Lessons from a Recovering Hardware Founder | Bluesmart, ROOM, Kite Compliance | Brian Chen
Think about Apple or Tesla. They have departments of people who are focused on product compliance. Right? Our whole motivating belief is that all of those capabilities of world class, well established established compliance departments can be made accessible to companies of all sizes now with the benefit of AI.
Nate:You're listening to TRADEOFFS, a podcast about the trials and tribulations of designing, building, and manufacturing hardware and the people that make it. Each month, we sit down with founders, engineers, and other hardware professionals to understand the unique trade offs inherent in building a business that makes physical products. I'm Nate Padgett, hardware community guy and founder of Informal, a freelance collective that helps companies all sizes design, build, and ship world class hardware.
Chris:And I'm Chris Rill, startup founder, engineer, and fractional CTO, where I help hardware and software companies build and scale their products. TRADEOFFS captures the best of these conversations so you can learn about the numerous skill sets needed to successfully bring physical products to market. On this episode, Nate and I sat down with Brian Chen, a serial hardware founder whose career spans MIT Sloan, a Y Combinator batch with BlueSmart Luggage, and Building And Scaling Room, those fancy phone booths we've all used for meetings. Today, Brian is recovering hardware founder helping hardware companies simplify the messy world of product certification at Kite Compliance. Let's dive in.
Chris:Tell us about yourself and how you got into hardware and startups.
Brian:I grew up in Taiwan. I went to middle school and high school in Taiwan, and Morris Chang was, like, a household name when I was in elementary school and as a middle schooler. Now he's obviously very famous for what he's done at TSMC. But, like, even as a kid, I always wanted to be an entrepreneur, and that was kind of, like, the path I wanted. But my path into hardware was a stumbling act, I suppose.
Brian:It was not intentional. Knowing that I wanted to be an entrepreneur, one of my first jobs out of college was working at a nonprofit supporting entrepreneurs from emerging markets called Endeavor. And I spent two and a half years there, traveled to 14 countries working with crazy entrepreneurs from around the world. It was just my way to, like, get immersed in the community and to be as close to entrepreneurship as I could.
Chris:What was the most memorable product or company that you worked on that, like, stands out, like, burned into your memory?
Brian:There was a company called Ruma in Indonesia that was digital payments, but the way that you have to manage that is a lot of cash. You have to, like, create this infrastructure to ferry cash in these, like, bicycles. And the challenges of creating, like, payments infrastructure in a developing country is so different and so much more challenging than anything that you would encounter in The US. Right? So that was memorable.
Brian:Wild. But really inspiring working with these entrepreneurs who have built really meaningful sized businesses. So this particular nonprofit there claimed to fame was, like, they were one of the first supportive organizations for company called MercadoLibre, like the eBay of Latin America and is now probably a $200,000,000,000 market cap company. But, yeah, the stories of these people are they're starting companies in countries where it's extremely difficult, lots of red tape, and they're creating these amazing entrepreneurial ecosystems. So, frankly, one of the most inspiring places to work as someone in their early twenties and getting started in their career gives
Nate:you a lot of exposure to different companies. I started something similar in college, a nonprofit incubator for climate tech companies called Climate Tech. And I remember at the time, everybody was really stoked on photovoltaic cells. The technology was just starting to come out, and it's, like, laughable thinking about that now, how much excitement there was.
Brian:Yeah. Was that right out
Nate:of undergrad? Or because I know you you went to business school too. Right?
Brian:I did a semester at business school. Okay. Yeah. But no. I had actually this is a slight detour, but I moved to San Francisco in 2008.
Brian:And I was like, you know what? I just need to be in the Bay Area wanting to knock on doors of founders and startups to get my toes wet. What happened in the world at that time was great global financial crisis, and there was, like, hiring freezes around. Funny enough, I was able through a college friend to get a job, not at a startup, but at, like, a financial institution that was doing an endowment style investing for portfolios that were, like, north of a 100,000,000. This company was called Hall Capital Partners, and the office was in 1 Maritime Plaza.
Brian:And as my first real professional experience after college, I started learning about the One Maritime Mafia. Like, all of these incredibly successful hedge fund and private equity managers, Hellman and Friedman and Fairlawn Capital, which is built by Tom Steyer. But you could start to see that these networks of people create networks of companies. So One Maritime Mafia was analogous to the PayPal Mafia, but for Bay Area Finance. Right?
Brian:Very cool. I remember grabbing breakfast with the CEO, and I was like, listen. I am interested in entrepreneurship. Like, maybe there's something I could do in venture capital or how do I get my foot in the door when it comes to building my own company? And credit to Katie Hall.
Brian:I'm sure she doesn't even remember me, but she was like, You're probably in the wrong place. If what you want to do is build a company, you should be in the mix and in the flow of people who are thinking about similar things. You should not be sitting next to someone who wants to be a portfolio manager of endowment or doing finance for their lives. So I took that to heart, and that's how I landed at Endeavor because I thought to myself, what I really want to do is be absolutely immersed in the highest quality network of entrepreneurs that I can find. Reid Hoffman sits on the board of Endeavor.
Brian:There are all these amazing entrepreneurs who serve as mentors in the organization. And then on top of that, the exposure to these international entrepreneurs developing or creating amazing companies around the world. I guess the business school story is, like, happening in parallel. I became friends with one of the entrepreneurs that I supported from Argentina, and he was like, hey. Listen.
Brian:He had actually just had a a small exit for his first company, a travel booking app. And he approached me and was like, I've got an idea for my second company. I think that the next wave after mobile is IoT. I remember the exuberance. Yes.
Brian:This was, like, 2014. And he was like, IoT is is gonna completely change the travel experience. Let's create this first smart suitcase. I started working on that kind of project with him part time. He was trying to recruit cofounders.
Brian:At the same time, I had thrown out an application to business school. I had gotten accepted into MIT Sloan. There was one semester in there, the first semester where I was, like, attending these MBA classes, getting a foundational business education, which I needed. At the same time, was helping get a prototype off the ground, and we're able to put together an Indiegogo campaign. And we submitted an application to Y Combinator.
Brian:And a lot of things happened all at once, like, our Indiegogo campaign did over $1,000,000, I think, in the first day.
Chris:Two okay. I watched the video last night because Canary went on Indiegogo, and I'm like, oh, you guys beat us. 2,240,000.
Brian:Yeah. The campaign, over $2,000,000. I think in the first day, it was clear that we're gonna cross a million. And it was it was so exciting because it was, like, this new way of crowdfunding and with the traction of the campaign and the prototype. We got accepted into Y Combinator, and then I dropped out of business school.
Brian:So
Nate:It's a good reason. Yeah. Now you say you got that dropout story, which is key. Exactly.
Brian:All the credit that you need. Right? And, yeah, no regrets. I am extremely grateful for the semester of business school education I did receive because I'd never taken an accounting course or I'd never heard of sales and operations planning or some of the theoretical grounding behind operations management. That that's actually an area where Sloan excels.
Brian:Right? The school's named after Alfred Sloan of General Motors. So lots of technical operations management in the DNA of how that program has been built up over time. And those are all lessons that were important for me, at least frameworks for me to have in my mind as I kind of embarked on the Blue Smart journey. And, yeah, I got thrown into a role at Blue Smart where I was managing the finance and operations for the business.
Brian:So as you do when you're in your first company, you're just learning everything at the same time, and it is truly drinking from a fire hose. But the first financial model I've ever built was the one I built for BlueSmart.
Nate:Yeah. That's not drinking from a fire hose. It's like a water slide. You're getting hit in the face with a slide. You know?
Brian:Totally. Totally. It was insane. An incredible learning experience commercializing a hardware product and managing relationships. We actually moved after Y Combinator.
Brian:We raised some money from different venture capitalists.
Nate:How much did you
Brian:guys move? How much did
Nate:you guys raise total?
Brian:Out right out of YC, you know, what I was told at the time was, like, everybody has, like, an unofficial top 10 list. So by the time you approach demo day, people are like, who's on your top 10 list? And your goal going through the batch is, like, whatever it takes, you should be one of the companies mentioned in everyone's top 10 list. And credit to my cofounder who was the CEO and doing a great job of building hype and buzz and growing everyone's top 10 list. So we raised $5,000,000 on an uncapped safe.
Chris:Gotta love those YC safes.
Brian:Yeah. So $5,000,000 on an uncapped safe, that's free money. Mhmm. I mean, that's crazy. Mhmm.
Brian:We ended up introducing a cap, but it was like us founders just saying, okay. We think this is a reasonable cap. Here's what it is. Right. I wouldn't necessarily recommend that path to fundraising.
Brian:I work with a lot of YC companies today, and I'm like, been there. Like, you get this free money. You can't say no to that really. But, like
Nate:Why would you take less money? There's a whole Silicon Valley episode about this when the guy, like, does a down round, and he's like, wait. I could have taken less money? What are you talking about?
Brian:No. But after we raised that money, we moved our team of nine people to Hong Kong. Oh, wow. Big move. Woah.
Chris:Hold on. What motivated you guys to move the entire company there?
Brian:There were all of these stories at the time about successful crowdfunding campaigns that never shipped. Right? Campaigns returning money or two and a half years later, update comes. Sorry, guys. And, you know
Nate:Yeah.
Brian:So we were very aware of that being a risk. Like, can we ship what we said we wanted to build? And we had, at that point, like, 10,000 preorders. Can we deliver these 10,000 units to our customers? Like, step one.
Brian:We don't get past step one, then we have no business. So the most important thing for the company is set up a supply chain in China. And so we decided to move the whole company there. It was not intended to be a permanent thing. It was like Yeah.
Brian:Let's all be here until we ship.
Nate:Gotcha.
Brian:And, I mean, it was you can imagine, like, it was such a fun time.
Nate:I'm sure it was a fun time. I'm sure it was a fun
Brian:incredible place. Like, we lived in Hong Kong, and then there were a group of people who would go to China and cross the border every day for five days a week, and then a group that would do it maybe once a month. But Hong Kong is super fun place to live, and to do it with friends and cofounders and have that kind of immersive experience, it was an unforgettable period of time.
Nate:How did that impact the team? Like, was everybody on board and go, or did that kind of weed out members of the team?
Brian:The bonding experience was unmatched. I mean, it's like the exact polar opposite of kind of, like, building company during COVID. Right? The closeness and the ties that you develop from having that that kind of formative experience are incredible.
Nate:Well, and going going into it, just to, like, be okay with moving across the world with your team to build this thing. Right? The amount of alignment around mission and goal just has to be so strong. You know? So that must have been amazing.
Nate:I can only imagine what the energy on the team must have been like. That must have been awesome.
Brian:It was it was incredible. It's one of those moments where I think it's probably the most fun moment of building a hardware company where the mission is so clear. It's like, what's first customer ship? Right? Let's get into production.
Brian:And you don't have to ask, hey. What's the priority?
Chris:Mhmm.
Brian:You know? There's so much clarity in that particular stage. We had our big whiteboard in the office, and it was just like a t minus x number of days until we ship. It was very easy for everybody to get super aligned.
Nate:Mhmm.
Brian:And everything changes once you start shipping.
Nate:That's a whole another can of worms.
Chris:Yeah. I'm curious. Did you guys hit your estimated ship date?
Brian:Yeah. We pretty much did. It was kind of crazy.
Nate:The follow on question to that is, what was the return rate on the first batch? Maybe don't give that information away, but that's the obvious question.
Brian:So I'll answer both. So we were able to hit the date because in the first few weeks of landing in Hong Kong, we met someone who was working as basically an MPI manager for Apple products. Honestly, none of us on the founding team of BlueSmart really had that much hard like, true hardware experience. So we're like, oh, like, this guy, he's perfect. And we've convinced him to join us.
Brian:And but he was someone who he, like, ran an NPI schedule like no one else. Right? And he would get, like, a daily report that would just detail all the open issues, and he was just a machine. And, yeah, we were able to hit our deadline. I mean, I'm trying to remember exactly, but it was, like, within a month.
Brian:You know? Yeah.
Chris:We were nine months off. So I always try to gauge how bad were we because we weren't that bad in the grand scheme of things, but still nine months is almost a year.
Brian:Right? But, no, nine months is actually not that bad. And in terms of return rate, it was less than 5%. The reason for that is also just a great learning lesson for hardware entrepreneurs. But when you do a crowdfunding campaign and you're talking about all these bells and whistles, and people are almost basically donating money to your campaign.
Brian:Mhmm. Right? Not yeah. They're not buying a product, really. They are donating in support
Nate:whether they know that or not.
Brian:Yes. Like, Kickstarter is not a store blog Yeah. As I remember.
Nate:Oh. But because everybody reads. Everybody reads.
Chris:That happened right before Canary went on crowdfunding. And they excluded three categories of product, one of which was medical devices, security, safety devices. Oh.
Brian:That's what you meant. And you go?
Chris:I don't know if we, the company, has shared this story, but we had submitted an application to Kickstarter. It was promptly rejected with a 500 character I remember this moment, like, it was yesterday. The CTO of Canary Now, Michael Klein, he was, like, over my shoulder, like, helping me type this out. We had 500 characters to basically rebut their rejection. Yeah.
Chris:And we basically said, if they don't accept this, we're going on Indiegogo on Monday morning, and that's what we
Nate:did. Wow.
Brian:Those were the times that, you know, crowdfunding golden era, for hardware. But, yeah, the the learning is that you really need to understand the motivations of those early customers. And if you are doing preorders and you're doing crowdfunding and get traction, like, what is it that people are buying? Like, in the context of a $2,000,000 plus campaign on Indiegogo, they're buying an idea. They're buying a dream.
Brian:They're not buying a suitcase. And the reality is, like, it's a lot harder to build a long lasting company based on a dream. It's pretty much impossible. You can't sustain that. You actually end up having to sell suitcases to help address travel problems so people can go from point a to point b and take their stuff.
Brian:I remember the feedback we got was like, oh, the electronics take up too much space in the suitcase. Like, I can't fit all the stuff I wanna put into my suitcase. So it was like, the the most important thing for a traveler is the thing that we ended up compromising on and a lot of learning from that. And I'm sure, Chris, that you all of this is probably ringing some bells for you as well.
Chris:Very much so. You know, one of the reasons why you guys had to shut down was around the batteries being permanently installed. And I'm curious going back into product development, did you guys ever have conversations about, hey. What if we made the battery removable or interchangeable? I'm curious if you have any memories of that pivotal decision because it seems to have played out in ways that we know now.
Brian:For sure. You can imagine we're all tech enthusiasts and Apple fanboys, and we were trying to go for this kind of, like, Apple esque product ethos. And so clearly remember that discussion. And we said, listen. Our whole thesis is around location tracking and IoT capabilities.
Brian:If we remove the battery, that all disappears. So, like, what are we doing this for? You know, we wanted to keep that purity. It was easy in those types of, like, almost late night dorm room discussions to kind of, like, wanna have that purity, but that is the path that we pursued. Smart luggage was there were lots of copycats that came after us, which was very interesting to see.
Brian:But as the concept of the smart luggage started to catch a little bit, airlines cracked down. And they said Regular. It was kind of like an FAA type of standard that got released where, basically, they said, like, no lithium ion batteries can be embedded in the suitcases and whatnot. So it was the e scooters that were catching on fire and being manufactured in China and catching on fire. There were a couple of public cases of these cover board escooters catching fire on subways, maybe even one in an airplane.
Brian:There was also the case of the Samsung Galaxy Note seven that also had an airplane incident. So it was kind of like wild west of lithium ion batteries at that point in time. That's what catalyzed it.
Nate:Chikas are more collateral damage than anything. Right? It wasn't necessarily about smart luggage. It was about other instances of lithium ion batteries being implemented poorly.
Brian:Right. In hindsight, as I've talked to people who are very senior at UL or at these standards development organizations. If you rewound to that moment in time and you had understood what was being discussed in, like, technical standard committees, you could have seen the writing on the wall. The smart thing to do at that moment probably would have been to say, let's make it removable. Let's make it modular so that if something does change, which reasonable probability that it will, we can solve for that.
Nate:But I get the argument. Right? Like, Apple doesn't do this. We wanna make a premium product, make it like Apple. I feel like a lot of hardware companies, IoT companies wanted to emulate Apple, which is funny because now, like, my company, Informal, anytime a client's like, I wanna build a company like Apple, we're like, no.
Nate:You don't. No. Do not they're not there yet. It's gonna take a really long time for us to get there. Let's start somewhere else.
Brian:Yeah. You don't place there somewhere else.
Chris:We had a battery powered product, and we had that same conversation. So the Canary Flex was battery powered, and I was pushing for it to have removable batteries because it seems like it was a simpler approach to having to take the product down and charge it. And Ring actually has a product today with a removable lithium ion battery. I think both options work. It's just the environment that that product is in.
Chris:And if the federal government comes in and decides to make a decision, that you have to kind of live with that or die with that.
Nate:Yeah. So that's how things went with Blue Smart. And then what next?
Brian:I spent about three years on the Blue Smart journey. Afterwards, what I did is I went on a listening tour, which meant that I contacted as many different founders as I could. And that was easy because of the fact that we went through Y Combinator. And I was just kinda, like, trying to hear what people's problems were or hear what ideas people had. So in visiting with these different founders, the companies that were growing really quickly, they had a very common problem where you would have these open floor plans and there would be no privacy.
Brian:Right? One guy basically told me that he had hired a carpenter to build a phone booth himself Mhmm. And that it was the most popular square foot real estate in the office, but it was also terribly designed. He was like, dude, you should make a company that builds phone booths for offices because these open floor plans are terrible and nobody has space to think. So I spent some time pulling at the yarn of curiosity of why this was such a big problem, why open floor plans were so hated.
Brian:And a lot of the demand for commercial real estate was shorter term, whereas the structural way that, like, commercial real estate is set up is designed for ten year plus leases. That mismatch between supply and demand, like, if we wanna solve this, it's not just about what WeWork was doing and, like, okay. Sign a ten year lease or a twenty year lease and chop it up into six month increments or whatever. It was really that the way the offices get built out needs to change. And so I started a room to address that at the level of modular build out.
Brian:So we wanted to replace unnecessary cycles of tear down, build out that takes place in offices. Our vision was for a company to walk into a white shelf space and have their office pop up with modular products overnight as opposed to waiting for a year of drywall. Right. Yeah. Started with the phone booth.
Brian:That was the initial use case. And then over time, we expanded the products to take over more of the office footprint.
Nate:We had talked about this when you and I spoke a couple weeks ago. We were looking at your modular offices and meeting rooms for Studio forty five and the second location we'd opened in SoMa. But that was a key part of our growth plan basically because we didn't wanna have to hire contractors, throw up drywall, run electrical, do all that stuff. And the ability to just drop something in that would be like a whole room in the office for, like, 14 k was awesome.
Brian:Yeah. It was incredible. I I I credit my friend who had gone so far as a higher carpenter to do this for his office himself, but we hit immediate product market fit officially in 2018.
Nate:I remember, like, end of twenty eighteen looking around, like, every office I was in, and there was a room in them. Yeah. That was so fast. Overnight, suddenly, we were just like, oh, this is a phone booth company.
Brian:I was so proud of those early stages because all of that accelerated pain that I experienced in that short window of time at BlueSmart, I felt like I was bringing to bear in building room. We really did price based costing. We did the whole Van Westen door pricing analysis to figure out what is the right price point, and let's work backwards from what the customer willingness to pay is and design the product around that. We didn't overengineer. We didn't add bells and whistles.
Brian:What we launched with was a $3,000 single person phone booth where we had about 40 gross margins. In hindsight, I wish they had been a little bit higher than that, but we had done all that work to truly engineer around the COGS versus what we did at BlueSmart, which is like we just engineered the product we wanted and then added some margin on top, that ended up not being the right decision. We didn't create a lot of hype. We actually went to market primarily through Google AdWords. People were searching for solutions to too much noise in the office.
Brian:The customers who were buying our product were not buying an idea. They were buying a prototype in the earliest stages that was not very good, but they were very happy with it because it solved such a big problem in their lives.
Nate:Were you at in parallel also, like, direct selling into office buildings and companies, or was it all digital to start?
Brian:It was all digital to start. We thought of our go to market as akin to Casper and the direct to consumer companies that were coming along at that time. We had this thesis around consumerization of enterprise where you wanna make procurement really simple even in a b two b environment, make it feel like a consumer experience. We did that, and our price point was so attractive that it was, like, sat below the office manager's credit card limit. They could put it on a credit card.
Brian:Mhmm. So we got, like, a lot of these things right. And truly, I felt like a genius at the time. The lead time acceptable for these customers was, like, eight weeks was fine. So we didn't have to build up inventory.
Nate:That's awesome.
Chris:Cash flow must have been amazing in this business.
Brian:Yeah. And and so learning from the Bluesmarck experience, we were planning around Black Friday sales, being worried about selling out. We're putting together these crazy forecasts. You sell 10,000 units in a preorder campaign. How many are you gonna sell if it's in stock and shipped the next day?
Brian:And the answer is probably, like, a fraction of 10,000. We thought, well, listen. If we did 10,000 in a preorder campaign, we're gonna sell, like, 50,000 when it's actually in stock. So, anyway, those learnings about, demand planning that are extremely challenging in the consumer environment, I was like, okay. In a b two b environment, we're not gonna try to do next day shipping.
Brian:That's a bad part of b two c business models. Let's stick with our eight week lead time and basically not have any inventory. And so the cash flow was incredible. Everyone was paying us with credit cards. So, yes, we had to pay a credit card fee, but, like, that cash was upfront.
Brian:And then I also negotiated hard with suppliers. We need to have net 45, net 60. They were listening to me. So, like, we had this machine. We got to, like, a $30,000,000 run rate in 2018 off of less than $5,000,000 raised, and we were just cash flowing.
Nate:In 2018, within year one? Holy smokes.
Brian:I was like, 2019. '20 Still.
Chris:Woah. And did you guys raise any money for this?
Brian:Yeah. So we raised around $5,000,000.
Chris:Well, the reason I ask is because it seems like with that kind of cash flow, you didn't need to raise again. I'm curious if, like, you bootstrapped at the beginning.
Brian:Well, initially, we started off with friends and family money, and then we raised a seed round. And then our seed investor doubled down when they saw what we were doing. By the time we were doing 30,000,000, we had raised about 5.
Chris:That's awesome.
Brian:Yeah. It was really two years of, I think, very strong execution from product, supply chain, marketing. We kind of, like, put it all together, and then two things happened that really, like, threw a wrench in our in our plans.
Chris:One in 2020. Right?
Brian:Well, so there's something that happened in the fall of twenty nineteen first. So so fall twenty nineteen, I'm getting ready to raise my series a. I have investors begging for meetings because they've heard about our our growth trajectory, and they start seeing their products in every portfolio company's office. But, like, basically, the week that I started saying, okay. I'm gonna take meetings.
Brian:WeWork filed their s one. And, basically, it was kind of like, is this a technology company? Is it just a real estate company? Like, questions really started surfacing, and everyone's conclusion was, like, this is not a technology company. Like, what is this community adjusted EBITDA?
Brian:Like, public investors were not impressed with that. Right? And so if you remember, like, they were gonna file their IPO at, like, $45,000,000,000 valuation or something like that. They ended up going out at, like, 4,000,000,000, something crazy. But all the venture capital investors kind of had the same, like, oh, shoot.
Brian:What we were previously underwriting is not going to fly in a post WeWork IPO world that it made it a lot more difficult to raise because it threw all this uncertainty into the environment. And probably around that time, I guess, like, some of those high flying direct to consumer companies, you could start to see the cracks a little bit. And
Chris:Fitbit, GoPro. Yeah. Canary was hurt by their valuations. So when we went out to go raise, our investors were like, I don't know, guys. You gotta figure something out, but the valuation that you had for your last two rounds is not going to cut it anymore.
Brian:Right. Yeah. I think, like, Casper, when they were growing like crazy, they were raising, like, 10 x revenue. And then probably when, like, Nest got acquired by Google for a nice valuation, people thought, okay. Like, there's so much potential here and that multiples and valuations are justifiable.
Brian:But in late two thousand nineteen, the cracks of those beliefs started to appear, and that changed the fundraising environment dramatically, like overnight. What I tell hardware founders is if you're building hardware, it could be the flavor of the month right now, but the capital markets for this will be fickle. Be aware of that. The capital markets were very fickle. We actually we were able to get our series a done.
Brian:We kind of always said that we weren't trying to raise a 10 x valuation. I was like, oh, I've done that before. I'm gonna raise it, like, two x. We'll probably raise it a little bit less than that. We got a round done.
Brian:We signed our term sheet in January 2020.
Chris:That is well timed.
Nate:Yeah.
Brian:Yeah. Yeah. Do you think
Chris:you would have been able to close that in April 2020?
Brian:Hell no. No chance. We signed our term sheet. Money hit our bank account. I still remember the day, March 13.
Brian:And that was when the stock market halted trading twice in the same day because everything was going to shit, COVID. So
Chris:Did any investors try to pull their money back? Or were they, were they ride or die room?
Brian:One investor reduced their investment by a million, but we actually been oversubscribed. So I was able to same day kind of reshuffle. Yep. Mhmm. Yeah.
Brian:Another investor put in another million. So we had a minor retrade, but otherwise I mean, my investors called me and they'd be like, listen. We don't think the offices are going anywhere, So we still believe in this in Cleveland, you know, they were half right and that offices are about half of what they were. So offices did go away. It's one of the few things that did not have a reversion to the mean.
Nate:As an operator of a coworking space, I do feel like there has since been this blossoming of independent coworking and workspaces. Not necessarily even coworking, like third spaces for people to spend time in, meet community. Very different than the McDonald's of work model that was WeWork. And a lot of these places aren't building out their own interiors. Right?
Nate:And so they're consuming rooms or all these myriad of other pod companies that are out there. When things started to open up again, obviously, offices are half of what they were. Did you start to see an uptick in the coworking business?
Brian:Yeah. So, basically, from March to April, our sales dropped by overnight by, like, I think something like 85%. The demand came roaring back in 2021. Q one of twenty twenty two, we did close to $20,000,000 in sales net quarter alone. Woah.
Brian:And it was on lead times of over four months.
Nate:Oh, I remember. We were buying phone booths, and I, like, had to finagle getting some showroom models so that I could get them in time.
Brian:Yeah. The demand roaring back, and it was just like I would say in q one twenty twenty two, there was still this potential belief that, like, we would really go back to offices. And, yeah. I've spent a lot of time thinking about demand for offices, as you can imagine. Not just, like, demand for our products in offices, but demand for for offices because that's kind of the ground on which you operate.
Brian:And, wow, it is that has not been a fun thing to watch over the last four or five years. Literally, like, kind of like clockwork, Wall Street Journal every three months will be like, new article. CEOs are pushing their employees back, blah blah blah. There's all this, like, buzz about it. And if you look at the actual data on card swipes of people going into offices since, like, summer of twenty one, we're exactly where we were back in the summer of twenty twenty one, which is about fifty five, sixty percent of where we were before COVID.
Brian:So it's just a permanent loss of 40% plus foot traffic to offices that has been experienced, and it's been pretty steady.
Nate:That's crazy. Yeah.
Brian:When I think about what it takes to build a hardware business, getting the product right, having the right margins, having the product that people want, all super important. But then you layer on top of that getting to a place where you can operationally withstand these types of swings. I don't even know if forty chess kind of accurately describes it. It's a crazy thing to undertake.
Nate:Yeah. Well, you gotta be you gotta set the business up so that you're agile and you can run with these things. That's hard in a hardware business, especially consumer hardware business. You need to commit to inventory and you need to be ordering your product to be produced six months to a year out. That's what makes hardware so hard.
Chris:Don't say it, Nate.
Nate:Yeah. How did that lead you to where you are today?
Brian:We were able to survive those wild oscillations of the market. We're able to get to a place where we were doing close to 60,000,000 a year, breaking even, and I was fortunate enough to be able to sell the business in 2023. But after I had a transition period with the company, my wife and I had our first child. I was fortunate to take almost a year to really deal with family and reset, which I loved, and I was so grateful that I was able to do. As I was emerging from that, I went on another listening tour.
Brian:For ten years, I'd been so focused on the survival of the one thing and to lift my head up and look further out on the horizon to see what it was I wanted to do was just incredible gift that I feel fortunate to have had. I was talking to a lot of AI founders and trying to understand what they were building. I was watching demos, seeing what's possible. It was blowing my mind in terms of what was possible. So I became really excited about what AI could do to make different pain points I had experienced in my journey easier.
Brian:And understanding the limitations of AI, I honed in on product compliance as an area in the sweet spot of problems that AI would be well suited to address. So I've been working on that problem for the past year. My third company now, which is called TechCompliance, and we are building this AI powered compliance platform really designed to make hardware innovation easier to scale and do so safely. So I am, I guess, in some ways, a recovering hardware founder. Still very passionate about the hardware community but trying to build some tools to make an unloved aspect of hardware development a little bit easier to navigate.
Nate:Well, I always say the infrastructure for building the hardware is just as important as the product itself. Right? So I'm I'm glad you're focusing on that now after you've been in the trenches for so long. I also just wanna highlight how deep in the entrepreneurial game you are now. Like, working at nonprofit, wanting to get a front row seat, you definitely have had that front row seat.
Nate:You're addicted.
Brian:I am addicted. It is my life's calling. I love founders. I love being around founders. I just love thinking about startup businesses.
Brian:I have a small fund that I've put together with other founders, and we make lots of investments and lots of angel investing in new startups. I just love being in the ecosystem. Like, this is what I wanted as a kid. I I wanted to be bringing new things into the world. I wanted to be surrounded by other people doing the same thing, thinking about, like, innovation and how new ideas going to change the world.
Brian:So I I had to pinch myself oftentimes because I am having such a blast.
Chris:Do you have a favorite in your portfolio?
Brian:You know, as a founder, you build a lot of peer relationships and you end up developing this great network and then you're also constantly testing tools. So, I kind of developed this thesis that as a founder, you have your ears more to the ground, even more so investors, and you can generate compelling returns based on that. And I think the the case where that really comes to life for me is for a company called Magic Patterns. So early on for kite complaints, we were starting to mock up our application, and we wanted to do some wireframing. And we're like, okay.
Brian:Surely, there's gotta be some tools out there now that help you do this better and faster than before. And we'd ask this question to different founder forums, and Magic Patterns was a company that was recommended. There was two people at the time, and it was a jaw dropping experience for me. It was like, wow. You can literally mock up these wireframes via some simple prompting.
Brian:And I had the customer support question. The founder jumped on a call with me, like, ten minutes later. And then I was like, hey. Can I invest? And he's like, yeah.
Brian:Sure. We're just two people right now, but we're growing, and we think that this is gonna be big. They have since crossed a million dollars in ARR, and they raised their series a recently. For me, that kind of story illustrates. It is true.
Brian:You you have to test these tools, and you get to build rapport with founders. And then if you can kind of, like, sweeten it with some money, then it's just a very rewarding kind of, like, full circle story that proves what I want this, like, founder slash investor kind of thing to become.
Chris:That's awesome. Paying it forward a little bit for the folks coming up.
Brian:Yeah. You know, I don't I don't wanna be a full time investor. Right? So this is, like, the most fun way for me to do it, and I'm having a blast.
Nate:Did you say you've done hardware investments, or has it mostly been software stuff?
Brian:Been across the board. I would say it's probably 90% software. Mhmm.
Chris:As it probably should be, sadly.
Brian:Don't say that. Keep that to yourself. Definitely have invested in a lot of software for hardware, but I do wonder sometimes if the current batch of new hardware founders have in mind what the journey ahead is gonna be like.
Nate:Oh, no. They don't. But I'm hoping through content like this and trying to connect the dots with things like our pitch nights and with the collective that we can help them foresee some of the speed bumps. But it's a lot of excitement around the product and the idea and the prototype with very little perspective about, well, how do I make this into a product, not just a engineering exploration?
Brian:Yeah. And then beyond product, like a business.
Nate:Yeah. Exactly.
Chris:To your point, I think a lot of founders don't know what they don't know, and that's actually a benefit because some founders will opt out of something based on their past experience. A lot of times, it's that curiosity that finds the innovation or finds the missing link that the people before you didn't have. The company that I can think of is Lifex. I don't know if you, Brian, remember Lifex from crowdfunding. I backed, like, 60 Kickstarters before I did Canary, so I was deep in it.
Chris:That was, like, my addiction. Right? But there was a company called LIFX. I wanna say this was the first IoT connected light bulb. Philips and GE have been building light bulbs for a hundred years, and yet this company in Australia saw something that everyone else didn't and did quite well with that.
Chris:I I do know there's a bunch of drama around what Kickstarter did to them. I won't share that story because it's not mine to share. We should talk to them, Nate. There's a story there. There's a real story
Nate:there. That's a great idea.
Brian:I feel like we're past the statute of limitations. Like, it's been close to ten years ago. Right?
Nate:So That's true. Everybody that was on the Kickstarter team is no longer doing hardware stuff at Kickstarter.
Chris:Yeah. They'll talk. But I think that goes back to Kite. You've got companies building hardware. They don't know what they're doing, don't know what's ahead of them.
Chris:Where do you see Kite filling in for them and giving them some insight into bringing a product to market?
Brian:So think about what a well established hardware business does when it comes to product compliance. An Apple or a Tesla, they have departments of people who are focused on product compliance. Right? They also probably participate in technical committees to understand what changes are coming down the pike when it comes to standards. So they have regulatory compliance intelligence, and they make sure that is embedded in workflows across the organization.
Brian:Engineering, design, procurement, supply chain. And our whole motivating belief is that all of those capabilities of world class, well established compliance departments can be made accessible to companies of all sizes now with the benefit of AI. And I think there's will always be the segment of compliance work, which is truly groundbreaking, which is let's write new standards or let's work with these regulatory bodies and chart a new path forward. But everything below that can be more accessible and more intelligible to more people. So if you've never brought a physical product to market before, I think the very common path for founders is they realize they need some level of certification to go to market.
Brian:They contact a testing laboratory, and then they're taken for a ride by these testing laboratories. It's really hard to get in touch with them. It's really hard to get answers. So there's a whole roundabout conversation that takes place. And, ultimately, they realize the testing laboratory just wants to do more testing, so we have to figure out the answer.
Brian:And then sometimes you hire a consultant, and you're paying $10,000 or waiting four or five weeks just to figure out what requirements are relevant for your product. That's a painful experience, especially if there are any surprises in that process that could cause rework or redesign. And basically, with what we've developed at Kite Compliance, we can bring most of that to software and equip product developers or founders with compliance knowledge that allows them to navigate their path with a lot more confidence. It's hard to appreciate unless you've been through it, but it's very valuable because if you go to that testing laboratory and you say, hey. I know I've done my homework.
Brian:Here are the standards that are relevant. Here's the testing scope. You can have a much smoother journey to certification than if you go in asking open ended questions.
Chris:I know in a lot of the products I've worked on, we already knew what the answer was going to be when we went for certification. Right? If you're going to a certification body to learn if you pass or not, that's usually not the right approach. And I guess do you have any advice based on some of the wins that you guys have had for customers? Like, what are some of the insights that you're able to glean from the product going to market?
Brian:A couple come to mind. One is around product categories, especially relevant for a lot of wearable companies, but there are certain lines that you don't wanna cross. But if you cross them, then you get classified as, like, a medical device. Right? And if you're a medical device, then you're talking about FDA approvals, and you're just signing up for a whole different beast when it comes to oversight.
Chris:And just to drill down into that, like, how would a company building a device trip up in that process?
Brian:So there's a company called Owlette developed a wearable for babies. Right? And they didn't contemplate that their device could be considered a medical device. And the FDA issued a recall, and so they had to pull all their products from stores. That's like a real world painful example.
Chris:Doesn't that come from the claims the company is making about the product? Because it's not just about the components that go into a product or what they do. It's also how you are connecting with the customer and making claims about the performance of the product, that's not necessarily always obvious.
Brian:That's correct. It's something that you should be aware of as early as possible in your journey because that does inform what is the value proposition that you're selling. Right? Another example that comes to mind is I was working with a customer, and they assumed that they needed certification for their product and to be UL listed. Right?
Brian:And so what that means to get UL listed is that there are factory audits, like people that need to travel to your suppliers and see if you're being kind of, like, compliant on an ongoing basis. What we uncovered for them is that for their stage of business and for them to go to market, what they needed to prove was to be compliant with the standard versus being certified. That's the difference of tens of thousands of dollars in headache, and it changes what tests and laboratories you would approach. It changes a lot of different things. So this particular founder, whether it's certification or compliance, they weren't trying to spend a lot of time understanding the nuance differences between those two things.
Brian:The testing laboratory was like, here's your quote for certification. Testing lab never volunteered any information about what's actually required by the market. And, yeah, so we were able to save this company tens of thousands of dollars with that small insight. But they were forging ahead, and everyone was encouraging them to get certified.
Chris:That's key, especially for companies that are cash strapped in, you know, tens of thousands of dollars can meaningfully change the operation of the business.
Brian:Yep. And then I think that so that's obviously for at the startup level. It's like being knowledgeable. I think where we're excited to help is for more mid sized companies where they actually have their first compliance engineers maybe hired already. They're spending a lot of their time answering questions from salespeople or doing routine administrative work.
Brian:You know, the story is less about just the knowledge but about the efficiency. That's the moment when you realize, okay. We have to take this seriously. We're gonna start bringing people full time to focus on compliance. And cost can be significant.
Brian:But, you know, we can unlock some of those routine tasks and take it off the table. Things like product labeling or answering sales questions, things that I think are squarely within the realm of what AI can accomplish today.
Chris:So it sounds like not just going from understanding the product and what it's need to go to market, but truly embedding an agent within the organization that can act as a middleware to these compliance organizations.
Brian:Exactly. So if you're trying to vet a supplier and you're trying to expand your supply base, before you go too far down that path, you can answer basic questions about, okay. Like, what do I need to know from a product compliance perspective about this company's goods? Or from an engineering perspective. If I change the length of this cord from four feet to six feet, is that okay?
Brian:Like, in some cases, that actually changes how your product might be categorized according to the UL standards. Right? So if you can have all of that information at two of your fingertips, then that smooths every single process within an organization.
Chris:I'm thinking about how that applies to some of the organizations I've been in. In our prior conversation, we talked about AS 9,100 and having to go through the implementation process and bringing in experts within the organization who, I would say, they're individuals, but they should be teams, you know, really trying to add leverage in these situations. I think applying AI in these categories, it's imperative. It has to happen because it is really challenging without the tools.
Brian:It's funny that the human element of some of these things I'm not talking about the groundbreaking compliance that needs to be done for things like humanoid robotics, but, like, routine stuff. The human element I've found is extremely frustrating. Like, when you have to bring in experts, the experts wanna justify their worth. They're usually billing time and materials. They're overcomplicating issues, and they wanna appear to be experts, which means not answering things in a straightforward manner.
Brian:So this is an area of knowledge work that's very technocratic, but where I think that there will be a strong preference for AI answers when the work is routine and a little bit more predictable. Health care compliance can be such a no brainer tool that it's really used by the entire ecosystem, whether it is consultants, product development firms, the hardware companies themselves. Like, why wouldn't you tap into it? Because it's gonna save you headache. Totally.
Nate:I recall when you and I were first talking, we were talking about the tool, and I was thinking about who in the informal network could utilize this. I've mentioned that a lot of the guys that get brought in for compliance are really experienced EEs or mechanical engineers, right, who've been through that process and can help map it out and guide the way, but they're not compliance people per se. You know what I mean? And, like, having a tool like this allows them to extend that knowledge and be a lot faster because they don't wanna be doing the compliance stuff. Wanna be designing.
Brian:I I don't wanna undersell the importance of the human touch because that is really important. If your challenge is navigating testing labs, like, being put into the back of the queue and you're waiting months to get a testing lab appointment, that's a human problem, and relationships really do matter in those cases. I think it's more just yeah. Like you're saying, you wanna free up people to work on those higher value tasks, and that's what people should be spending their time on, not on copy and pasting standard paragraphs from one place to another.
Nate:Yeah. Agree. 100%. So how are things going with Kite so far? Jay said you're not actually raising, which was a nice little tease for all the investors in the room.
Nate:Get them salivating.
Brian:So we're in this exciting moment where we cross the barrier going from just having testing users to converting them to paid users. Now I am trying to drive in more paying customers and showing growth and traction. It's a lot of fun because it feels like being a detective, and you have to piece all of these pieces of feedback together into a new world view. And the tool right now, yeah, it's designed to meet you where you are. If you are at the napkin sketch level, then that's all we need.
Brian:If you are, hey. I've got my bill of materials fully baked, my schematics fully done, then we will ingest that as well. And, obviously, that means that the final requirements results are more comprehensive and accurate, but you need that information regardless of what particular stage you're at.
Chris:100%. Yeah. Cool. So if you're comparing your past journeys, right, that have been more, atoms, not bits, What's been different about the last year at Kite versus the formative years of the hardware companies?
Brian:I think the biggest difference is supplier relationships. A hardware company can live or die based on supplier relationships. Right? It's a lot of work to build those relationships. It's a whole another stakeholder that you actually have to really sell into.
Brian:Right? You need to make those supplier relationships resilient. The reason we were able to survive at room through the pandemic and through this roller coaster of a ride from a demand perspective was because we invested in supplier relationships. There have been multiple times when building a hardware company where, like, something has happened, and the answer is get on the next flight to see your supplier multiple times. And, yeah, that just doesn't exist in software.
Brian:You know, Amazon AWS has a crazy outage for a few hours. Like, I'm not flying out to Seattle to repair a relationship and make sure that doesn't happen again. Like, that's, I think, just the biggest difference.
Chris:Yep. I would agree with that.
Nate:Chris personally, he's writing a lot of this software, plus he's on the hardware side.
Chris:Yeah. I've bridged the gap between hardware and software my entire career.
Brian:How would you characterize the act of building a software company versus hardware company?
Chris:Oh, man. That's a really good question. Like, I would characterize, like, building hardware as almost like assembling a team of teams that you don't control. Right? You've gotta get your suppliers on board, your manufacturing is on board.
Chris:There's just so many folks that have disinterested motivations, and that's really hard depending on who you are and where your company's at. Right? But going through YC, having an exceptional crowdfunding campaign, people are coming to you. And so you have incredible, opportunity and access to the best operators, the best factories, the best capital as opposed to a founder who has a good idea and no access. And it's like, what what do you mean you can't call them and get time with them?
Chris:It's because they don't have the network. Right? And so I think it's a lot easier as a software founder because you're dealing in bits, right, not atoms. And atoms, it's a lot of humans as you mentioned. So I think if you don't have a network or you don't necessarily know how things go together, it can be way easier to live on the merits of the software tools you build because they speak for themselves as opposed to having to negotiate or will other people and other companies to help you on your journey.
Brian:Yeah. Yeah. I I I think it's so different from a marketing and sales perspective, but I found that with the software products, how you communicate value, it's like it's so different from the tangibility of a hardware product. And this could also be relevant specifically to AI, but if you're building an AI agent, it's like you're building skills and intelligence, almost like an employee. It's not that straightforward about how do you market this new employee's capabilities.
Brian:Oh, they scored this on this test, or they can do this for you. So, yeah, I mean, that's been a whole journey of learning as well.
Chris:So do you feel that this is a little bit easier of a business? Like, is it easy mode for you because you've struggled with hardware and different challenges?
Brian:Yeah. So I feel that hardware is infinitely harder. But it's like suppliers. It's like logistics. It's figuring out how to control your logistics costs.
Brian:It requires more people. You you need an ERP for really critical reasons from an accounting perspective and order management and change orders. And holy cow. Like, the complexity is multiplicative in my opinion Mhmm. When it comes to building a hardware business and one that scales.
Brian:Right? Mhmm.
Chris:Yep. What piece of advice would you have for founders coming up that maybe you wish you had heard ten years ago?
Brian:There was this framework when launching BlueSpark where you get a product out and you don't necessarily place that particular launch into what it means to develop a product that has a life cycle where you're developing a second generation, a third generation. I think it's, like, appreciating that there are these different stages of product development, and you need to plan for that, like, generational type of thinking on these products. Because if you appreciate that and you understand that that's gonna coevolve with your customer base, it kinda takes a lot of pressure off of the features you're packing in. Right? It's like, okay.
Brian:What am I trying to prove in this generation? What can I wait to prove in my next generation? Like, I think that's a very healthy way to think about hardware iterations. It means that you can simplify products in the early stages and create value through simplification. That's like a hard lesson to learn intuitively, but so important when it comes to hardware.
Chris:I would agree. Launching a product is often the start of the race, not the end.
Nate:Exactly. Do you have any fundraising advice for hardware startups? Like, a lot of hardware founders are engineers. You know what I mean? And they have ambitions to raise money, but a lot of times they feel out
Brian:of their depth. Do you
Nate:have any advice on that?
Brian:I think I heard Tony Hsu from, like, DoorDash say this. But at the end of the day, fundraising is about emotions and managing emotions. And I think his his phrasing is something along the lines of, like, you wanna open with greed and close with fear. Like, I think that is true of fundraising no matter what type of business you're fundraising for. Like, when you're telling a story, what are you trying to achieve?
Brian:It's like, you're trying to make someone feel greedy. That's it. Mhmm. And then when you wanna actually close around, you have to make sure that they're afraid of being A missing out. Idiot that missed out.
Brian:Yeah. The master fundraisers are people who understand that emotional side. Mhmm. When I'm talking to founders working on pitch decks or whatnot, make sure you elicit a feeling of greed. Mhmm.
Brian:Understand what it takes to do that. Is it margin? Is it market size? What is it? But Mhmm.
Brian:You have to pay attention to the emotion.
Nate:That was fantastic.
Chris:Yep. So I guess finally, Brian, where can people find you in Kite Compliance?
Brian:On LinkedIn, Brian Chen. Kitecompliance.ai is the website address. And if any founders are thinking through a product compliance, I'm really passionate about the hardware community and helping founders when when possible. I'm excited to get this out there and to see who listens and how I can be helpful.
Nate:Thanks for joining us. This is great. Thank you.
Brian:Yeah. Thank you, It was fun.
Chris:TRADEOFFS is hosted and produced by Chris Rill and Nate Patchett. Editing done by the illustrious Alex Michael. Our logo is designed by the talented pixel alchemist, Tanya Shica. If you'd like to be a guest on the show, reach out to us on our website at tradeoffs.fm. If you made it this far, please rate and subscribe to the pod.
Chris:Nate and I appreciate your support.
