Western sanctions against Russia: Tips for tech companies managing compliance risk

As the war in Ukraine rages on, authorities are cracking down on the smuggling of U.S. technology in support of Russia’s war effort, an initiative with implications for the tech industry. One significant example of this is Russia’s drone program, with a December 2022 expose describing U.S. chips, circuit boards, and amplifiers found in downed Russian drones, and mapping part of the supply chain trafficking such items to Russia in spite of Western sanctions.

This has prompted broader concerns regarding the diversion of Western technology to Russia in support of illicit end-uses, such as, for example, the Russian government’s use of facial recognition technology to crack down on dissidents.

In response to this, the United States and its partners recently imposed new sanctions against Russia to coincide with the one-year anniversary of the invasion of Ukraine, including expanded export controls over drone components, electronics, industrial equipment, and other items. The U.S. government followed this up with an advisory warning companies of the risk of third parties diverting their products to Russia.

Suppliers of electronics, drone components, and other sanctioned items face the risk that third parties will divert their products to Russia’s defense industrial base or to the battlefield in Ukraine, given the Russian military’s continued demand for battlefield equipment. Companies can mitigate this risk by conducting due diligence on counterparties and by auditing sales channels.

Overview of Russia sanctions

The United States and its partners (including the United Kingdom, the European Union, Canada, Australia, and Japan) have imposed a range of sanctions and export controls against Russia, prohibiting, among other things:

  • dealings with restricted parties (such as major banks, oligarchs and oligarch-owned companies, and companies in Russia’s defense industrial base);
  • new investment in Russia; and
  • exports to Russia of certain items, including a broad range of electronics, drone components, software, sensors and lasers, marine equipment, aviation and aerospace equipment, power supplies, and industrial equipment.

In particular, U.S. export controls can have worldwide reach, applying to all U.S.-origin items, wherever located; non-U.S. items incorporating more than a “de minimis” level of “controlled” U.S. content; and non-U.S. items that are the “direct product” of certain U.S. technology or software.

Violations of sanctions and export controls carry stiff penalties, including civil penalties of up to the greater of $353,534 (annually adjusted for inflation) or twice the value of the transaction, and criminal penalties of up to $1 million and/or 20 years’ imprisonment.

Concern over diversion of items to Russia

U.S. officials are deeply concerned over the ongoing diversion to Russia of items restricted under sanctions, and have made it a policy focus. This concern is reflected in the March 2023 advisory noted above, in which the U.S. Department of Justice, the U.S. Department of the Treasury, and the U.S. Department of Commerce jointly warned industry of the risk of third-party intermediaries seeking to procure items on Russia’s behalf, identifying certain red flags to note.

Western sanctions against Russia: Tips for tech companies managing compliance risk by Walter Thompson originally published on TechCrunch

7 common pitfalls for hardware startups and how to avoid them

You’ve likely heard that “hardware is hard”; mostly because hardware startups have to deal with things that software companies don’t really have to worry about. That includes pesky details such as “physics” and “battery management” and “general wear and tear.”

Hardware development is complex and challenging. Physical parts have tolerances, both in size and material properties, and components get hot and their characteristics change when they do. Once you’ve designed a product, the manufacturing process itself poses significant challenges. Ensuring that components are produced with the required precision and quality demands careful planning and rigorous testing throughout the process. Hardware manufacturers often work with multiple suppliers and manage supply chain logistics, which can be resource intensive and time-consuming.

Hardware development is inherently a lot more costly than cranking out software. Developing a physical product requires substantial investment in materials, tooling, manufacturing and logistics. These expenses, combined with the need for multiple iterations of prototypes, can make the process financially risky, particularly for resource-constrained startups.

There are plenty of pitfalls, and as a hardware nerd myself (I founded a hardware startup, which I then spectacularly ran into the ground at high velocity, making mistakes that most experienced hardware folks would laugh at these days), I am always curious to learn how hardware entrepreneurs can avoid some of the common mistakes.

Sera Evcimen knows a thing or two about the challenges for hardware startups. She’s a mechanical engineer and worked at four startups, including satellite design, consumer electronics, standing up the R&D department for a fusion startup and working on ion thrusters. These days, she’s an adviser for a large company she can’t name, where she’s working on soft robotics for human interaction, and she’s an all-star mentor for the Techstars startup accelerator. She even runs her own consultancy to boot. She’s working on a podcast called The Builder Circle, where she breaks down the challenges and risks of building hardware companies. Like I said, she knows her stuff, and we chatted about things to avoid when building hardware.

Lack of focus

As a startup, you are an organization designed for learning, and learning is sensationally exciting. But it has its downsides: As you continue to learn, it’s tempting to try to chase every great opportunity that comes along.

The mistake is to fall for the temptation and lose focus.

“Oftentimes, this sneaks up on people because people have completely different systems that they’re trying to push forward,” Evcimen told me. “They’re saying, ‘Oh, this could work in this application, and this application and this application.’ Alternatively, a company may say, ‘Oh, it’s just the same thing, but bigger,’ or ‘It’s just the same thing, but smaller.’ I think it’s really important to know that each variation of a product is just an additional product line. Similarity doesn’t mean anything. Even if that is true, you still have to have individual designs; you still need to manage your supply chain. And … you even need to develop multiple supply chains.”

A smaller module might mean different chips. A different casing could mean different molds and tooling. Each small change can affect the whole product development timeline. Even something as simple as launching exactly the same product in a different color can create significant bottlenecks.

“Working on more than one version takes away from early learning because you’re trying to do too much at once. You’re already a small team, trying to operate with cost constraints and time constraints,” she said. “It also dilutes the understanding of the market: If you do your proper due diligence and your user studies and market research, you’ll start to get a sense of which one is going to be potentially the most lucrative, or which variant you can use to learn quicker. By giving up focus, you are going to start learning slowly on all of them. That means you need to bet on one, rather than pursuing one that has the most potential.”

And that can be a killer: Startups raise money, then make a bunch of products, trying to push them all forward at once. If something happens in the production process, they’re stuck with a bunch of half-baked products, sucking up funding along the way. It’s a spiral, and it’s not pointed in the right direction.

7 common pitfalls for hardware startups and how to avoid them by Haje Jan Kamps originally published on TechCrunch

How Fellow bootstrapped for 8 years to build a coffee empire

A decade ago, a little coffee company launched a Kickstarter campaign for a product called Duo, a coffee maker that’s the best of both worlds: a cross between a French press and a pour-over.

The campaign sold almost $200,000 worth of machines to 2,700 backers, but the product itself was a flop. The company was Fellow, which today makes some of the best pour-over coffee grinders on the market; much-copied kettles with hyperprecise temperature control, loved by pour-over baristas across the industry; and a bunch of other caffeine-related paraphernalia.

Most recently, the company launched the Opus, one of the very few sub-$200 coffee grinders that can grind the beans in a variety of ways, from fine espresso to grinds suitable for electric coffee makers, French presses, AeroPresses, pour-overs and the like.

But the machine almost didn’t see the light of day: A year into production, the team had to scrap the entire idea and start over. I sat down with Fellow CEO Jake Miller to learn about the highs and lows of manufacturing hardware that keeps us well caffeinated.

“Looking back, not raising institutional money early on was absolutely the right call. We only exist today because of that choice.” Jake Miller, CEO, Fellow

“What’s true for most entrepreneurs is that there’s just something in them that has to come out,” Miller said, who started his entrepreneurial streak by bootlegging CDs in high school, creating and selling novelty T-shirts in college, and then starting a roofing and siding company after he graduated. “I didn’t want to sell inappropriate T-shirts in a side hustle anymore, but I still loved the thrill of entrepreneurship.”

He fell in love with coffee during a stint at Caribou Coffee. From there, he earned an MBA at Stanford and decided to start building Fellow. He attempted to raise money, but after receiving 73 rejections from VCs, he gave up. Not raising a serious chunk of cash in the early days turned out to be a company-saving blessing in disguise: Fellow raised its first “real” round of institutional money last year in a $30 million round.

“I graduated from Stanford, and I had this idea for Duo. Bright-eyed and bushy-tailed, I said, ‘Let’s go,’ and we launched it on Kickstarter. It was just me at the time, and when we raised the $200,000, I thought I was rich,” Miller said. “It took two years and more than $300,000 just to deliver the Kicsktarter units. It was this incredible fall from glory and me realizing how hard product design and development was. That product flopped and doesn’t exist today. I learned a lot from it.”

The Duo was a mashup between a pour-over and a French press, with the convenience of the latter and the quality of the former. It made a great cup of coffee, but it was complicated to use, hard to clean and unreliable.

At the Fellow office, a sneaky preview of the company’s upcoming scale that makes pour-over coffee fool proof. Image Credits: Haje Kamps / TechCrunch

Fellow had to go back to the drawing board after its sub-$200 grinder was a year in development. Thus began an incredible journey in which bootstrapping and raising small angel checks turned out to be a blessing, though there were a lot of war stories along the way.

How Fellow bootstrapped for 8 years to build a coffee empire by Haje Jan Kamps originally published on TechCrunch

10 tips for de-risking hardware products

Manufacturing real-life, tangible objects that you can touch is often a lot riskier than developing software. Once you’ve created 10,000 thingamajigs, it’s far harder to make changes to them than in the software world, where you can push an update if you want to tweak something.

In the world of manufacturing, then, the question is: How can I make sure that I’m building the right thing for the right audience?

Last week, when I wrote about Prelaunch.com’s $1.5 million fundraise, I asked company founder Narek Vardanyan what he thinks are the biggest pitfalls in hardware development.

Measuring the right users

To truly understand what your customers want, Vardanyan recommends studying what your potential customers actually do, not what they say they are going to do.

In an ideal world, that means getting them to buy or at least put down a deposit, for your product. Real buying intent is more valuable than someone simply saying, “Yes, I would buy this thing.”

“You need to make decisions based on people’s actual behavior. You need to make sure that the data you’re tracking is coming from the right types of people,” Vardanyan said. “Working with people who are putting down money acts like a filter: You keep only the people who really want to risk their money. In other words, your potential customers.”

10 tips for de-risking hardware products by Haje Jan Kamps originally published on TechCrunch

You can probably manufacture closer to home than you think

There’s a persistent theory in hardware that manufacturing overseas is the cheaper/better/more efficient option. You manufacture there, assemble somewhere else, and finally approve and get to market in the United States.

But it turns out that it’s possible to manufacture closer to home. With supply chains in the news more than ever, “nearshoring” is an option for startups; it turns out you can build in your own backyard many of the things you can build overseas, with surprising benefits along the way.

To learn more about how to pull your manufacturing back — or to set up a local supply chain in the first place — we connected with FORGE, a Massachusetts-based nonprofit that’s on a mission to assist innovators in building relationships with manufacturers and designers much closer to home. So far, it has supported over 600 startups with their manufacturing, product development and supply chain needs, and it wants to help many, many more.

“We help innovators, folks with innovative products, companies, individual inventors, specifically with their product development, manufacturing and supply chain,” explained Laura Teicher, FORGE’s executive director. “There’s a tremendous number of support organizations in the ecosystem, but many of them are focused on business planning, fundraising, on these other aspects of business. And hardware is hard. It has a higher failure rate. It has additional challenges. And that’s where FORGE is laser-focused.”

Hardware is indeed hard. Inventions don’t spring fully formed from their inventors’ brains, and manufacturing at scale is particularly challenging. So let’s take a closer look at FORGE, how it works and how it helps founders potentially manufacture on the other side of town instead of the other side of the world.

You can probably manufacture closer to home than you think by Haje Jan Kamps originally published on TechCrunch

How are global chipmakers preparing for the US-China chip war?

Great results can be achieved with small forces,” Sun Tzu wrote in “The Art of War” some 2,500 years ago.

That quote is so old it’s now an adage. But it appears the U.S. isn’t content to wager that small actions can achieve the wide-ranging impacts necessary to gain an edge over China in the development of AI and machine learning technologies.

After implementing sweeping restrictions on the export of semiconductors to China last October, the U.S.’ recent deal with Japan and the Netherlands to restrict the export of vital semiconductor parts and chip-making technologies to China is throwing the $600 billion global semiconductor industry into turmoil.

The implications of these restrictions are broad, given that China accounts for approximately 80% of the world’s electronics production and is a large consumer of semiconductors. To make things even more complicated, nearly every major chipmaker has Chinese customers.

But Washington doesn’t seem to be concerned with the worries of global chipmakers or near-term supply chain volatility. It’s looking far to the future: It wants to choke out China’s ability to develop and access AI technology while diversifying its sources of the increasingly important semiconductor.

The United States’ aggressive moves are about “AI dominance, which underpins what many call the fifth industrial revolution, and ultimately, about global economic leadership in the next few decades,” according to Josep Bori, research director at GlobalData.

And the recent deal with Japan and the Netherlands, which includes “preventing legacy deep ultraviolet (DUV) machine exports and outright advanced AI chips,” targets China’s semiconductor business and its ability to develop its AI technology well beyond just hardware, Bori said.

You can’t make pancakes without a pan

You see, while China makes a ton of different semiconductors, it doesn’t have some of the advanced equipment that’s needed to make the fastest processors, chips and memory storage devices.

Manufacturers in the country import a lot of the chips and equipment from companies across the world, including Taiwan’s TSMC; the U.S.’ Intel, Nvidia, and AMD; South Korea’s SK Hynix and Samsung; the Netherlands’ ASML Holdings; and Japan’s Nikon and Tokyo Electron.

This, to an extent, means that Chinese manufacturers like Semiconductor Manufacturing International Corporation (SMIC) rely heavily on the global semiconductor industry for the machines to make high-end chips.

According to Bori, a number of the high-end logic and memory chips are made using extreme ultraviolet (EUV) and deep ultraviolet (DUV) lithography machines.

“Initially, the [U.S.’ export] bans to China only affected EUV machines, used for the most advanced process nodes, such as 3 nm, 5 nm, and 7 nm,” Bori said.

This played into the U.S.’ strategy to slow Chinese companies’ advances in AI, machine learning and other cutting-edge tech. Basically, the smaller the distance between each transistor, the faster and more power-efficient a chip becomes. The smallest process nodes, such as 3 nm, 5 nm and 7 nm, are used to develop artificial intelligence systems, smartphones, cloud data centers and self-driving cars and are used in military applications.

But the January agreement targets older DUV machines that could let Chinese manufacturers make 14 nm chips, as well as 18 nm DRAM chips and NAND flash chips with more than 128 layers, Bori added. DUV machines let you make chips at the 14 nanometer, 28 nanometer and larger process nodes; such chips are commonly used in automobiles, industrial equipment and home appliances.

How are global chipmakers preparing for the US-China chip war? by Kate Park originally published on TechCrunch

Startups, here’s how you can make hardware without ruining the planet

Nobody starts a hardware company with the express goal of destroying as much of the planet as they possibly can. Walking around the startup hall at CES, however, I noticed that — with a few notable exceptions — there was painfully little attention given to material choice, repairability, ease of disassembly and considerations around the end of usable life.

It’s embarrassing, really — but as someone who used to run a hardware startup, I know it can be hard to prioritize when you have limited time and resources. However, if you can’t make planet-friendly choices as the founder of a startup, when the buck literally stops with you, when can you?

In an effort to figure out how you can create greener hardware, we spoke with Lauryn Menard, a professor at the California College of the Arts, where she teaches the future of biodesign. She’s also an adviser to Women in Design SF and the co-founder and creative director at PROWL Studio, an Oakland, California-based design and material futures consultancy focusing on sustainable solutions.

“As a startup, you have choices. The thing is, it’s such a capitalistic society we live in, and a lot of decisions are made based on time and money,” Menard explained. The startups want to think about sustainability, but they are moving at breakneck speed and trying to get a product to market as soon as possible. “The startups need to hit their target price point and all that good stuff.”

“You don’t have to adopt a new bioplastic, you can instead choose something that already exists: Not everything has to be made from a new freaking material!” Lauryn Menard

But there are some big things moving out there in the market. Consumer demands are shifting, and climate pledges, circularity strategies and environmental questions are all bubbling to the surface. It’s hard to say whether enough customers are making purchasing decisions based on a company’s green credentials to move the needle meaningfully, but product development cycles can take years, and who knows what the landscape looks like by the time your product makes it to market? To some companies, it might make sense to take the risk, but other founders are starting to think differently about how products are made.

“If a startup is being run by solely engineers, that can be problematic: Engineers tend to be worried [about] making sure they’re getting to the finish line. They put all of their energy into making something function and are probably leaning toward materials, ways of making and manufacturing processes that they’re already familiar with,” Menard explained. “What we’ve seen [be] really helpful is working with a design studio that specializes in more sustainable ways of thinking and healthier materials. Or partnering with someone like a materials library, so they’ve already started thinking about the functionality of the materials by the time they are making a prototype. Just in the same way that it takes a really long time to get an MVP product that works and looks the way you want, it sometimes takes a long time to put a new material into an existing manufacturing process.”

Thinking sustainability

One of the big challenges we have with creating more sustainable products is that we are often replacing plastics with something else. The problem is that plastics are deeply embedded in workflows already. Product designers love how predictable, easy to design and repeatable plastic is.

There also isn’t an obvious one-for-one replacement for plastic; depending on the use case and material properties you need, you may have to replace it with wool, paper, wood, plant pulp, carbon fiber, seaweed, hemp, mycelium, lab-grown leather or any number of other materials that are available.

Here’s what founders and product designers can do to think about sustainability and product development in a more conscious way.

Startups, here’s how you can make hardware without ruining the planet by Haje Jan Kamps originally published on TechCrunch

How Fictiv is making hardware manufacturing more like building software

Over the past few years, we’ve spoken with hundreds of hardware startups, and there’s one phrase that has been showing up in almost every interview: “supply chains.”

They were always important for people shipping physical products, of course, but the pandemic and the international logistics chaos that resulted from it made the pain of getting components to factories and products from factories to warehouses, then to stores and to customers, all the more present.

A few of the founders TechCrunch spoke to at CES in Las Vegas this year seemed to be optimistic, saying that some of the supply-chain crisis is on its way to being resolved, while others laughed at the suggestion that all of this is behind us. We decided to find out what the status is.

I spoke with supply-chain experts Fictiv to figure out whether the light at the end of the tunnel is daylight or the headlights of an oncoming train. If anyone knows what’s going on, it’s Fictiv CEO Dave Evans. He’s been running the manufacturing platform for more than a decade; before that, he was part of the Advanced Manufacturing Group at the World Economic Forum and a lead hardware engineer at Ford. We talked to Evans about the status quo and the near future of hardware manufacturing, seen through the lens of startups.

“The main problem for early-stage startups is that it’s really difficult to get someone to care. You might care about your product, but nobody else does because you’re too small. Suppliers will ask if you have volume. If you don’t, why would they work with you?” Evans said, pointing out that relationships are super important with whoever your supplier base is. He noted that you have to be the right size for your suppliers. If you’re too small, they don’t want to deal with you. But if you’re too big, that’s also a problem.

“When I was Ford, you know, there were a lot of great suppliers, but they only do $10 million a year. At Ford, we never worked with them, because there was simply too much risk.”

I asked Evans if the supply chain crisis was finally in the rearview mirror. When he was done laughing, he had a pretty simple answer: Nope.

“Is it over? I would say, unequivocally, no. I think we’ve shifted from a conversation about ‘if’ to a conversation about ‘when.’ I don’t think we are at the peak of it by any means,” he said, adding that while the pandemic was a big hit, supply-chain resiliency itself has been a conversation among his peers for a very long time. “We can go back to 2019 and talk about trade wars. We can go to 2020 and talk about pandemics, the Suez Canal, we can talk about shipping delays and massive global conflict in Europe. We can talk about recessions and all of these things that disrupt global trade and supply chains.”

The big change that happened during the pandemic, however, was that supply-chain disruptions started showing up in the lives of people who weren’t supply-chain professionals. Average consumers suddenly couldn’t buy the kind of ketchup they wanted, or the new car they were excited about was delayed, or they couldn’t get the right stuff at the hardware store to renovate their homes.

For businesses, disruptions were mostly hidden from view before the pandemic, something the chief supply chain officer would take care of. It went from a functional, practical problem that affected a part of the business to a management problem where the whole team suddenly started caring. Suddenly, everyone had to know why there were delays in shipping, gaping holes in the financial statements and questions from the board.

Dave Evans, CEO at Fictiv. Image Credits: Fictiv

“I think what this is doing is forcing companies to rethink their supply-chain strategies and modernize them, versus if we went back three, four years ago, people didn’t really care,” Evans said. “Before Amazon, there wasn’t this much pressure to ship in two days, but now the supply chain is a critical business function for anybody that ships a physical good. And I think we are probably at the peak or close to that peak of demand for change.”

Let’s take a look at how hardware startups can think about de-risking their products and supply chains and figure out how to think about resiliency.

How Fictiv is making hardware manufacturing more like building software by Haje Jan Kamps originally published on TechCrunch

How we pivoted our deep tech startup to become a SaaS company

For the foreseeable future, global markets will require billions of highly specialized electric machines that perform much better than the inefficient relics of the past.

Initially, we approached this as a hardware challenge until we determined that the key to meeting next-generation electric motor demand actually lies in software. That’s why we’ve pivoted to a SaaS model.

Like any major startup redirect, there were several “a-ha!” realizations, accompanied by trials to make it all work. Fortunately, the SaaS direction has delivered upsides: We’ve achieved relatively strong product-market fit and cash flow-positive status without big VC raises or burn rates.

The process wasn’t precisely linear, but (looking back) we did four core things to conclude SaaS was our model:

  • Assessed what was truly disruptive, scalable and profitable about our technology.
  • Engaged our board and investors candidly.
  • Studied global markets and tech trends.
  • Took our MVP to market quickly, opting to polish in public rather than perfect in private.

Pivoting from hardware to SaaS was the right move for our electric motor design startup, but the process wasn’t precisely linear.

ECM PCB Stator Technology was founded on the innovation of MIT-trained electrical and software engineer Dr. Steven Shaw, our chief scientist. After launch, we began developing proprietary printed circuit board stators that replace bulky copper windings — the central component in electric motors — and using in-house software to make them lighter, faster and more efficient machines.

Two years later, I joined as a growth-stage CEO after leading two energy technology companies to scale and acquisition. At that point, we were still at a relatively early stage in funding and product-market fit. The startup had raised a venture round and was flirting with becoming an axial flux electric motor manufacturing company. The initial impetus for a SaaS shift came when I began to assess the company with fresh eyes and engage Steve and the board on our inherent advantages and path to profitability.

At that point, we also pulled in some new investors.

On a macro level, we conferred to determine our competitive advantages and addressable market. An early observation was that there were already several large, established players making off-the-shelf electric motors. An assessment of global trends (e.g., mass electrification, automation, reducing carbon emissions) also revealed that the need and requirements for next-generation electric machines were rapidly shifting.

After plenty of analysis and a number of board meetings, this appraisal emerged: The global marketplace will require more efficient, better performing and custom-designed electric motors that can be produced in the hundreds of millions in a more sustainable way.

With that in mind, I turned to Steve and our board to evaluate the best business model. We concluded that the most competitive aspect was the ability to leverage printed circuit boards via “motor CAD” software to create bespoke electric motor designs that require less raw material and outperform legacy offerings.

Then we addressed a critical question: How can we take this technology to market rapidly with a favorable capex profile?

How we pivoted our deep tech startup to become a SaaS company by Ram Iyer originally published on TechCrunch