed (purple) and costs incurred (blue), keeping financial flexibility for as long as possible.
Most first-time hardware startups rush through the concept design phase, making key decisions before fully understanding the market, technical, or financial risks. Then, when these risks surface later, they’re forced to backtrack - often at great cost - because design changes become harder and more expensive over time (yellow line: ease of change).
Some startups, instead of backtracking, push forward despite the risks. The result?
They can’t ramp to production.
They launch, but no one buys the product.
They launch, but margins are too thin to scale.
They launch, but the product fails on quality.
Either way, moving too fast early on locks in costs and risks that can sink the business before it even has a chance to grow.
So, how does a startup better set themselves up for success in the product development process? Start with a clear product definition.
Part I - The Product Definition Overview: Start with a Problem, not a Product
Product definition is the foundation of your process. Doing this well will set your company up for success in everything down the road. Product development is incredibly expensive and time consuming, so having a strong foundation is necessary to minimize cost and effort.
Product definition is the combination of a compelling customer need, a solution to meet that need, and a viable business case that wraps it all together. Is a customer willing to pay a price for the product or solution that is higher than the cost it takes for the company to deliver that solution, i.e. are you profitable at a unit-level? What does it look like when it scales? Are there enough customers to buy the product, so sales exceed total costs / expenses, and invest into the company to deliver at scale?
The customer need / problem, the solution, and the business case are interrelated, so tweaking and adjustments may be required to balance it out. Once they are balanced, you have a solid foundation.
None of this is worth much unless it's documented. Having your product definition documented helps check yourself, communicate internally to your team, and externally to your partners and investors with exactly what you are doing and what you are aiming for.
This article outlines a framework to document your product definition, broken into:
Opportunity - problem, market size, competition, industry
Product - solution, differentiation, MVP and roadmap
Requirements - detailed list of what is included
Economics - product level, hardware and manufacturing costs, and company level
Opportunity
The opportunity captures the customer need/problem, the market size, competition, and industry.
Customer Need / Problem - This should include your target customer, how you reach your target customer, their preferences and purchasing habits, and typical user stories that illustrate the need. How the customer solves the problem today should also be considered.
Market Size - determine how many people have this need. Research and document your total addressable market (TAM), determine serviceable addressable market (SAM), and finally your serviceable obtainable market (SOM).
Competitor Matrix - a competitor matrix helps to outline what currently exists in the market, and white space opportunities to fill. This exercise should help address questions such as:
How are customers currently solving the need / problem?
What does the competitive landscape look like?
How many companies offer solutions to the need / problem?
How concentrated is the market share across that group?
What are the strengths and weaknesses of the competitors?
Where and how are most competitors manufacturing the product?
A competitor matrix can be built into a spreadsheet, with different columns representing different products, and each row can include product names, company names, price points and features.
NOTE: the competitor product does not have to be exactly the same as the solution you may already be thinking about. The goal here is to be prescriptive enough to uncover as many interrelated competitors as you are able.
Industry - industry impacts distribution channels and regulatory. Determine how the distribution channel is characterized, number of options for customer purchase, and what (if any) regulatory forces impact the market.
Product
With the opportunity defined, next we need to think more about the solution. At a high level, we want to think about customer need(s) being addressed, how the product is differentiated, key features and pricing. Then, we want to think through a product roadmap - namely what is the minimum viable product to ship, to validate the business case, and what can be moved to a future product?
NOTE: It’s important to capture the opportunity clearly before thinking about ways to solve the problem.
Solution - think through how the product addresses the customer need(s) outlined above.
Differentiation - determine how you are different from other products in the market. Review the competitive matrix as you work through this - what provides a competitive advantage? Can that advantage be protected, with things like a patent, strategic partnerships, exclusive deals, etc.? How do the key features and pricing compare to other products in the market.
MVP / Roadmap - Think through the minimum viable product (MVP) - what features are required to ship, and which can be added to future iterations? Are there any features that may be excluded altogether? From here, you can map out a product roadmap, which can include different iterations of your product or new products. An MVP is critical to outline - minimize the product to the simplest version that meets your customer need, at a price they are willing to pay.
Requirements
With a better understanding of the solution, the requirements may be documented.
Each requirement should have a priority label, such as: required, nice to have and deferred.
Required - feature that is necessary for the MVP - the product will not ship without it.
Nice to have - the addition of this feature could benefit customers or business, but it is not required to ship.
Deferred - features that could enhance value or performance, and this feature can be held until a later version or iteration of this product.
Every requirement should also have a measurable technical requirement, to aid in verification testing.
Requirements vary based on the product, but typically requirements fall into the following categories: user interface, form factor, performance, durability, connectivity, environmental, regulatory and serviceability:
Performance:
Product performance metrics, must be quantitative - examples include signal strengths, audio alert levels, other functional performance metrics.
User Interface:
Features that the end user will interface directly with - some examples include power ports, LEDs, audio alerts.
Form Factor:
Physical form requirements for the system - examples include size of system, color, material, finish requirements.
Durability:
Requirements around reliability - examples include battery life, life cycle testing.
Environment:
Requirements around environmental conditions - examples include operating temperatures (min max), ingress protection, pressure, humidity.
Connectivity:
Interconnectivity and communication requirements - bluetooth, WiFi, cellular, etc.
Regulatory and Safety:
Safety and agency certification requirements, determine countries where product will be sold to determine - such as UL, CE, FCC, TUV, etc.
Service:
Requirements for servicing the system - such as ease of disassembly, debugging commands / responses, etc.
Economics
The economics to consider are at the product level and company level, along with development and manufacturing costs. Product level costs help to understand unit economics, development and manufacturing costs help understand funding needed to first product sale, and a financial model helps to understand growth, cash flow positive and break even.
Product Level - The goal is to build a model for your gross margins at the unit level. To determine gross margin, first determine your cost of goods sold (COGS) and your sale price to the customer. Consider your expected production / sales volume, key components, manufacturing strategy and distribution / fulfillment strategy to determine COGS. Be sure to also determine gross margins between direct and channel sales, and the margin of each channel. Also think through any recurring revenues in addition to the device sales.
This can be fairly difficult for companies unfamiliar with associated costs - working with a partner that has an understanding of how these costs typically look can be valuable.
Development and Manufacturing - The goal is to determine development costs until the first product sale. Be sure to incorporate into the model:
Staff (contractors, FTEs, partners, etc)
Testing and certification costs
Expected costs for prototyping units, at each milestone - proof of concepts (POCs), prototypes, production stages (EVT, DVT, PVT, etc)
Expected unit costs at each stage (costs will be significantly higher than when you are in production)
Tooling or other NRE required to manufacture the product, at the forecasted volumes
Inventory / supply chain - minimum order quantities (MOQs) and lead times for key components, lag from purchasing components to selling finished goods, inventory needed to be produced to fill the channel
Financial Model - Armed with product level costs, development and manufacturing costs, a financial model may be created to show financial performance. Useful outputs include revenue growth, cash flow positive and break even points. The model should include
Development and manufacturing costs / burn period
Staff and salaries, outside of development costs, required to operate the company and support the product
Operational expenses, e.g. office space / utilities, legal, other professional services
Expected sales ramp / growth over time
Cash flow positive expected (i.e. gross revenues greater than total expenses, across a time period)
Break even point (accumulated gross revenues equals total accumulated expenses / investment)
[1] “Principles of Operations Management”, Heizer/Render, Prentice Hall
Building a successful hardware startup starts with a solid foundation. Every part of the product definition process, from defining the opportunity to mapping out requirements and financials, plays a critical role in determining whether the business is viable. Startups that approach product development with a disciplined, holistic mindset—balancing customer needs, cost structures, and market realities - stand the best chance of not just launching a product, but building a sustainable business.
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