 I know I know we're here in San Francisco. We had to come to Silicon Valley though because Small Empires has never covered a hardware startup and we found a pretty interesting one called August and we're going to learn just what it takes to go from an idea in your head to something actually on a shelf. I'm Alexis Ohanian, startup founder and Y Combinator partner. Over the last year I went on a 200 event book tour and met people building Small Empires all across North America. Now I'm back with a new season revisiting some of my favorite stops from the tour. Ever since Pebble Technologies' $10 million dollar kickstarted for an eWatch in 2012, a lot of upstart entrepreneurs and established players alike have been trying to enter the hardware space. But what many don't realize is just because you made a cool video and you have a working prototype doesn't mean you can get your product to shelves on budget with the same degree of quality that you or more importantly your customers desire. The August Smart Lock just came out and it looks like they may have cracked the code. They have a beautiful working product on the shelves but getting it there wasn't easy. I'm Jason Johnson, I'm the CEO and co-founder of August. We make the August Smart Lock. This is a new line of product called a Smart Lock and so I can control it with my phone. I'm going to just lock the door, it's authorizing us to tell me that it's green so that means the door is open. Let's close it. There we go, the door is locked. It's a device you put on the inside of a door. August is designed to go on the inside of your door. So it's just on the inside of the door, it attaches to your existing deadbolt lock. To allow you to stop using metal keys and instead use your smart phone to access a house or a business and also to give keys to say your family, your housekeeper, you can set the time, the hours it works and it really solves the problem of keys. Also it knows when I get home by geolocation so if I've got my hands full of baby in grocery, I come near, it opens up. The main advantage of this is that you can invite people to your house without actually having to give them a physical key. Or you don't have to worry about whether you're made multiple copies of your keys or the ex-boyfriend, ex-girlfriend situation. So there's a lot of convenience and some security elements to it that are really compelling for a lot of our customers. Why solve this problem of unlocking doors? Why do you hate keys? Yeah, so it's funny, the past two years we've been working on this, if there's a phrase I've heard more than anything, it's I hate keys. I've heard that a hundred times. And we do hate keys. In fact, in New York City, two million people a year are locked out of their houses. Keys are a pain. We working another job, got locked out of your house, just said, get it, I'm solving this problem right now. I'm ending keys forever. Yeah, I wish it was that dramatic. For me, it was actually somebody else that actually suffered. I had friends staying at my house and they got locked out and had to crawl through the dog door in the back of the house. It was a very small dog door. Not a proud moment. That's how they got in. And so they're telling you this story and you're sympathetic, I presume, and you're like, I'm going to solve this problem so you never have to crawl through my dog door again. I built a couple of technology companies and so I have a little bit of an idea of what you can do with technology and I thought, you know, there's got to be a way to do this, a way to kind of change those old metal locks and keys that we have and do it with electronics. Because of crowdfunding and pre-orders, a lot more people are thinking about starting hardware companies. That's great. The thing is, when you start a software company, you really just need a laptop, internet connection and time. With hardware companies, you need all of those things as well as contacts at factories, distribution, supply, prototyping, so much more. The list goes on. And all of those things cost a lot of money. Yeah, so I'm fortunate that I've built a couple companies previously. And when I started August, I started over at Founders Den, which is a private co-working space in San Francisco. The great thing about being in a space like that is you're around all kinds of interesting people. They're entrepreneurs, also investors. So I casually started mentioning the idea of August to a few people that are active angel investors. And I was very fortunate. I got great reception. Everyone could relate to the problem of keys and the hassle of keys. And so very quickly, people started asking if I would be interested in them investing in the company. There are a lot of folks who have tried different approaches to creating the smart lock. How did you settle on this one? I'm always interested in technology that becomes universal, that's easily attainable. I'm not so interested in technology that is exclusive or expensive. And this is what home automation has been for the last 20 years or so. Very complex, very expensive systems. And usually, it's the person who installed them in the home who likes them. And then everybody else in the household really hates it. Because it's over complicated, and it breaks down, and it requires specific equipment. So this was one of the ideas. How do we make automatic, smart door lock? How do we make it very easy and very attainable? The key was to not make it a full replacement product, to not force people to remove their hardware, remove their doors, and to make it an add-on, essentially, to what you already have. So when you say you look at your front door, well, actually, when you look at your front door, you see whatever was there before from the outside. We're not changing the outer part of the deadbolt. If somebody has a key, they can still use it. And the fact that this just attaches on the inside, as in a smart robot that will be able to determine whether you're getting close and will unlock and lock for you, that's a way to make the product attainable, meaning anybody can install it. People don't have to have a big discussion or a big change in what they already have. The secret was to tackle it in a way that is really cognizant of what people already have, what they live with. And maybe they don't want a big, flashing, techy product on the outside or the inside of their doors with a big screen. Maybe they want something that is subtle and discreet. And so this was an exercise in restraint, in a way. Great design should be invisible. Well-designed products are beautiful, elegant, and simple. And that simplicity takes a lot of work. And it's one thing to build one version of a beautiful product. To scale that to thousands or even millions is a whole new challenge. Does this start on a cocktail napkin? There are a lot of companies, a lot of approaches to this. It seems simple, right? Get rid of the key. Unlock the door magically. There are a bunch of different ways to do that. You've settled on a solution that is pretty elegant, certainly very sexy, but also simple. And why was this the right choice for August? So we spent a lot of time on this issue. We thought, you know, you can replace doors. You can replace the whole locking mechanisms. You could do a lot of different ways to address the issue. And what we wanted to do was to make what we thought would be the most simple solution possible. So that anybody could go to a retail store, take it home, and install it themselves in under 15 minutes. That was the design intent. And so we spent two years, in fact, doing a design towards that to test it with many people, people that aren't technically sophisticated, people that don't know how to use power tools. We wanted to make it really simple. So it just takes a simple screwdriver and about roughly 10 minutes. With regard to this August Lock in particular, what are some of your favorite parts? So from the very beginning, my philosophy is, you know, it's not about sticking a display on the wall or on the fridge, which is kind of a lot of what you've seen in the home automation or, you know, the smart home environment. For me, it's all about discretion. I know the friction of using a key. You have to kind of look for it. You have to dig in your bag for it. You have to remember it. You have to physically take it out. And so everything I've tried to do is how do we make, you know, that experience so much more fluid and so much more discreet at the same time? So being able to hide, you know, a little bit of an indication of, okay, the lock is turning and it's working, for example, with the LEDs that appear through metal, through a technology which is about sort of microscopic laser etching of the metal, for example. Being able to just get that little vibration in your back pocket so that you know that it's working in the background without you having to actually look at your phone and look at the display. For me, you know, where this is going and it's going to go more and more there is this notion of the invisible interface, meaning invisible interactions as well. So you get signals and it tells you in the background that, oh, my door is locking after I've come in or my door is locking after I've left the house or it's unlocking as I'm approaching. You want this to be happening in ways that are not disruptive of everything else that you're doing. You know, it just lets you kind of live your life fluidly and it works in the background to make that happen. But humans still need signals to tell them that it's happening, right? And those signals can be very subtle. And so that's what I'm excited about is in a way the product reveals itself through the experience, not what it's trying to scream with onto itself in a way. You have a problem that you've engineered a solution for and it's a clever one, right? Because you don't need a drill. It doesn't take very long to set up. It's a clever way to get the robot to do your bidding. What is it like then building a product, not just one that, you know, in theory scales beyond a few Arduino's, but like actually scales to thousands and tens of thousands of units when you've set some pretty high expectations? Once we came up with the initial concept, like automatic door lock, right? Smart door lock. Then, you know, we worked with Eve and his team, you know, we want to make something that is attractive to end users. We want to make it a very beautiful and magical experience when you're coming in and out of the house. Then you have to figure out how are we going to actually engineer and build this, you know, for mass production. And that's where a lot of the real challenges came in, right? So for example, this aluminum face, for example, from a design standpoint, we wanted it to look basically completely like a flat piece of metal. There are no holes or no penetrations in here at all. But at the same time, there's a set of LEDs behind, right? Which we want to shine through here. And that's, you know, an ID goal, both for the brand as well from a design standpoint. It's industrial design. Industrial design, yes. And then in order to make the light shine through the aluminum, we had to execute a series of micro-perforations using a combination of laser and CNC, right? So how do we find the right manufacturing process for this? How do we control that process well? How do we match it up with the LEDs? And how do we ensure that we get enough light shining through here that it's an accurate indicator to the end user? It's such a subtle, simple feature, but we went through at least a dozen different iterations of this combination here and working with different factories to try and execute this design really, really well. One of Yves' amazing geniuses is how he's able to push the envelope on almost everything. So over our two-year development cycle, we've had many hours, every week, hours and hours and hours in a room with the creatives, with the engineers, looking at how we can just tweak the smallest of things. And Yves has this amazing ability to just ask questions like, oh, can we make that a little bit smaller? Can we make that a little bit smoother? Can we make that a little bit blank? And he just asks questions. And he keeps asking questions until it's refined and refined and refined. And either you refine it, right, or you're exhausted. You're like, no, the answer is no, Yves. Actually, we cannot make that any different. We're not doing this. The line is drawn. And he does it in a challenging way, but also in a very respectful way. He just has this great creative process. He pushes everybody on the team. Twitter was conceived right here in South Park. And at the time, let's face it, it was pretty janky, crashed a lot. The nice thing with software is you can deal with bugs like that as long as what you're making is still what users want. Hardware, on the other hand, is harder. If you're shipping something, it needs to be really good, especially when the thing that you're shipping is keeping people's homes and loved ones safe. You only really pay a cost in time when you're iterating with software. When you're dealing with atoms, obviously there's all kinds of other things that come into it. How do things like shipping and maybe even 3D printing, how do those things affect how you can create maybe a little bit more easily? Right. So this particular element, this is the mechanical heart of the system. We went through several different iterations of this particular design to get the right torque output to have everything match up mechanically and electrically. For instance, 3D printing allowed us, 3D modeling, 3D CAD, 3D printing allowed us to prototype a lot of different types of case designs and mechanical features in terms of how it's going to fit. But the ultimate drivetrain that's in here is made of, at least the case part, is made of injection molded plastic. This is where a lot of people who are in hardware, they're like, this is where your tooling costs come in. There's a lot of physical plant property and equipment that you have to have in place and you pay a lot of money for it and it takes a lot of time to make it in order to mass produce these parts. You can only really have maybe one or two iterations on it, soft and hard tooling. So you try and do as much prototyping as possible. This one happens to be a machined aluminum prototype. It's all in a relative sense cheaper and faster than creating hard tools for making the parts. But that's kind of the cycle that we have to go through. We try and use every single prototyping technology that's out there, whether it's 3D printing, CNC machining, before we get to the point where we actually have to buy and cut soft and hard tools. Because at that point, that's serious commitment. That's a serious commitment, yeah. That's usually under a normal schedule, maybe a month to build a set of tools. So you'd been CEO before of a couple of companies, but never a hardware company. How much did that help or hinder you? Yeah, so I had to learn a lot, right? So I've done a couple of software companies, I did a sizable services company. But the hardware was new for me, which meant that I had to rely upon some of Yves' expertise and also outsourcing and using firms that have done hardware before. If I had known two years ago that I would know so much about hardware than I do today, boy, I'm not sure I would have been as excited. It's been a tremendous learning curve. It's a device that has 167 components inside of it. And ostensibly, it doesn't look that complicated. It doesn't look that complicated. And of course, it's the beauty of good hardware, you kind of hide all that inside. But it's a very complex device. So what's your advice to someone who wants to start the next August? And let's say they don't even have the experience of being CEO before. Maybe they've tinkered a little bit with hardware, but if you could take those two years of lots of lessons and distill that in some way, what would you say? So I would probably more readily encourage someone towards software. Because you don't want the competition? No, I'm not so concerned about that. Hardware requires a tremendous amount of capital. And I had some great people give me advice on this when I saw a council at the beginning. And they said, yeah, prepare to spend a lot of money, because prototyping is an expensive endeavor. And tooling for manufacturing is very expensive. And sometimes you've got to change the tools. And you spend several hundred thousand dollars on a tool. And you've got to redo the entire thing. Not to trivialize when you've spent a lot of hours into software, but you don't have that level of cost generally with software. No, definitely not. So it's really hardware founders, beware. Is it an expensive endeavor? And I don't want to scare people off, but just be prepared for that. Because the worst thing you want to do is spend a lot of time and energy and your own money working on something. And then you find out you can't actually make it into a product, because it would require a lot more capital to turn it into an actual product you could sell. There's no beta in hardware. People's expectations in hardware is that it has to work, and it has to be of high quality. And I think in many ways, the reason why hardware is becoming more sexy is also because generally the public has become a lot more sensitive to quality. I mean sometimes when you struggle to kind of explain design to people, if you just change the word design to the word quality, then people start getting it a lot faster, right? You're welcome, Silicon Valley. We came here, we shot a Small Empires episode, and we taught you something really important. Hardware is hard. But software is one thing. Get away with a few bugs here and there, but hardware may seem really cool, really sexy. You can put together a really compelling video, people get really excited, money, pre-orders, all this stuff starts coming in. You still got to build something. You got to build a lot of something. And it has to be good, because if you don't build something great, you're fucked. August Smart Lock found success by bringing home safety into the internet age. But it isn't just about having a great product. Having a clear process will help your business work efficiently and greatly succeed. Start by identifying specific areas of your business that are struggling and tackle those right away. Make sure everyone knows exactly what their responsibilities are and that no two people are working on the same thing. Are you spending too much time on work that isn't necessary? Eliminate time wasters and keep your team focused on a simplified workflow. And finally, don't get tied down to any specific step. Scheduling reviews will allow you to make sure that everything is running smoothly and let you adapt to anything that might come your way. For more business advice, visit AT&T's Business Circle.