tech-company, startup-costs, funding, customer-developmentI have a startup, a very interested $200M customer, 20 initial PCB’s, which is simple and has just 3 chips. Customer expects volume/year to be > 1M units. I need money to prepare for high volume production.
I’m interested in asking them to cover my Non-recurring engineering expense, since my product added to theirs will reduce long term costs of customer’s customers.
How does NRE work? Do they sometimes just write a check, if not too much, and forgive paying it back? (like crowdfunding)
Or, is the NRE treated like a loan that is paid back by a discount on my product price?
By funding your NRE, your customer is obviously going to expect not to be paying twice. So typically, their payoff comes in the form of a unit price that doesn’t reflect those costs. They didn’t loan you the money, but they took away all of your up front cost and risk. And they can reasonably expect to be first in the queue for products and to enjoy pricing that’s far below what you would offer to someone else.
Suppose instead your customer wanted to buy the product from you in volume, and was ready to write the order, but not to pay for the NRE directly. In this case, your unit price and minimum order quantity would factor in these costs and the associated risk. And you may well need to find a way of funding that cash flow, and a way of funding the risk that orders come through smaller and later than you were banking on.
What all this is telling you is part of Pricing 101 for manufacturing businesses. You need to get straight who is paying for what, and how cash flow works. And, if this is new to you, you probably want to reach out to some contact manufacturers, because the binary choice (NRE and low unit price with low risk for you, or no NRE and a unit price that reflects your view of the market and leaves you all the risk) may not give you what you want as a start-up.
If I would be your customer knowing what you just asked, I would hire you to do the job for salary (bought your startup). If outcome is still not proven (you have no prototype) I would invest in you having major stake in startup to be able to claim / acquire IP created during research. If you disagree on all above, if you do not have any IP properly filed probably start R&D myself using your idea. Thus before anything else I recommend you securing your IP, and having more than one customer interested in what you are going to produce. And remember: there’s no such thing as free lunch. Earlier or later question about who owns what will arise.
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