Follow my progress at starting my first mini-business.
Thursday, February 11, 2010
Learning Points when dealing with a contract manufacturer
I have received an initial 25 pieces of my product from the factory in China, and to my dismay, its wrong. It's one thing that was done incorrectly and it makes the entire product feel cheap. Now I have to argue with the contract manufacturer to redo the product with no cost to me. I am unsure how that conversation is going to go.
LEARNING POINT!
When you go to order your product, find out from your contract manufacturer, how to deal with mistakes in manufacturing, and in particular, labor the point, that you will not pay for product that is manufacturered incorrectly. I have a call with them tomorrow to discuss how to solve this issue.
There is a wonderful interview at San Jose Mercury news with Max Levchin. If you do not know who he is I am sure you know the companies he has started incuding Paypal, slide and Yelp. What is interesting is all the various iterations his companies have gone through to be he companies they are. Link is here:
As I had talked about earlier, I had found a contract manufacturer I was working with to create my product. Since I have posted, I have had two samples created. The first one, done from drawings I had created. After receiving the initial sample I made changes and had a second sample created.
Needless to say I was blown away with the quality. Of course with that quality comes a higher price per unit, plus import duties and shipping. I have put in my first order of 1000 units, which will take 30 days production time and 30 days on the water.
Realize that you, as the small guy, will get less "love" from the contract manufacturer then their established clients. You need to push and push to get them to get back to you. Its a test in the way, as until you order something, you are a cost center.
Keep persevearing and you will get your product made. As I get closer to launch, I will let you know how it goes.
I know it has been a while since I posted on this blog. I have been very busy with the business and will catch up with multiple updates. Needless to say I am almost at the point of the product launch.
I have now talked with three contract manufacturers. Of those three, one essentially will not be able to do it, but was good enough to put me in touch with their independent design person if I wanted to pay them to design a prototype. One is currently having their product engineer take a look at the idea and figure out how and how much it would cost to produce. The third one I am meeting in person at their design center this week.
The one mistake I did make with the first two, is not getting a Non-Disclosure Agreement in place. It is quite easy and you can either 1) find one online or 2) alot of companies have general ones in place that they will sign with you. This is particularly important for companies that produce product overseas.
The biggest thing I underestimated was tooling and die costs. One company quoted me close to $5,000 just for tools and set up which surprised me. I will see what the other companies have to say. I will keep you informed.
After much explorations I made my first outreach to contract manufacturers. While I found several on the web, it was old fashion paper that helped me out the most. I went to the local library and found a manufacturing directory. Don't discount your local library's reference section. This was in a local township library that I found it, not a huge big city library.
I proceeded to look up the companies and see if they have the ability to create my product. I have a lot of faith in one as on their website they have link directly to OEM/ODM services. You have all heard about OEM's, Original Equipment Manufacturers, think companies like Dell and Apple that make a product. What most people don't realize, is many times behind that OEM is an ODM.
ODM stands for Original Design Manufactuer. Ever notice that a lot of your electronic products look very very similar? That is because they are all made by the same "Original Design Manufacturer" in China. Foxconn makes a majority of the cell phones as well as the ipods and iphone. Quanta makes a majority of the Laptops for companies such as Apple, Dell and Acer.
ODM's are different than a contract manufacturer, because the ODM will actually take your drawings or concept and design your product for you. A contract manufacturer will just build to particular specifications. ODM's are key for those of us starting out early in business.
I will be calling the manufacturers over the next couple of days to ascertain whether they can build my product and for how much. Currently I have asked the question of:
Do they provide contract manufacturing services? Can they build and develop protoypes off drawings? What is the cost per prototype development? Material costs? Manufacturer value added if not included? (MVA is a fancy term for labor and B & C components like wired and solder.) Set up and tooling costs and whether existing tools can be adapted? (If they can adapt your tooling and set up costs should be less.) Minimum lot sizes Pricing on small and large lots? Acceptance of payment through the use of credit card? (Important since they would not provide trade terms for a "new company". Might as well get the points.) Shipping (Understand how they will ship your product and when you take risk of loss. Especially important if shipping internationally.)
Other questions I will ask is whether tooling and set up can be amortized over a particular production run. I will let you know what I find out so you can ask the same questions of your contract manufacturers. Wish me luck!
Your company structure is set up and you are ready to reach out to manufacturers and to various other vendors. But being a small business, you want to be take seriously. I am sure getting an email from xyzbusiness@hotmail.com is going to put your request at the bottom of the list. If only you could have professional looking email. Well you can.
After I set up my legal structure, I went to godaddy (or any registrar of your choice) and bought a domain that matches my LLC name. I do not have a server, nor do I want to deal with setting up email through a hosting service, nor would I like to pay for it at this time, given I am trying to bootstrap this business. That is where google comes in.
Google will host your email service, provide typical gmail size mail box, as well as a calendar and google docs (poor but free substitute for office) and do it all at no cost to you. You can now have an email address of myemail@mycompany.com without the hassles of hosting and setting up. You can host up to 50 email addresses with their free service which means you can even set up dummy mail boxes like sales@mycompany.com, HR@mycompany.com, and others. What better way look like a real company.
If your company gets even further, for 50 dollars per user/per year you can get a whopping 25GB mail box size. What I also like about gmail, is it has POP and IMAP support if you want to use outlook. The system walks you through setting it up and I have been quite please so far. Just search for google aps, and look for the standard version.
SO far it has worked well for me. If I find a substitute I will let you know but the ease of this just can't be beat. Anyone else had experience with this?
If you are an investment banker or consultant, most likely you are flying first class to your various destinations. Many people look at this as both a luxury or a frivolous waste of money. In fact most companies have policies associated with what class of flight you can purchase, whether you can upgrade and when you are allowed to fly business class. Unfortunately I think this is one of the more penny wise and pound foolish decisions a company can make.
I had the benefit of flying first class round trip on my three week trip to Hawaii. I made the most of it when I could. In fact, it was worth every penny I can see right now, and if I was in business development, even more.
Forget the fact that you can both work more efficiently in a first class seat, but arrive at your destination more rested, but just the people that you meet is in itself, the very reason to fly first class. On my four legs, there were three people I met that stand out from both a personal development as well as interesting people that a business may want to have an in with.
I met, a television producer. This gentleman was quite interesting, and I even knew one of his productions, the documentary, Carrier on PBS.
http://www.pbs.org/weta/carrier/
I met a professional photographer whose main business is going to motor sports and taking pictures of vehicles that drive on Bridgestone tires.
Both of those gentleman were interesting and may know others that can help you in the long run, but the one gentleman that was most interesting to me, was a former diplomat and ambassador to an asian nation. He is now an EVP for a asian conglomerate and has his PHD from Harvard. Interesting guy and am glad to have met him. But can you imagine the possibilities for your company?
Here is the head of business development for a major multi-national. He talked to me about the companies expansion in Russia and in asia. You have got a high level executive, without a gatekeeper in front, and you have a captive audience for a 4 hour flight. That is even better than a golf course.
I was putting him in touch with a couple colleagues, with the hope they could develope something from the relationship. Asian companies are all relationship based and you never know what could happen.
This is why investment bankers and consultants sit in first class. Not because it is posh, but because it is lucrative. First class gets you decision makers in an organization as not every executive flies on a private jet, and in fact most companies have policies around executives being on the same plane.
Next time you are in a first class seat, talk up your neighbor, you might be surprised at who they are and who they know.
I was reading a blog entry on a guy having trouble quitting smoking. I understand his difficulty as I used to have that nasty habit as well. But is also made me think about one of the difficulties of starting your own business. I am trying to start this entity with less then $2,500.
I figured $5 dollars for a pack of smokes. One pack a day for 365 days is $1,800, or almost 75% of your cost of starting your business. Add on that lower health insurance costs you will need to buy and not smelling for your prospective buyers, it makes sense to quit now.
Take a look at his blog if you want, interesting what we do to our bodies and how are bodies and minds work.
As we all worry about the cost of starting a business I thought I would give you a quick update on my costs so far to my business. This does not include gas and mileage, phone charges and other incidentals but outright costs that went on the credit card and that I have kept receipts for. This includes entity set up, website and prototype build.
As of right now, my total out of pocket has been $1,059.52. $667 of that had to do with entity set up and filing fees. The rest has been fairly inexpensive including domain names and hosting and a "business" mail box for 210 that lasts for 15 months.
If you really wanted to do it on a bootstrap, home address, sole proprieter, then in reality you are looking at so far no more then $500. Don't let cost stop you from doing what you need!
I got my documents from MyLLC today in the mail. I have to get the member to sign which I am doing next week and fill out some paperwork that needs a wet signature. So there is a one time $125 fee for listing the members. There is also $100 dollar for out of state business licence.
I need to change some small materials in the operating agreement that will essentially give me tighter control. The one thing that bugs me is they tell me its a sample operating agreement. I thought the purpose of hiring someone is to have someone create a document that complies with the state laws.
edit: MyLLC is changing the cover page on the operating agreement since it is a usable and robust operating agreement.
I also have to set up a business banking account next week and capitalize the business. I will probably start with $1,000 dollars and if I have to input more I will. I might try and create loans to the business till it is up and running. I haven't decided yet. MyLLC has done quite well so far and will keep you informed.
If you need to set up an LLC here is a link. Yes I get a referral fee but I am trying to be as honest with my experience as possible.
I got a call from MyLLC and they have notified me that they got the paper work back from the Secretary of State and are fedexing the paperwork to me. I also received my EIN already. Great great great work so far. Super fast!
I realized I was talking about a lot of things that I wasn’t sure if my readers understood. Let me walk through some of the filings and the explanation of why I filed what I filed:
LLC
A Limited Liability Company provides shelters your personal assets from those owned or controlled by the business. It also offers some anonymity when you are doing business online. I chose Nevada for its strong privacy, no state income tax and fairly pro-business environment. Besides, my next trip to Vegas, maybe I can write off. In addition I am not running a store front but a virtual business so filing one in my home domicile was not required.
Other structures include the typical Corporation, a Sub-Chapter S corporation, Partnerships and sole proprietors. You will have to do the research yourself on the various reasons you might want one but given that mine is a single product, low overhead that I feel I can run myself, and would never need funding, I think the LLC is a good fit for me.
Registered Agent
A registered agent is a company that will take any type of legal service on your behalf. This included any type of lawsuits or subpoenas, as well as documents from the state, such as filing and tax documents. They also remind you of compliance issues and filing dates. It is important to note, if you do not live in the state you are filing in, you will need a registered agent anyway.
EIN/TIN
This is an employer identification number or also known as a tax identification number. It is like a social security number for your company. You need it to open bank accounts, registered with the local taxing authorities, and if you hire employees to pay excise and employment taxes. Even if I didn’t have an LLC, and was a sole proprietor, I would still get once just to keep my SSN off a bunch of public documents.
DBA
Doing Business As. This is a document you file with the state to identify the name of your business. It is also called a fictitious business name in some states. A DBA has several purposes. Once, it allows you to have multiple businesses under one corporate structure:
It also allows you to receive payment into a single bank account under multiple names. Your bank will most likely require it to open a business banking account. It even allows you to make letter head and business cards.
Operating Agreement
This is filed with your LLC to explain how the company will work. I have not received mine yet but will most likely make a few minor changes if I do not like the indemnification provisions. The operating agreement could even include things like ownership changes, splitting of profits and even little things like, year end.
Certificate of good standing
I know little about these. I just know I didn’t need one. Certain states require it but since mine didn’t. If you have a store front and an LLC in your state, just make sure you don’t need one. Unfiled
There are more documents I need to file, I am just not sure yet. Some of these will be sales tax documents with the states I will accept sales tax in. Others will be a listing of the members and any tax documents I need to think of. I will update you as I figure out which ones they are.
Disclaimer
I am not a lawyer by any means. I am just a small business person sharing my experience. Part of the reason I used the service was, not only for speed, but to make sure things are filed correctly. My whole filing including all the items I listed above was less than 400 dollars, all in. This included the filings as well as state fees and even shipping (pure profit by the way). Don’t let fear of the unknown hold you back.
Moving right along. Not an hour after my order, I received the filled out form for my approval to go to the Secretary of State. They did a search to make sure the name was available, which it looks like it was, got the signature from the registered agent acting on my behalf and said it would be approved with in a week to ten days. There was one mistake on the application which most likely was my fault when I filled the data in on the online form. So far quite pleased with myllc. If you need to set up yours, go ahead and click below:
Many of you might ask why I need a registered agent. Several reasons, because my business will be virtual, I set it up outside my home state so I need someone to take any type of service. Second, even if it was in my home state, I like the privacy of not having my address listed, and I like knowing there is someone to take service between 9 and 5 as required by law.
Finally, after dragging my feet, I got the process started for creating my legal entity. I went with a Nevada based LLC. Since it will be a virtual business, i.e. no store front, I decided on Nevada which had strong privacy and no tax liability outside of sales tax. I looked at a lot of different services including legal zoom, incorporatefast.com, intuit and myllc. I chose MyLLC and I can not be happier so far. The woman who started the company also wrote LLC for Dummies, so there is at least some literature pointing towards expertise.
I got onto their live chat and was lucky to connect with Nicole who is their operations manager. She walked me through the entire process, what I needed, what I didn't need and to make it even better, gave me a coupon code at the end that essentially waved the filing fee.
As the process continues I will keep you updated and let you know any snafus. If it does as well as it has so far I will be quite pleased. If any of you need to start an LLC, here is a link:
I purchased the domain name that I wanted the other day. It was quite easy. I purchased through godaddy.com and actually purchased a couple other domains to play around with. I also bought a general hosting through hostgator. I understand now how programmers can get caught up in programming. I have been playing around with wordpress and trying to figure out how to change the HTML without messing things up to much. So far I have been fairly impressed with what little I have been able to do.
I am thinking about whether I should try and pick up the .ca and other associated domains incase I want to sell to other countries. Right now I am focusing on the US at the moment. What do you think?
As I read through other blogs I see great articles from time to time. Over at the Samba Blog they had a great article on "Do Something Amazing".
http://tiny.cc/pbYAj
Again this hits to the heart of what I have always said, but maybe not in the way they were thinking. The crux being, doing something amazing for 2 - 4 hours instead of working on everything else for 8, 9 or 10 hours. Again, starting a business does not need to be an all consuming endevour where you quit your job and risk the house on an idea.
If you can dedicate 2-4 hours a week even, and accomplish alot, you can ease into being the entrepeneur with less risk. It is amazing what you will get done in those 4 hours because it is something you have passion for.
I love finding talks from people that have started companies to explain how they started out. I managed to find this pesentation at a site called Venture Hacks. Quite interested. Take a look.
Seth Godin has a great article on Luxury versus Premium. I personally want my products to be Premium products. Luxury products can be to much work. Not only do you have to persuade people your products offer value without any compelling difference between yours and another product (besides price), but protecting that luxury moniker is quite time consuming. eBay continually gets sued by luxury good manufacturers trying to protect their distribution channel and prices. Trademark and copywrite infringement is a huge deal. A premium product sells itself.
