4 Critical Factors For Startups Outsourcing Production

By Armin Schon

The path from innovation to scaled-up production represents a critical juncture for hardware startups. For companies developing novel technologies, selecting the right manufacturing partners can determine whether a breakthrough technology turns into a viable product and whether the company successfully commercializes its developments.

After leading startups through production cycles, I’ve identified four key factors that they must prioritize when outsourcing production.

1. Manufacturing partner: the inverse size-risk tolerance

When selecting a manufacturing partner, startups often gravitate toward established industry giants. However, I’ve observed that eagerness to collaborate with new technologies is often inversely correlated with the size and maturity of the potential partner.

Every new manufacturing process carries inherent risk. Larger, more conservative companies tend to avoid these risks by either rejecting the project outright or shifting costs onto the startup. They may also demand long-term capacity commitments — an unrealistic expectation for a new business with an uncertain growth trajectory.

On the other hand, smaller, more agile contract manufacturers often seek opportunities to differentiate themselves. They tend to be more risk-tolerant and better aligned with a startup’s innovation cycle. While they may not guarantee unlimited production capacity three years down the road, they provide the flexibility that is critical in early-stage manufacturing.

2. Pricing: transparency and flexibility

Manufacturing novel technology presents real pricing challenges. Contract manufacturers operate on razor-thin margins and rely on well-optimized processes to remain profitable. When unproven technology enters the mix, pricing becomes even trickier.

The biggest challenge is creating viable pricing agreements that can withstand surprises — which invariably emerge when manufacturing something new. Effective pricing frameworks must keep the contract manufacturer commercially motivated while establishing clear paths to price reductions once the new process stabilizes and manufacturing costs decrease.

Thus, the initial pricing structure must lay the foundation for a sustainable partnership that evolves as the technology matures. This approach requires transparency and trust-building between founders and manufacturing partners.

3. IP protection: geography matters

For startups whose primary value lies in intellectual property, outsourcing production carries significant risks that should always be carefully considered. Many startups initially retain the most IP-heavy components in-house, outsourcing only assembly, integration and testing until formal IP protection through patents and trademarks is established.

Even with formal protections in place, geography plays a crucial role in IP security. The U.S. and many European countries offer strong legal protections, but in some low-cost manufacturing regions IP protection may be difficult or impossible to enforce. Political interference, complex legal bureaucracy and local favoritism can make pursuing legal action against a copying manufacturer financially and logistically unfeasible.

For startups whose value hinges on intellectual property, choosing a manufacturing location with strong legal safeguards should not be an afterthought — it must be a priority.

4. Quality control: scaling back presence as processes mature

Quality management is crucial when outsourcing production. For novel technologies, startups often need on-site quality control teams early on to establish processes and define clear quality metrics. Once these targets are consistently met, they can gradually shift responsibility to the manufacturer.

However, this initial involvement comes at a cost, and smaller manufacturers may require more guidance to maintain strict processes. Larger manufacturers, by contrast, often have stronger quality systems, reducing the startup’s oversight burden.

This creates a trade-off: While larger partners may be more process-driven, they are also less likely to take on a startup’s risk, as discussed above in No. 1. Navigating this contradiction requires startups to carefully balance risk, cost and manufacturing capabilities when selecting a partner.

The bottom line: a strategic partnership

For hardware startups whose technology requires innovation not just in design but also in manufacturing, outsourcing is not a simple transaction — it’s a strategic partnership. Establishing strong manufacturing relationships can take at least six months, with another year before optimal quality metrics are reached.

With the right manufacturing partner and well-structured agreements, startups can successfully navigate the challenging transition from innovation to scaled production. The right choice can mean the difference between a breakthrough and a breakdown.

Armin Schon is CEO of Galileo Wheel, where he leads the company’s development of advanced tire technologies for industrial vehicles in agriculture, construction and related sectors. A German-Israeli executive with a physics doctorate from the University of Heidelberg and management education from MIT Sloan School of Management, he has spent more than 15 years in leadership positions at companies implementing new technologies in established industries. His expertise spans medical devices, industrial manufacturing and agricultural technology, with particular strength in bringing innovative technologies to established industries.