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Should I bring on partners or hire contractors for a physical product?

I've already created a successful online business as the sole owner/investor, and have currently have 25+ contractors and employees to help run it. I never saw enough benefit to bringing on a partner. Now I'm looking to create a physical product (a folding digital piano), which is a completely new world to me. I hired a couple of engineers, but due to some serious non-work-related health issues on the team (cancer and death), and reaching our budget, the project has been on hold for several months. My enthusiasm has also taken a hit. So I'm considering bringing on partners to help me move this forward, but I struggle to know how to go about finding them, and who exactly (and how many people) I should invite into that role.

I currently have a mechanical engineer I've been working with (as a contractor), and someone to help with marketing. I'd love to find a good electrical engineer. I also need a graphics designer, but that would be more temporary (and I know a few). Someone with more market knowledge or "ins" in the industry would also be helpful. But which of these roles should I consider as partners vs just paying as contractors or consultants? Any other roles I should be considering at this stage, or later?

My initial plan was to crowd fund this project once we got a decent prototype built. And while I probably could remain the sole owner of this business, like I'm used to, I'm beginning to open to the idea that working with others who are as passionate as I am about a project, may be worth a good chunk of equity and responsibility. Is that true, and if so, how is it done?

Thanks!

5 Replies

David Still
1
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David Still Advisor
Founder of Start-ups, Entrepreneur, Financier and Advisor

Dear Brandon,

I would recommend that you do everything possible to avoid bringing in an institutional investor, either directly or through crowdfunding.Here are a few reasons" (I will send you citations if you wish.).

90 percent of new businesses can't bridge the "valley of death;" when the feel-good times funded by an initial personal seed investment come to an abrupt end after a search for formal venture capital fails and end up shutting down. 99.95 percent of entrepreneurs will not get startup venture capital. For at least 20 years thefailure rates of start-ups has remained constant at 50 percent in year five to approximately 75 to 85 percent in year 8.75 percent of venture-backed firms in the U.S. don't return investors' capital. Somepeople believe the failure rate in startups is something like 90 percent.

There are no known empirical data bases or systematized research programs on the failure rate of start-ups founded.But we do know something about institutionally funded founders:66 percentof early stage failures stem from people problems;52percentof founder CEOs have been replaced by the 3rdround of financing.44 percentof the founder CEOs replaced by the 3rdround of financing were fired by board (aka investors);8 percentof the founder CEOs, theremaining cases - by far the minority - the founder raised his hand and said: there's got to be someone better than me to lead us to the next stage; when you're the creator of a company, you're increasing the chances that you're going to get fired; and the most successful of founders, the ones who led their start-ups to completing key milestones the quickest, were actually the first ones to get fired

Warren Buffett on investing opines: "With a wonderful business, you can figure out what will happen; you can't figure outwhen it will happen. You don't want to focus on when; you want to focus on what. Ifyou're right about what, you don't have to worry about when."Rarely are institutional investors' interests aligned with yours. I have spent millions of personal dollars to arrive at the conclusion that I would do almost anything I could to never have any institutional investor partners. Also, are you sure you want to venture into a different business? A successful online businessdoes not necessarily translate to a successfully creating a physical product.... totally different set of skills and challenges. At a minimum protect your successful business in a separate legally entity with NO personal or corporate guarantees so that the new venture does not take everything from you if it fails.

Best of luck, David

www.davidbstill.com

Glenn Donovan
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Glenn Donovan Advisor
Vice President of Sales (fractional)
@David Still - The statements you made above are something that every startup founder should read carefully and take to heart.

My take? As a guy who's done sales/marketing as an employee/contractor/consultant for 20+ early phase/startup enterprise tech companies all I can say is that the current angel/vc investing culture seems upside down to me. The cost of taking their money is giving up running your company.

Example: I just saw a startup that has managed to get to a 1.5 million dollar run rate with a sales vp who didn't have big company sales VP experience. He crushed building this company from zero to their current ARR, with a very high growth rate by hiring the right, small team. But because the founder needs more capital, he's going to fire the sales vp to put someone who VCs won't question into the slot. It's not that he doesn't think this sales VP couldn't scale to 10, 20 or 30 million, it's that the VCs will tell him that they want someone else in the chair if they invest.

While only a tiny example, to me it exemplified the insanity of running a startup enterprise tech company funded by institutional investors. These days, they all have ideas and input and systems they push on their portfolio companies, as though they know actually how to grow companies while they ignore their ludicrously high failure rates. It's amazing to me. The "incubator" approach couldn't be more tilted in the favor of their current strategy versus founders needs. They are fine with a cookie cutter approach because it gives them the 1 in 20 moonshot - and they simply don't care about the other 19. If they actually needed more capital or didn't fit within the incubator's "formula" it doesn't matter.

In my role, I work with founders who need the advice of someone who's actually sold 50 million of enterprise technology personally. Who's actually cold called and converted leads and built things like demonstrations and proposals and content and campaigns etc. I also have great strategic chops, and while I can drive down to painful detail, I can also helicopter up to strategy and help them from making fundamental mistakes. Fyi, the biggest weakness I see in most founders and startups is good strategy.

Where I'm terribly weak is in the financing side of things. And that whole world has changed so much, so the reason I'm commenting is that I'd like to connect with you. I'll send you a message. But my larger point for this thread is that "capital is destiny" - who owns you really matters. Money drives and if you give up the drivers seat for capital, don't be surprised if your company becomes something other than you planned.

As for Brandon specifically, I have no idea what the right next move for you is. My only advice is to very carefully consider your strategy. What are the competitors/alternates/substitutes available to your addressable market? What the the likely product pipelines of those companies? What is your distribution model? How will your value proposition be defensible? How will you punch through the huge level of noise in all markets today?


Gary Jurman
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Gary Jurman Entrepreneur
Screen Printing Industry (30 yrs)
Here's my 2 cents:

Crowdfunding is great, but unless you bring the bulk of the audience, you'll come up flat. (I did a small Kickstarter for our project and raised 44k). There are other models as well that will lend you money instead of taking product for the investment. If you already have a successful online business, I'd skip the lending platform.

Marketing: It's way too early to market this product. You can, however, use a smart marketer to help you figure out if people even want to buy the product in the first place before going through the intense battle of creating a physical product out of thin air. (I have a physical product with IP to boot, and we did a lot of market testing before getting too far into it.) You can try using mock-ups and running ads and surveys to determine initial interest. Also try talking directly to potentially interested customers.

Graphic designer: Hire that guy. There's a billion of them.

Electrical engineer: Hire that guy. If you shop, you'll find a decent one for a reasonable price. I have a recommendation for a circuit board builder, if you like. He won't be creating IP in most cases.

Mechanical engineer: Only if he if also a musician, is a machinist, and would make a great partner. This is the guy who you will wind up with his name on the patent along with yours. If I were to look for a partner in the situation you described, it would be this guy. It'd be great if he can build prototypes. A cheap 3d printer might be very helpful here as well. You will blow through tons of cash building prototypes, and paying this guy a salary plus partnership could be a big win.

Once your marketer has proven they can get you to a product that is on point, you might want to see if you can offer them a partnership role for their expanded next duties --blowing the product sales up through intense marketing efforts. At this stage, it is likely that your marketer will either have had enough of your product, or will be a zealot.

As far as getting someone for day-to-day OPs goes, if you can find a partner that shares your vision and follows/believes in your systems, I'd hire them and then explore a piece of ownership after they prove their worth.
David Still
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David Still Advisor
Founder of Start-ups, Entrepreneur, Financier and Advisor

Institutional investors have two things that an investee does not have: power and money (usually other people's money like a pension fund and its imprimatur - even though no pensioner ever knows their money is being used for abusive purposes). As a result, all the agreements and laws in the world will generally not protect a founder from personal bad times and/or failure. It's very pragmatic. As a general statement, founders cannot afford to sue an institutional investor for a breach of anything.Most institutional investors will make that happen at closing. "Laws are spider webs through which the big flies pass and the little ones get caught". Honore' de Balzak. Through discovery I have seen behind their curtain and know exactly how to change the paradigm to level the playing field but it requires a number of changes in the way deals are structured and documented in the beginning, with input from litigation counsel.

Tony Dobaj
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Tony Dobaj Entrepreneur
CTO at Bizzz
Hi Brandon, In general I would say a reliable partner is almost always better than a reliable contractor because the former will be there for the long haul. But there's that word "reliable" - a difficult thing to quantify until you're in neck deep. In your specific situation I would say that a reliable tech-savvy adviser (at least) would be mandatory, someone who's been through the development life-cycle before to help you ensure that any contractor has all the proper boxes checked. As to the how - no substitute for doing what you're doing - networking.
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