If you’re a consumer device company, don’t dog paddle.
Dog paddling is when you’re swimming in inventory (debt). This typically happens when you’re retail payments (receivables) don’t match up to your vendor payments (manufacturing). For example Apple retail will not pay you until your product is sold off the shelf. And guess what? Your product left the factory in China 60 days ago. You were counting on revenues from retail sales to pay the manufacturer. Oops. That’s dog paddling.
Dog paddling leads to a cash crunch. Cash crunch leads to unfavorable terms with your vendors, emergency capital needs (bridge notes, etc) and sometimes even worse, bankruptcy.
A lot of consumer device start ups with freshly minted VC money are quick to chase retail orders with pre production models. They launch at TechCrunch, Indiegogo or launch a PR campaign to build awareness, community and pre sales. Suddenly they’re flooded with orders and channel partner requests. It’s all great, it’s what start ups want. But… it’s only a momentary buzz. The real work comes next. Building a model that scales requires building cash, not just sales. If you manage your cash cycle you’ll scale. If you don’t then you’ll dog paddle.
How do you avoid dog paddling? Follow these steps:
1. Know your cash cycle… how long can you survive without payment? Until you’re paid by retailers and distributors you are essentially a bank. You are financing you’re own inventory until someone pays you for it. This is your cash cycle.
2. Understand manufacturing terms (and be ready to negotiate).Manufacturers require payment for finished product, otherwise known as ex-factory. What are their terms, net 30, 45 or 60 days? Do they require you to pay for specific components upfront such as memory, CPU, sensors or wireless chips? If so are you financing these parts through third party vendors like Arrow? Do they charge you for warehousing or docking fees? What are their penalties for late payment?
3. Manage retail terms & shrink. Retailers pay differently. For example Apple does not pay until product is sold off the shelf. That’s a long time before you’re paid. Other retailers will pay you for a percentage of product upfront. If you have a hot product (who doesn’t in their mind) then you may have some wiggle room with retailers but not a lot. For example you may be able to negotiate better terms with an exclusive deal for Apple stores. A successful Indiegogo or Kickstarter campaign with pre orders makes a big difference with retailers (the “Pebble” effect). Retail shrink is managing inventory to your advantage. I discuss this in The 2-Year Itch. It’s important to keep retail hungry, not well fed.
4. Use distributors to float inventory. Distributors will pay for inventory upfront for a fee. This includes managing delivery to retailers and reverse logistics (product returns, etc.). You’ll give away gross margin to distributors and direct control of retailers. In some cases distributors will mark down unsold inventory below agreed upon pricing. You need to actively manage distributor relationships for missteps and fine tuning but they’re a necessary option if you don’t want to finance ALL of your inventory. At Ugobe we used retail partners and distributors globally. Most of our product (Pleo) was sold through distributors in Europe and Asia and direct to retailers in the US.
There are other nuances to avoiding dog paddling that I cover in The 2-Year Itch but for now these tips will keep you out of deep water. Retail and manufacturing are the bookends to your business model. What you do between them is learn to swim or dog paddle. Hopefully you’re swimming :)
Bob Christopher; robot guy
& author of “The 2-Year Itch”.
ugobe07@gmail.com
