Building Hardware and Taking on the Phone Giants

0:00I think there's a lot of people like us who are tech fans out there and who remember being Apple fanboys and fangirls and now just feeling like the magic is lost and wanting to recreate the magic. People often say that building a hardware company is like building on hard mode. While building a hardware company during a global pandemic with the unpredictability of supply chains and markets, that's harder than hard. And trying to penetrate the phone market in particular, where there's only a few players who own almost all the market chair. That's really freaking hard. I mean, just take a look at your phone.

0:38If you're living in the US, there's an 85 % chance that your phone is from Apple or Samsung. Well in today's episode we talk to Carl Peck. He's the founder of Nothing, the company of course. I'm not the first person to make that joke, but he's done so much more than nothing. He previously co -founded OnePlus and between nothing and OnePlus, Carl has twice managed to do what so many others have failed, and to one of the most demanding markets. In just over two years, nothing has sold over 1 million units and built a team of over 400. And in today's episode, Carl chats with us about why he's added again, what it takes to successfully build hardware, and how he thinks about making technology fun again.

1:23And by the way, if you hear us talk about the glyph interface throughout this conversation, a defining feature of the nothing phone, make sure to head over to our YouTube channel to see exactly what I'm talking about. So the question becomes, do you think what nothing is created here is enough to become something? As a reminder, the content here is for informational purposes only. Should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details please see A16Z .com slash disclosures.

2:10All right Carl welcome to the show. Thanks for having me. All right so I like to start out with statistics. I feel like this really sets the tone for where we're at in the hardware market. And so within the phone market specifically, it sounds like there's two companies really with 50 % of market share. And in the US, it's 85 % what is going on there? It's a very difficult industry to break into for a startup company. So the big companies just keep accumulating market share. So that's what's going on. In the last 10 years, there's been a couple of teams who try to break into our space, well -funded and less well -funded and everybody's failed.

2:49So it's not a route that a lot of entrepreneurs are taking these days anymore. It's definitely not. I mean, people say hardware is hard mode. And to your point, it's not just these new startups. It's large incumbents too. I mean, if you look at the companies who do have strong market share in the phone market, you've got Apple, Samsung, Motorola, Google. So those were founded in 1976, 1938, 1928, and 1998. You also worked at OnePlus before this, so that's one company that's entered the market in the last decade. And now you're working on nothing. Why are you doing this? Why are you the founder who is stepping up and saying, you know what, actually, there's a lot of these incumbents, but I think I've got what it takes to reshape this market.

3:33Hmm. I think it might sound a little bit pretentious, but I think if I don't do this and if we don't do this, then nobody will. And by this, I mean, try and take on the incumbents in our industry. So I know it's going to be hard, and I know there's a chance we're not going to be successful, but looking around at all the teams in the world. If we don't attempt this, then I don't think anybody else will. And we brought together a lot of people from the industry with a lot of experience. And we all feel a little bit guilty that we contributed to creating such a boring state of things. And we just wanna do something about it.

4:12It will be really stressful and really hard. So if everything is hard, why not just do something big or attempt something big? It's true, why not make your mark? But a lot of these companies like even Meta Snapchat, they have so much money and they've struggled with hardware. And then we've also talked about some of the smaller companies trying to disrupt. What are these companies not seeing? What is causing them all to fail? If you're a company who's already making a lot of money on non -hardware stuff, then hardware kind of becomes like a side hustle for you. And you might not be that rigorous in how you run it.

4:49For us, if we're not successful on our products, if every single product does not become a hit, then we're not going to be around anymore. But for some larger companies, you know, they can spend years burning cash on their hardware initiatives and they can afford to do so. So maybe that's the reason. Maybe we just cannot afford to fail. Yeah, I mean, you've seen tons of startups succeed for that very reason. So I guess if your convince you should do this and you're the one to do this, it's worth doing, how do you even start to approach that problem? Like how do you decide what products to build first, how to approach the problem, how you're going to differentiate?

5:28No, there's a lot baked into that. But once you have that seed, you wake up one day and you're saying, I want to tackle this. What are your first steps? Yeah, I think a mental model that I use is iceberg model. I think we're always misunderstood and that's fine because we're only showing a little tip of the iceberg to the market and to external stakeholders. So in the very beginning, we know we got to prove ourselves, right? Because if you look at the smartphone industry, all the startups who try to make smartphones have failed and as a result they lost the factories, the ODMs a lot of money in the process.

6:01So now the ODMs are like, hey we're not going to do this anymore. We worked with XYZ. They all had great vision, they all had great investors, they all caused us to lose money. So why should we support you? It's the same thing all over again. So I think the bar was a lot higher this time. So we had to pick an easier product to start out with and that's what we picked the audio product, the earbuds. It was still a fast growing category. It was a mass category and we felt we could differentiate there. So using the earbuds that we released in 2021, we kind of proved ourselves, proved our team abilities in terms of designing something iconic looking, manufacturing that at scale, and also selling it at scale.

6:42And then to take those credentials to then convince the next set of stakeholders be it supply chain or investors to support us on the smartphone. So in a way the iceberg revealed a little bit more of itself. So if you were watching us in 2021, okay, this is like a cool kind of hip audio company. And then last year, oh, they also made a smartphone. It's like a smartphone company because smartphone companies also make earphones make sense. But I think over time we will reveal more and more as our team gets stronger, as our capabilities get stronger. I think ultimately we cannot be a smartphone company and we cannot be an audio company.

7:19We need to push into the future. Oh, well, I want to hear more about that future, but I like that you mentioned that you started with the nothing ear. But even that industry is pretty big. There's a lot of competitors in it. And I think people are always shocked to hear just how big the air pod industry is or how big of a company that would be if they were on their own. I think it'd be a top 100 company, which is crazy when you really think about that. And so when you ventured into this, how did you think about differentiating amongst the already existing products? You mentioned that you wanted to create something cool.

7:54What does that mean? What is the calculus in actually producing something that people resonate with? I think as a startup company, you have no resources anywhere. Your capabilities are weak everywhere. So you just got to pick the lowest hanging fruit or the easiest thing that might give you an opportunity to break through. So we started off with differentiating our products in terms of hardware design and the way we approached it was first we looked at the entire industry and we saw that there were very few brands that tried to build a family of devices that had a coherent design language. I think Apple today is one of those companies that still do it.

8:33If you look at the Apple product design they've started introducing much sharper edges on their products. So the iPhone is much box here than before, but it also cascades into their other products that I mac the iPad etc. So you can see that there's one coherent design vision being brought to life and even if you don't see the Apple logo you know it's an Apple product. It's very hard to find a second company like that today, but some of the most respected tech companies of the past, stay true to this. So the Sony or the past or the bang all of a sudden of the past, they all had very distinct design languages.

9:08So that's like one of the first principles we decided that we had to pursue when we have more products on the market and different categories. Even when the consumer don't see our logo, they just still know it's a product made by nothing. And then we started just taking inspiration from different creative fields, from architecture design to fashion design to movies to electronics, et cetera. And then we kind of landed on this concept of having all our products be transparent in some way. strategically, I think these big brands are not going to create a transparent product anymore. Apple used to, a lot of the Apple iMacs of the past.

9:45Yeah, I remember those. Some of the Nintendo Gameboys were transparent. But I think when you're a niche player, you can be more differentiated in your hardware design. Yeah. But when you're a mess, you got to sell to everybody from the youngest person to the oldest person, all types of different professions. So you cannot take a lot of risk of your design anymore. If you take too much risk, that's going to reduce your market share. But for us as a small company, that's exactly what we need to do. So Apple used to have this positioning on the design side that they abandoned because they grew out of it.

10:18Yeah. I mean, every startup has to find their wedge. And to your point, Apple itself, the iPhone used to be a more niche phone catering to a more niche audience. And now they have to cater to literally everyone. And so there are many ways that a company, let alone a hardware company, can differentiate. What you've at least sounds like chosen to differentiate with is design. Yeah, I think in this stage of the company's development, we can only differentiate on design. And the insight that we drew upon is very simply that all product categories start off functional. Imagine when clothing was just invented as a concept.

10:54that we just needed to keep ourselves warm and shelter ourselves from the weather conditions. But now we wanna express ourselves, our personality, our individuality through the types of clothes that we wear. We knew there were people out there who just didn't want to have the same white wireless earbuds as everybody else. And we thought there would be a market for that. But having said that, it's not a very strong mode designed differentiation. So as the company grows and we start generating more and more free cash flow that needs to be reinvested into technology. Technology is the only real mode for a tech company.

11:31It's true. Today it's this really beautiful, really cool looking transparent phone with your glyph interface. If people aren't familiar, it's got all these lights in the back. It looks cool. I can see why people would be like, I want to walk around with this phone. Your Twitter even says, like, let's make tech fun again. I get this. But as you're talking about the next phase, What do you mean by evolving that technology? What do you see as the future of the phone or maybe what you're alluding to is another device altogether? So if we started off with hardware design differentiation, I think this year we can take the leap into software design differentiation.

12:06When we ask our users, what's the number one reason you buy our products design is number one? So how can we strengthen that design proposition even further by introducing it on the other side of the phone, the screen, the software? I think that's another step. It's a little bit stronger of a mode, but not super strong. I think the step after that is to work on the user experience. Because the mobile user experience has not really changed for the last, I don't know, how many years, 20 years. Even with Symbian, right? Even with pre -symbian devices, there were icons, perhaps. And when you click through the icons, you got like a full screen app and then you went back to your home screen.

12:43That existed in the Nokia Navigator of the 1990s. And now like 30 years later, we're still on that same UI UX. It's just that everything is smoother, prettier, faster, there's more apps available, but fundamentally the human and mobile device interaction hasn't changed. I think after design is UX, how can we make that interaction simpler? How can you accomplish more faster? I think that innovation is going to be the next step. And then as we said in the beginning, we want to build an ecosystem of devices that talk to each other and they work well with each other. So how do we build that interdevice connectivity?

13:19Like when you're in the Apple ecosystem, all the Apple products work really well or somewhat well with each other. And then as we scale, I think the opportunities to invest in deeper and deeper modes will emerge. We're looking a lot at AI happening right now, but we're in no rush because I think people are still trying to find the product market fit. And I think us having a hardware component to what we do puts us in a really good spot because we have the users, we have the distribution, and we can create more meaningful interactions if we own both the hardware and the software for how humans interact with AI in the future.

13:51So I think we're not in a rush, we're in a lot stronger opposition than a lot of startups that are a pure software in the space. But we just need to be patient and find the right product market fit before we go all in. Yeah, I love that you mentioned this symbiotic relationship between hardware and software. Using the iPhone as an example, when the iPhone 4 came out and had an HD camera, that empowered this wave of photo sharing apps like Instagram. And then once GPS was integrated, you see all these map apps. And so yes, the hardware is not disjointed from the software. It actually empowers what can come with software.

14:26And you mentioned AI, but I'm just curious about the, you know, you're talking about this like future user experience. It's so true. Apple, if you think about the iPhone that I own today, has pretty much the same interface as the iPod touch I had when I was like 10. That's crazy, right? Maybe some people could argue that's just the best user interface, but what are you thinking there? Do we see a fundamental shift because now we have better voice technology? You mentioned AI. What might that look like with the introduction of the technologies that have risen in the last, you know, like five, 10 years?

14:59I think the first question to ask is, in all of humanity's future history, is this the final state of human computer interaction? And if no, then I mean surely there's a better way. And then we just gotta keep exploring what that better way is. But fundamentally, I think we want our devices to deliver intent. Like let's say we wanna go for a dinner, but actually organizing dinner is quite a burden on something on a mobile device. There's so many steps to go through. There's some kind of messaging app. We have to use to message each other some Yelp like app to find the restaurant, got to book the restaurant, got to put something in people's calendars.

15:40On the day we have to get an Uber or whatnot to get there. There's so many different apps like why is it so complicated and shouldn't there be an easier way? Mm -hmm. Well let's take a step back. So you started building the nothing ear. You've also launched the nothing phone. And you do seem to have this large community of people who are listening who are like, like what are you building next and who are buying your products. But taking a step back from even those individuals, how did you get people interested in the first place? First of all, I don't want people listening to this to think that there's a hack.

16:14I don't think there's a real hack. It's based on a track record. And because of what I did before, I think some people were excited about what we're gonna do in the future. And then I think the second step is to have a really clear vision of what you're going to do and bring people along the story. And I think a lot about Tesla, especially in the early days, they always communicate beyond just the next product cycle, they communicate how the world will be different if Tesla is successful. And I think people, consumers these days, they buy into these causes or these missions versus the individual products.

16:52I remember a couple of years ago, a Tesla opened up the patents to some of their technology with the rationale that if more people use this technology and leverage this to create electric vehicles, then we can make our vision happen faster, doesn't have to be us. So I think that made a lot of sense to me. So we've always been trying to tell people the problems we see in the world, in the industry, and how we could potentially make things better with our involvement. I think that played a big role, but obviously launching products the consumers are satisfied with, it's kind of like table stakes.

17:26Table stakes, yeah. Yeah, if we don't do that then people are not going to believe in us for the future. Totally. Like you said, it's table stakes to create a great product, but you've also had, I think, a track record of being a good marketer. You've built up a huge YouTube channel with nothing, but also you've launched things on StockX, you've done things with OnePlus that, you know, drummed up a lot of interest as well, like smashing your phone in order to get a new phone. So like what goes into those and also is there any marketing as you said there's no hacks but marketing techniques or things that you've done that you see some sort of to rely on with.

18:01So in terms of marketing I'm not a pro and we're currently recruiting for VP marketing but personally I think marketing is arbitrage so one example to make it clear is like when Facebook just launched their ads product The first couple of individuals or first couple of companies who learn how to really leverage the ads product They made a lot of money because there were not a lot of people who bought the ad product to the price was low But over time as ad agency started learning and as big companies started deploying their budgets on digital and on Facebook Then the price got really high so now the ROI on doing TV advertising and doing Facebook advertising There's no real difference from me.

18:42It's always about finding what's next? what's the next arbitrage opportunity so that we can have an unfair advantage compared to the bigger companies because if we don't then as a startup if our marketing cannot be higher ROI than the big companies we're not going to be able to compete so on the topic of YouTube that's just something we've been experimenting with for the last three months I think now we have four videos over a million views yeah that's huge maybe this is the new way of arbitrage because we can pull aside the curtains and show people how it is to build a company like this. So one of the videos that we made is phone reviews.

19:20There's already people making phone reviews on YouTube, but there's no phone maker making phone reviews on YouTube. So there's a lot more insights behind the curtain stuff that we can share that might be really interesting to the viewers. Yeah, you talked about behind the curtain. Given your experience at both nothing and one plus, What do you think people misunderstand about hardware? Like if a new founder is like, you know what? I agree, Carl. Hardware is not innovating the way it used to be. I want to be part of this change. What do you think they might not know? I think it's very easy to make mistakes that are very, very costly when you're making hardware.

19:58Because I've seen it many times, people with the software background making hardware, they might underestimate the length of the value chain, like 10 different teams from supply chain to manufacturing, to industrial design, to hardware, engineering, to software engineering, to sales, to marketing, to after sales. Everything kind of has to work for the project to work. If one chain breaks, then the entire thing breaks. And on top of that, cash flow is really, really difficult to manage. It's very, very difficult to manage, especially as a young company. Actually, that's one of the big learnings for us because at OnePlus, we actually had a big company behind us.

20:32So we could leverage their supply chain, we could leverage their working capital. But starting from scratch, supply chain and working capital have been our biggest headaches because without a track record going to the suppliers, they're not going to give you the best payment terms. Like if you're a big company, you can pay, let's say, two months after getting the product, you can pay the factory, but you get paid within one month. So you still have 30 days of kind of buffer time. So you don't even have to use your own working capital to grow your top line. But for a small company, because the suppliers, they don't know if you're going to be around.

21:07So you need to pre -pay. They want their money now. Or even in advance, sometimes months in advance. So if you're planning to scale something and you have to pay them the money, many months in advance, I think that's like a really hard thing to manage. That's on the production side. And then if your sales don't come fast enough, your cash flow might break. Might not have cash, might need to find other ways of making payroll. And the second one is supply chain. Supply chain doesn't make a lot of money either. They're usually squeezed by the brands to make the minimum amount of money. So if your project is not successful, they're also going to lose money.

21:42So convincing them to work with you is almost like pitching investors. Like they need to believe that this is going to work and they're going to make their money back. Yeah, didn't you work with a factory that ended up shutting down? Yeah, it was the only factory that wanted to work with us. It wasn't the best run factory, but you know, you got to fight with the army you have. So we worked with them, launched our first product very quickly after we began manufacturing with them. We saw that there were big management issues on their production line. So then we deployed our own engineers onto the line.

22:13So every station of the line was supervised by our people, kind of micromanaged them so they couldn't make mistakes. What kind of mistakes are you talking about there? Like a broken product or? First, we start off with the industrial design, how the product looks, right? And then we'll do the mechanical design, how the parts all fit into the product. And then we would design for manufacturing. So we would design the production line. What each person, in each stage of the process, has to do in order to go from components to finish good in a package. And then we give that scheme to the factory and they just have to replicate that.

22:50So for instance, if we define that there needs to be a certain strength between the polgo pin, so the metallic connector on the case and the part on the air bud, so that the air buds can get the charge. We design it with a certain like strength requirement, but then the factory couldn't source the right type of spring, I think. So the strength was less than required. So there were some earbuds that came out of the line that couldn't get charged because of that error in the production, but similar issues all over the place. And so that wasn't working out for you. This factory shuts down. What other complications have you run into?

23:29I mean, you also built this during the pandemic, which introduces its own complications. When we were going to develop our first phone, the phone one, It was pandemic, but because of the pandemic, there was a semiconductor shortage all over the world. And when suppliers cannot even supply their big partners that they already have commitments to, they're very reluctant to take on a small company. Like, why would they do that? I already owe these big guys a lot of components. Why would I give you anything? And some of these big companies, they had bought supply for some components for up to six years.

24:05So they have a guarantee supply for six years. as a small company, you don't have anything. We really had to swallow our pride in the beginning, and just with our tails between our legs, just go and beg, just beg everywhere. From the execution level to the board chairman level, just try and find introductions to map out the supplier, like who makes decisions, how does the decisions get made within their organizations and try and pitch everybody every single angle. We will be big angle. I'm just a kid with a dream angle, you know, just until it works. I spoke to most of our competitors, CEOs as well.