Operational Mastery

Sep 22

A guide to avoiding startup death.

By Patrick Hunt, General Partner, NIVC

Most startups die. Take ten early-stage startups and give them everything they need to succeed – good tech, an experienced founding team, plenty of funding, a smart strategy, lots of hustle – and maybe one will meet its full potential. A couple might survive, but not in the way the founders hoped. The rest will just shut down.

I’ve founded a company and failed. It’s terrible.

Change is the company killer. A major reason most Deep Tech hardware startups fail is they aren’t ready for the massive evolutionary changes necessary for success - especially when they start manufacturing. Overnight, the job of leading the company gets a lot harder. You need to add multiple new functions with large headcounts like procurement, production operations, quality, and logistics. This is a dramatic increase in operational complexity that few CEOs have experienced.

To build a factory and employ all those people, you also need a seismic increase in capital deployment. The increase in cash creates a wealth effect, tempting leaders to spend on projects off the critical path. Few CFOs have led companies through the step-change from shoestring budgets to mega-rounds, and fewer want to do it twice.

The Essential Transition

Perhaps the least understood change is cultural. At inception, successful tech startups prioritize speed, novelty, and innovation, but when you get to manufacturing you need the exact opposite. Good manufacturers prioritize caution, standardization, and repeatability. It is common for CEOs to avoid and delay the org churn required to execute this cultural transition.

Don’t get sloppy. When every aspect of your company is in flux, decision making can get sloppy. Every decision starts to seem subjective, and leaders lose sight of how sensitive the company is to seemingly inconsequential decisions. The weight of each question only increases as the company grows. Early product decisions can drive cost disadvantages years later.

Only The Disciplined Survive

I’ve seen Deep Tech hardware companies built right, and wrong. The ones who do it right have a character of discipline we call Operational Mastery. Without Operational Mastery, management teams become overwhelmed, distracted, and confounded by the tremendous changes they encounter on the journey to scale.

Let’s get deeper into the challenges of building a Deep Tech hardware startup to understand why it’s so hard, and why Operational Mastery is so important.

The Three Types of Risk

Deep Tech hardware startups face three prime risks:

Technical. Technical risk is the possibility that your product or process might not work the way you want it to. Maybe the improvements you are counting on won’t materialize. Maybe you won’t achieve repeatable quality. Maybe you’ll discover fundamental technical barriers to improving cost, weight, or other critical metrics. Hardware startups retire technical risk by conducting R&D, verification, validation, and qualification.
Demand. Demand risk is the possibility that customers won’t sign on at the price, time, or commitment level you need. Maybe they’ll be afraid to source from a startup. Maybe they won’t be comfortable with your technology. Maybe they won’t commit to a long-term agreement. Startups retire demand risk by developing customer relationships, conducting customer trials, establishing distribution partnerships, and, eventually, signing contracts.
Execution. Execution risk is the possibility that your company won’t achieve its scale-up production goals. Maybe you won’t build high functioning teams. Maybe you will select facilities and equipment that inhibit your production capacity. Maybe your spending will exceed budget projections and you’ll run out of capital. Deep Tech hardware startups retire execution risk by developing production capacity within budget constraints.

The Four Stages of Scale

To structure the company’s approach to each risk, it’s helpful to divide the journey into stages.

The trajectory of every company is different, and the relevant stages of scale can vary, but generally a startup’s growth proceeds in four stages:

Lab. During the Lab stage, a company is primarily working to reduce technical risk. It’s developing core products and processes and showing that they work.
Pilot. At the Pilot stage, the company has begun making product for customer trials, often at a larger scale than was produced at the Lab stage. During this stage, technical risk is largely retired, and demand risk is meaningfully reduced. It’s easy for a Lab stage company to start shipping samples and claim it has entered the Pilot stage. It’s much harder to exit the Pilot stage.
Demonstration. At the Demonstration stage, the company is operating every process involved in manufacturing – both physical processes and business processes. The management complexity grows dramatically from the Pilot stage, as do costs. Customers commit to offtake agreements. Production remains below the minimum efficient scale.
Commercial. At the Commercial stage, the company is producing product above the minimum efficient scale. Manufacturing operations scale up. The startup graduates to a growth company, and the leadership challenges evolve from managing change to managing scope and scale.

Successful Operational Mastery: Rivian

Few companies have executed as well as Rivian. Three years into manufacturing, the company has launched three vehicle models and ramped production faster than Tesla did. Rivian now manufactures its own motors, and its vehicle software platform is so advanced that VW has licensed it. But to understand Rivian’s Operational Mastery, you have to go back to some very early decisions.

Rivian was in the Lab for a long time. From its founding in 2009 until the LA Auto Show in 2018, Rivian attracted virtually no press, its website gave no clues, and employees kept their work strictly confidential. By staying in stealth mode for nine years, CEO RJ Scaringe preserved the freedom to design something incredible - a vehicle impressive enough to launch a new automotive brand.
This made the Pilot stage easy. Rivian stole the show and soon recorded over 100,000 preorders. The discipline had paid off. Following the reveal, Amazon invested, then Ford, Cox, and a long list of financial sponsors. The company raised $11b before a $12b IPO - the largest since Facebook.
Rivian prioritized quality in Demonstration. In 2018, Rivian estimated production would begin in late 2020. Inevitably, challenges arose, work took longer than planned, and the first customer vehicles didn’t come off the line until October 2021. To be extra cautious, the first 1,000 vehicles went to employees, to ensure any errors in retiring technical risk didn’t damage the perception of quality (and thus demand). Some customers canceled pre-orders out of impatience, but Rivian now tops surveys of customer satisfaction. By approaching production cautiously, the company avoided embarrassing quality issues.
Some problems could wait until the Commercial stage. When Rivian began production in 2021, each R1T and R1S contained 17 electronic control units (ECUs). In 2024, the company updated its electrical architecture, simplifying to 7 ECUs, reducing cost, and expanding vehicle functionality. The company expects the 2024 changes to lead to profitability. While critical to the long-term health of the business, these improvements did not change the consumer appreciation of the brand. Sequencing this work after the start of production allowed Rivian to scale and learn without further delay.

Absence of Operational Mastery: Fisker

Fisker shows what happens when a similar type of company makes very different decisions during the same time period. Whereas Rivian retired risks through the four stages of scale, Fisker showed no such discipline. Fisker’s lack of Operational Mastery led to bankruptcy after less than a year of production.

Unserious from the start. Can you name a brand that was launched with the same name as a previously failed brand? I can’t. Coke never gave us New New Coke. Sony went with BluRay instead of launching a comeback for Betamax. But that’s what Henrik Fisker did in 2016. Two years after selling the assets of Fisker Automotive, he founded Fisker Inc. with his wife. This was not a decision made out of deep discipline.
Unresolved technical risk. Fisker’s product development showed a similar unseriousness. Numerous issues were left open long after the Lab stage, across both hardware and software. Tech and automotive reviewer Marques Brownlee called the Fisker Ocean “the worst car I’ve ever reviewed.”
Problems with sales. The unretired technical risks only cascaded into later stages, hampering sales. Fisker had recorded an impressive 65,000 preorders, but couldn’t convert them. Conducting test drives was counterproductive because the vehicles had so many software bugs.
Outsourced production didn’t save them. Like Rivian, Fisker delayed production of the Ocean, from 2021 to 2023. And they got help, contracting production to Magna Steyr, the auto industry’s most prominent contract manufacturer. But you can’t bolt on Operational Mastery at the end. Like a house built on a weak foundation, Fisker’s production quality suffered from the unresolved technical risk. Parts availability (a common result of late design changes) and software problems persisted through the company’s brief history of production.

Avoid Startup Death

Operational Mastery is the disciplined approach of addressing risks in structured stages. It’s the best way to manage the massive evolutionary changes needed to build a Deep Tech hardware company, and it gives founders the best shot at avoiding startup death. Building a company this way can result in tremendous value creation. Founders ignore it at their peril.

Let Us Help You With Operational Mastery

Are you building a Deep Tech hardware startup with a disciplined approach to addressing risks? Do you want to maximize your chance of success through effective management? Let’s talk about it: pitch@nivc.us

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Operational Mastery

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