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  • Writer's pictureAlexander Suma

Your First Supplier or Your First and Worst Headache (1/2)

Based on Alexander Suma's (CEO & Founder of Nexuma) experiences as serial founder of hardware companies: What costly problems you can run into selecting your first supplier, and how you can prevent them?


Nothing is more difficult than selling a not-yet-existing product in a new market to a client who doesn’t yet understands yet that he needs it. That’s a typical scenario for many startups with innovations, and if it’s a hardware solution, the client even needs to pay a relatively high-cost price for it. In the same line, how do you then convince a large supplier company that they need to make that product or an essential part of it while having to invest many hours to figure out how to do it, while they kind of know you don’t have much money. That puts the startup usually in a pitch and selling mode trying to convince the supplier to work with them and provide all those preparation in-kind hours in return for future orders, and more than often a tricky lock-in contract is quickly found on the table.





 

Unfortunately, I have heard several negative experiences from fellow founders having issues with their first supplier and I have had such similar issues with them myself. When you are developing a hardware product, it is for most startups unimaginable, unreachable, and unrecommendable that you will produce all of it yourself. The startup needs to focus on the inventive intelligence and not get involved yet with acquiring and running infrastructure, machinery, skilled labor which are all at a too large cost of capital and resources which usually is simply not worth raising money for. Besides, setting up a manufacturing facility is a completely different skill and will run you out of money in no time as you don’t have (enough) backlog yet.

 

So, you look usually for local suppliers who are specialized in the parts you need, and as you have gotten so used to, you pitch your idea to them and promise a future of glory that they potentially can participate in. One year later, you find yourself in one of the following situations:

  1. The prices doubled or even tripled, and they don’t want to bring it down as they claim they had to invest many hours to start up their process and it was more difficult than anticipated. The result is that your product either becomes unsellable, your own gross margin is gone, and in the worst case your projections run into a loss while you have to deliver your pre-sales contracts. Yet, you don’t have the time or resources to switch suppliers. Your supplier is usually completely aware of this.

  2. In combination with point 1, there is a clause in the contract which binds you to take their product for the next couple of series regardless of price, quality, warranties or anything else that should be important.

  3. The supplier delivered a horrible product which broke within the shortest amount of time resulting in angry and disappointed customers. The product must be recalled / repaired while there are no clear warranty clauses in the agreement. You are the seller to the client (chain liability) and need to bear all responsibility and repairs within a certain amount of time, which is running your cash down dramatically. Eventually, you might even run into a legal conflict with the supplier which is costing you even more time and money. The negative experience of your early adopters will also damage your future potential tremendously.

  4. The product broke by the bad quality and delivery of the supplier. They finnaly offer to repair it after many difficult talks and discussion. Regardless that it is their fault they charge astronomical repair costs which you didn’t foresee at all and is a big hit on your cash reserves. As your early adopter is your most important client, time is running and the market is watching, you need to agree as you have no other choice.

  5. Without informing you nor asking your permission, they filed a patent or copyright on the work they carry out which is an essential part of your product. There are even cases where they filed IP on your work.

  6. When it finally comes to scaling, they push you to the end of the line with the message that either the price goes up or you will wait till they have served their better paying customers.


Read next week's Blog to learn about ways to prevent these difficulties.




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