--:-- Host: I 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 just 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 share, that's really freaking hard. I mean, just take a look at your phone. If you're living in the U.S., there's an 85% chance that your phone is from Apple or Samsung.
--:-- Well, in today's episode, we talked to Carl Pei. 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, enter 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 at it again, what it takes to successfully build hardware, and how he thinks about making technology fun again.
--:-- And 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 has 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.
--:-- All right, Carl, welcome to the show.
--:-- Carl Pei: Thanks for having me.
--:-- Host: 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 tried to break into our space. Well-funded and less well-funded and everybody's failed. So 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. 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.
--:-- Carl Pei: 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 want to do something about it.
--:-- Host: It 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?
--:-- Carl Pei: 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. For 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, 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.
--:-- Host: Yeah, I mean, you've seen tons of startups succeed for that very reason. So I guess if you're convinced 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? I know 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?
--:-- Carl Pei: Yeah, I think a mental model that I use is an 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. So 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 why 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. And 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, OK, 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. We need to push into the future.
--:-- Host: 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 AirPod 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. What does that mean? What is the calculus in actually producing something that people resonate with?
--:-- Carl Pei: 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. If you look at the Apple product design, they've started introducing much sharper edges on their products. So the iPhone is much boxier than before, but it also cascades into their other products, the iMac, 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 stayed true to this. So the Sony of the past or the Bang Olufsen of the past, they all had very distinct design languages. So that's like one of the first principles we decided that we had to pursue.
--:-- When we have more products on the market in different categories even when the consumer don see our logo they should still know it 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, they're not going to create a transparent product anymore. Apple used to. A lot of the Apple iMacs of the past were transparent. Yeah, I remember those. Right? Some of the Nintendo Game Boys were transparent. But I think when you're a niche player, you can be more differentiated in your hardware design.
--:-- Host: 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 with 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. Yeah, 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.
--:-- Carl Pei: 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, we just needed to keep ourselves warm and shelter ourselves from the weather conditions. But now we want to 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 moat, design 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 moat for a tech company.
--:-- Host: It'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.
--:-- Carl Pei: So if we started off with hardware design differentiation, I think this year we can take the leap into software design differentiation. When 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 moat, 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 for apps and when you click through the icons, you got a full screen app and then you went back to your home screen. That existed in the Nokia Navigator of the 1990s and now 30 years later, we're still on that same UI, UX. It's just 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 that work well with each other. So how do we build that inter-device connectivity? Like 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. So I think we're not in a rush. We're in a lot stronger position than a lot of startups that are pure software in this space. But we just need to be patient and find the right product market fit before we go all in.
--:-- Host: 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. And you mentioned AI, but I'm just curious about, 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 like 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?
--:-- Carl Pei: I 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 got to keep exploring what that better way is. But fundamentally, I think we want our devices to deliver intent. Like, let's say we want to go for a dinner. But actually, organizing dinner is quite a burdensome thing 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. On 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?
--:-- Host: 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, 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?
--:-- Carl Pei: First of all, I don't want people listening to this to think that there's a hack. I 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 going to 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, right? 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.
--:-- I remember a couple of years ago, 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. It 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 that consumers are satisfied with, it's kind of like table stakes.
--:-- Host: Yeah. If we don't do that, then people are not going to believe in us for the future. Totally. I mean, 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. Like 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 through line with?
--:-- Carl Pei: So 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 learned 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 so the price was low but over time as ad agencies 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 no real difference.
--:-- For me, it'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, right? There'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 insight behind the curtain stuff that we can share that might be really interesting to the viewers. Yeah, you talked about behind the curtain.
--:-- Host: Given your experience at both Nothing and OnePlus, 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?
--:-- Carl Pei: I think it's very easy to make mistakes that are very, very costly when you're making hardware, because I've seen it many times, people with a 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 so 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. So you need to prepay. 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. You might not have cash. You 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. So 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.
--:-- Host: Yeah. Didn't you work with a factory that ended up shutting down?
--:-- Carl Pei: 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. So every station of the line was supervised by our people, kind of micromanaged them so they couldn't make mistakes.
--:-- Host: And what kind of mistakes are you talking about there? Like a broken product or?
--:-- Carl Pei: First, we start off with 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 kind of 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. So for instance, if we define that there needs to be a certain strength between the pogo pin, so the metallic connector on the case and the part on the earbud so that the earbuds can get the charge, we design it with a certain 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? I mean, you also built this during the pandemic, which introduces its own complications.
--:-- Carl Pei: 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. So they have a guaranteed 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 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. I know the percentage chance would be quite small that they would help us because, you know, we're competitors. But everything that had like a 1% chance of working, we tried until we finally got all the components together. It caused some delay to our product development process. But in the end, we made it happen.
--:-- Host: You made it happen. Would you say there were any mistakes? I mean, we've talked about this already, but you brought this level of experience into this company. So you're starting at a great foundation. But it still is a new company, new products, new challenges like the pandemic that we just talked about. Do you think that you've made any mistakes along the way, like anything that would help other founders who are thinking of venturing into this very difficult space?
--:-- Carl Pei: I think another big mistake we made was not introducing enough flexibility in our supply chain. So I think the best way of running supply chain is to delay every decision to the last moment. Because then you have time to get more data to look at the demand and look at other market factors. I think sometimes we ordered components in bulk, in chunks, instead of the minimum amount at the last possible time.
--:-- Host: I'm just curious to know this as someone who's like a big remote work advocate. Do you think hardware can be built remotely? You're talking about these factories. I see your Instagram too. You're flying around. You've taken Zoom calls in different places around the world. You also are someone who's lived around the world, right? So you grew up in Sweden. You're originally from China. You now live in London. Do you think this stuff eventually can be done with a remote team?
--:-- Carl Pei: There's definitely a place for remote for some companies, but probably not our company. Because first of all, being a young company, a very young team to build that initial culture and those initial relationships, I think face-to-face is much more efficient. Maybe for more mature companies where people already kind of have established relationships and mature processes and how things work, there's a place for remote. I think secondly, our industry is one of the most difficult industries in the world. We talked about a couple of minutes ago that everybody who tried in the last 10 years to break in has failed. And there's a higher chance that we'll succeed if we work together.
--:-- And then third, I think if you work in a creative field or a strategic field, being remote is also going to be more challenging. If your work is more kind of just do the same thing over and over again, then it's easier to be remote and not coordinate too much with other people. But if it's strategic, if it's creative, I find it much easier to work in an office. If you look at our design team, they kind of print things out on a big wall and then they just discuss. Sometimes they make physical mockups and they discuss the mockups. It's very hard to do this in a remote setting.
--:-- Host: What gets you jazzed? Like you started this company. You had this vision. Like where would you love to be spending your time? What about this potential future of the hardware that you can build gets you just like truly excited?
--:-- Carl Pei: I think two things. One is community and two is product innovation. On community I think the world is a very different place to when Apple started more than 40 years ago. Everybody so connected these days so that in the past you might have had to be in Silicon Valley to get all the latest information and become an expert at something related to technology But today, because of the Internet, you can be anywhere in the world and be an expert on whatever topic you're passionate about. You can be on a remote island if you want to. So there's an explosion of talent and passion all over the world.
--:-- I think the exciting thing for community is, you know, how do we erase the difference between employee and community member so that every stakeholder can contribute to building the company and its products. We allowed our community to also become shareholders in our company. And our community has an elected board observer on our board to keep us honest and give us feedback from the users. So even if we become a big company, we still don't forget what our intentions are. And then we've seen a lot of cool creation now from our community. We see a lot of interesting ideas for future product designs made by our community. And some of the renders are really good. So that's really cool.
--:-- We have a very unique font. It's like a dot matrix font. It didn't support some languages like Cyrillic or Arabic. Our users have made those adaptations themselves and it's very professionally made. And we're thinking about whether we can integrate those into our products. We have users who've made PC and Mac versions of the control app to control our earbuds. It's not made by us. So this is just the beginning, but how can we over time become the collective that builds this company and builds these awesome products together and it's a big contrast if you're a collective versus the behemoth apple which is more like the i company it's like command and control top down ivory tower style ipad iphone i mac i everything and this is the collective versus the i so i think that's kind of community i would love to spend more time to figure out how to make that part happen and then second on product innovation i think apple they kind of stabilized their business using the personal computer. That wasn't their breakthrough moment. I think their breakthrough moment was with the iPod. That's when they really built a mass consumer brand.
--:-- I think, you know, we're at the tail end of the smartphone innovation curve. The total size of the smartphone market is actually decreasing, which is okay for us. We're very small, so we still have a lot of upside in the market. I think this is the market where we kind of have the opportunity to build a stable company, but it's not our breakthrough category. So we need to invent a breakthrough category over time. It doesn't have to be this year or next year or the following couple of years, but the next 10 years, we have to create a breakthrough category. And I would love to spend more time there as well.
--:-- Host: Yeah, let's return to community. But I have to ask you about this, this breakthrough category. The phone really has been the hardware device of the last decade, you could say, even longer than that. And if you think about the last few years, and I might be missing certain pieces of hardware. But what has come to be in that time period? I guess drones have been something that have become popular, but that's not as much of a consumer device, although consumers are adopting it. But it's hard for me to think of what this new hardware device might be. I mean, some people might say it might be AR-VR. That's been pending for a while. I know the Oculus has sold a record number of headsets in the last few years, but where do you think this is going? There's been a lot of this is the next thing, like drones, as you said, AR, VR, Web3 for a while. And those technologies might all make really big impact in the future. But I think the thing that has the highest potential of changing our habits, because AR, VR hasn't changed the way we live our lives, but the smartphone has, right?
--:-- Carl Pei: Correct. So I think the next product that has the opportunity to change our habits, I don't know exactly what the product is, but I think it's most likely in the intersection of hardware, software, and AI. I think just software AI is not enough. It's niche. If it's in a browser, I think the form factor has to be related to the utility. Yeah, I think about the phone. Like most people, as you said, interface with the screen, but there's also so many other modalities to a phone. There's the ability to connect to Wi-Fi, but there's also sound, right? Like AirPods is an example. I can't wait till there's a better set of applications that actually integrates with the AirPods. So maybe that's also on the roadmap for nothing.
--:-- Host: Let's quickly return back to the community because I think that ties into what you're saying, which is you're doing a lot of this with a small team, but you have this community behind you, people who are building apps for your products. And so what do you think is driving
