Y Combinator Startup Podcast - How Nothing Founder Carl Pei Built A Multi-Million Dollar Smartphone Brand In Just 2 Years | Main Function

Episode Date: November 16, 2024

After co-founding the successful Chinese smartphone maker OnePlus, Carl Pei felt the tech industry was missing the fun and wonder he remembered as a dedicated gadget fan growing up in Sweden. Pei decided to launch a new smartphone brand, this time with an increased focus on thoughtful user interface and stylish yet practical designs. In only two years, the brand known as "Nothing" has gained a cult following and gone to $600 million in annualized revenue. On this episode of The Main Function, Pei reflects on the highs and lows that have come with the journey of pursuing excellence in hard tech.

Today, on the main function, we're hanging out with Carl Pay, the founder of nothing. He built a smartphone company that launched two years ago, and in those two years, they've gotten to $600 million in annualized revenue. So we're going to talk about that and a whole lot more. Let's get started. So why don't we start right at the top? For someone who runs a smartphone company, you're really young, actually. What was your journey into tech and into making smartphones specifically?

I was a big gadget fan when I was a kid. I think I was probably one of the first people in Sweden to have the iPod. And I was definitely the first among my friends to get the iPhone. And back then, the iPhone was a US exclusive with AT&T. And I had to get a US friend to buy it for me and pay a cancellation fee to AT&T, ship it to me. I had to jailbreak it to be able to use it. How old were you when you first held the iPhone one?

First iPhone was probably 18, maybe, 18. And, you know, those early Apple products were super inspiring for me. And unfortunately, the iPod that I got broke just a week after the warranty ended. And I was very young at that time, so I couldn't really afford another iPod. And I got kind of pissed off because, like, after one year and it broke. So one time when I was visiting relatives in China, We went to the electronics market and we bought a mp3 player from a brand called Mezu. I'm like, wow, this is really cool.

I didn't know China could produce good quality electronics. So I got that. The sound quality was great. The design was beautiful. And I created a fan community around this brand. We were profiled a couple years later in Los Angeles Times. And then the company was really happy because there was this kid in Sweden doing, like, being their spokesperson. And so they recruited me after you.

they recruited me after uni. Through the magic of the internet. It's the magic of the internet. I was actually thinking about applying to YC at that time. So I was like waiting, okay, do I have to, back then it was all about consumer internet, right? Like it was a Facebook era and I was like, should I write a pitch for YC or should I take this offer in China

to be a part of the beginning of the smartphone kind of industry there? To be honest, I was just too lazy to write the pitch. Wow, it was only 12 questions. So I took the offer that I had and I, I flew to China in 2011 and stayed there for 11 years. That's where I learned how to make hardware. So how did you get in touch with Oneplus? And you started off, I mean, from this experience of creating a brand and creating a community, it translated very directly.

I went to this company and I love their products, but their founder was kind of depressed because their competitors were doing better than them. So for the year I was there, he never showed up to work. He was still working, like doing some UI design at home, but he never showed up to the company. So I lost a lot of respect, if I'm honest. I'm like, this guy's probably not going to make it if he can't handle setbacks. So I started looking and talking to other companies.

And back then, Opo was another company that I reached out to since I was already in the region. So I got recruited into Opo, but then quickly I heard that they wanted to create a new brand. to target the online market because Opel was very offline, offline distribution, offline sales channels. I owned one of their DVD players slash karaoke machines before. Very cool. There were new companies like selling products online that were really disrupting via D2C,

so that was the original vision for One Plus. Like how can we take the Opel supply chain advantages, huge scale, low cost, good quality, and sell products online and be really disruptive. And initially, like, there were really focused focused on China. They built a management team around China, and I was like a 24-year-old kid. So I was like, hey, I don't want to do this old thing anymore. I don't do this new thing. And don't worry about like China. Like I'll take care of everything outside of China. You don't have any team for that anyway.

And they were like, yeah, okay, whatever, like we're going to be focused on the China market. Was it Android already by then or was it other OS? It was, it was Android based. And the way works is, you know, Google does not have their services in China. So there was no Android build for my markets outside of China. And I don't know if you remember at that time, there was a company called Sinogen. They started off as a community thing, like a custom ROM that got to millions of users. And they had just become a company at that time.

They were sort of like a Linux skin back in the day, right? And then obviously Android is a variant of Linux. Yeah, it was based on Android. It sounds like they were able to translate that very quickly. We found a lot of users online, and they had just raised money. And they became a real company instead of this community thing. And I'm like, hey, we're starting something new. You're starting something new.

So why don't we collaborate? So that's how we solved the problem of not having our own operating system for my international markets back then. You stayed at One Plus through 2021, was it? Through 2020. And then did you know that you were going to start nothing or, you know, on day one? or, you know, do you have a moment in there where you're trying to figure out

what the next thing would be? Yeah, for the longest time, I thought I was going to travel the world for half a year at least because at 1 Plus I was so busy. I was working at least six days a week and just no real vacations for seven years. But after 10 days on that holiday, it got kind of boring. I felt like I was burning away my life

and I was still young, and I was staying in fancy hotels and enjoying the drinks and the dinners and whatnot. But I felt a lot of anxiety. that I wasn't contributing anything. So I quickly wrapped up the trip after 10 days, went back to Stockholm where I grew up, and started reaching out to entrepreneurs there

because I had never raised money before. So I started reaching out to all the entrepreneurs I knew, and they kept introducing me to people. So basically, in like three weeks in Sweden, I got coached by all the Swedish entrepreneurs on how to raise money. It was a super welcoming community. I'm sure it's the same here.

I haven't spent as much. much time here. That's the coolest thing about working with founders is that everyone sort of recognizes how hard it is and then we're the ones who can help make it easier for each other. Yeah. And it was really confusing at the time because everybody was giving me slightly different advice. Oh yeah. Well everyone has like n equals one like what I experienced. Yeah, there's all these concepts like how do they how do they fit together? But eventually it clicked and we quickly raised the seed round at that time. What was the first thing that you wanted to do?

I mean, one of the trickier things about smartphones is that unlike software, you can't sit in a garage in front of, you know, two or three people in front of a computer and just like get a splashy launch out there. Like this is, it's hardware, it's relationships, there's a whole value chain here, right? Yeah, I think in the beginning, the idea wasn't super clear. I'm super ashamed of my seed deck. It's really, really bad. And I think basically I just wanted to take all the learnings I had from Oneplus and do it better. That's how it started, but now over time the idea has changed a lot. So I guess at that stage, I just wanted to raise the money.

We knew that it would be impossible to raise enough money to make a smartphone. We made a quick calculation at that time. I think we said we needed at least $100 million USD to make a phone. And I think, you know, there's no way to raise $100 million for me, at least, in the seat stage. We also got shunned by a lot of the factories that made phones, like Foxcon for instance. Foxcon at that time had worked with like five startups that made phones.

And all those five startups have failed. And they're like, hey, we're not going to work with any more startups. We're just going to do our Apple thing and whatever and just make a little bit of money. No more startups. So Foxcon is a contract manufacturer. This is one of the key players that you need to go

and get a contract with, because they're the ones who actually take all the components and integrate it and test it for you. And they make iPhones as well. So they're very happy with their Apple relationship. And there was a period of time where they took on a lot of risk with working with startups. But when it came our turn, that wasn't the case anymore. What's the game theory there? I mean, Foxcon normally you'd think that they would really want more competition for Apple

because the problem that we see in startups all the time has happened to YC companies all the time is single-channel risk. Yeah. If you have one big buyer and they have 100% of your business, then guess who owns who, right? Yeah. So why isn't Foxcon worried about this? They're worried, so that's why they tried working with countless startups, but they all failed. And they lost money each time because they have opportunity costs. They have to invest engineering. And even inventory, actually. I heard they used to, this is pretty crazy now. It doesn't happen anymore.

but the factory, I mean, the Foxcon and their competitors, they took on the inventory risk for the startups as well. So when the startups made a big projection in terms of the unit sales and they couldn't deliver, they were fine. Foxcon was stuck with inventory. I mean, that's a lot of nuance there, right? In order to create a value change, like to actually create the supply chain, It's actually different companies that have to collaborate, trust each other, and take risk with one another, actually. Yeah, it was very hard. If I'm honest, I felt like when it came our turn, the game had become a lot harder because of what happened in the past. So that's why we decided to make earbuds first.

We're like, okay, nobody's going to trust us on making a phone. Let's make something smaller, but equally complicated, not equally, but still quite complicated, because there's like antennas and Bluetooth and radio and stuff like that and battery. And let's just sell a ton of them. Like we sell a ton of them and then the factories are going to want to work with us. However, when we started making earbuds, nobody wanted to take our business either. Because they were like, hey, there's a thousand companies making earbuds. What makes you special?

Who are you? Just because you've worked at a larger company in the past doesn't mean you're going to be able to contact switch and make an earbuds startup successfully. So the only factory that wanted to work with us was a factory that had no other clients. Without us, they would go bankrupt. That's the only reason they took us up. Underdog plus underdog. Yeah, but it was a disaster.

We do the engineering of the product. We do the design engineering. And we also designed the manufacturing line for each product. And then the factory just has to replicate our design. Like each station, what is the task? And that factory couldn't replicate our process so that the, So in the end, the Pogo pin, the metallic part of the case that connects to the metallic part of the earbuds that charges it. The spring wasn't strong enough.

Oh, man. So for the first batch of ear ones, 90% of them couldn't charge properly. Oh, no. And at that time, I think we had shipped like 5,000 units, and we started getting a lot of feedback through our customer support channels. And we're like, oh, my God, this is like, this game over. So that must have been a scary moment, right? So you raise your seed, you have this grand vision and plan that, you know, this is, we do this and then we get to do the smartphone. Yeah.

And then out of the gate, you ship 5,000, and 90% of them are coming back as returns. Yeah, so we were super friendly with our customers. We just shipped them new devices. And we immediately stopped the production. And we immediately rented out two apartments just outside of the factory. And we put 15 engineers in those apartments. And basically, our engineers de facto became the factory. floor managers, just overseeing like that every part of the factory was manufacturing to our spec.

And then we got the quality up. Oh, nice. So we ended up selling about 600,000 units for year one. So you saved it? We saved it, but it was very, very uncomfortable and scary at that time. Yeah. What caused you to sort of roll up your sleeves right at that moment? Was it just a either we do this or we die?

Like, you know, some people who obviously can't make hardware, they just sort of throw their hands up and they say, well, I guess that's it. There's a beauty to not having another option. It forces you to survive. I've seen that multiple times in our journey. And each time we come out a little bit stronger, better processes or better teams or better partners, I think is that. It's like the desire to keep on living as a company. In terms of like nothing users or nothing sort of your stalwart customers, there's a sense of like, if you know, you know. What does that mean?

Like how did you cultivate that? I think it simply just means that our brand awareness is too low, I'm honest. Well, I mean, I guess you could argue that it's like a growing cult brand. You know, 600 mil a year in revenue is actually quite a lot, you know, in terms of how bigger company might be, but on the other hand, like, it's not, you know, a large majority of the smartphone market by any by any stretch yet. I feel this time is different. This time around our current users are partially tech enthusiasts and partially kind of creatives. People who like design, who like fashion and music. And we didn't have that community before. So I think because

we're, we've been a lot more design-centric this time around with nothing. It's really helped us attract a different type of crowd. Our Instagram feed is very curated, kind of like a hybrid between a luxury fashion brand and a tech brand. The visuals have really attracted a different type of user. So if you had to guess or give advice to people who are trying to make a hardware startup, what percentage should they be Tim Cook versus Johnny Ive? I think for most people, they should be 90% Tim Cook, if I'm honest, because survival is

the name of the game for hardware. when you survive and you pick up in volumes, you pick up in, when you pick up in volumes, you can get stronger engineering teams. You get lower prices. Like, it's so, this industry is so volume driven. So I think in the beginning you should be like Tim Cook. Over time, you can become more like Johnny Ive. Or you should be more like Johnny Ive over time as you create more differentiation in the product. It's not something people want to hear, I think, but I think it's the truth. Is there a max amount of Johnny Ive you should be? Yeah, maybe it's like 20%.

Yeah. 80% be safe. Yeah. 20% take a risk. And you can increase the threshold, 20% to something higher over time. So let's talk about the glyph interface in the context of sort of this Tim Cook versus Johnny Ive thing. It seems like a really good example of 90% Tim Cook, 10% Johnny Ive. You might have heard of Yersper, the founder of Teenage Engineering.

He's one of my... Legend. Yeah. He's one of my partners in this company. and I learned this one thing from him, and it's basically for every product you make, imagine if a user sees it for like two seconds and then has to sketch a defining feature of the product.

So we try and build each product with something iconic that people can immediately remember and attach themselves to. That was like the thinking behind the Glyph interface. On a product functionality level, we have this thought that, you know, So when Steve Jobs pitched a personal computer, it was pitched as the bicycle for the mind. It enabled us to do way more stuff creatively. However, the modern smartphone is just so far away from that idea.

It's making us more addicted. It's making us sad. It's making us watch garbage content on TikTok. So how can we make people more mindful about their smartphone usage? And we wanted to allow people to flip the phone over and just through lights on the back of the phone, know all the important things that are happening, so they don't have to always check the screen or turn on the screen. Because once you turn on the screen and unlock it,

you just want to do the next thing, and you just want to scroll a little bit on your Twitter feed or whatever. So we would have useful things like being able to set different patterns for different people, so you know who's trying to contact you, or we've done integrations with Google Calendar and Uber. So in Uber's case, you can see how far the Uber is without turning over your phone. It's like a countdown with the lights. Google Calendar, you can see how much time there is to your next meeting.

So just things that keep you away from kind of doomscrowly. Okay, we're going to do a segment around design. So purely from a design perspective, tell me your favorite sneaker. This is a hard question because I've changed. I used to collect sneakers, all the like collabs and stuff. But lately I've just been wearing kind of classic white common projects. Common project. Yeah.

What's your favorite Apple product? This might sound a bit strange, but it's the volume knob UI on the first gen iPad when it was still scuromorphic. That's the moment I fell in love with Apple. That's such a small detail, right? On the original iPad, if you swiped up, you got this kind of control panel thing with the volume knob on the left side. And it was like brushed metal.

And as you tilted the iPad, the gyroscope recognized it got tilted. So the light reflection on the brushed metal also changed. I was like, wow, if Apple cares about such a minute detail in the product, I'll trust them completely because they've really thought through everything else. We need to bring schmorphism back. I love it. I hate flat design personally. Yeah, same here.

It's very unpopular opinion. People love flat design, but I'm not a fan. So bring me back. What's your favorite watch? You know, it's probably my Royal Oak. Nice. Classic. Yeah. I'm not a super big smartwatch fan, if I'm honest. Yeah.

Like I get a ton of notifications on my phone and just having another machine to keep beeping. I was not a fan of that. Yeah, kind of a nightmare. Yeah. Best sci-fi movie aesthetic. Aesthetic? Yeah. Space Odyssey.

Yeah. A lot of our brand, we have a lot of our brand. And we have a lot of like Space Odyssey screenshots on our mood board for the brand. That's so cool. I'm super into Blade Runner. Oh, yeah. Yeah, 249. I don't know.

Anything, both like the original and the Denny Villeneuve remake, it's pretty amazing. Yeah, that's pretty cool too. We also have screenshots from Blade Runner. Oh, yeah, definitely. Carl, thanks a lot for hanging out with us today. I really enjoyed this conversation. And you built something of great value that, you know, in some ways. you've been through many ego deaths and then in other ways you're i could see the trajectory on this

we're just getting started i think yeah yeah do you have any last words for now uh you know to leave our audience you know a lot of people who are watching you might want to start hardware startups um you know you've created one of the uh hardest ones to do which is uh in the smartphone category what you have to tell them yeah i think there's no beating around the bush it's going to be tough but it's doable if you want to do it i think you should go ahead but maybe think about like the sequencing of things. Like in our example, like we had to get the earbuds to sell really well before going into the phone. Like how can we build credibility to do the next thing?

And I think some people watching this might be a little bit confused as to why do it at all when there's other things you can be doing and this sounds really hard. But I would just like to say that there is a lot of satisfaction in seeing people in the real world using a product that you've helped build, especially if they don't recognize you. If they don't recognize you as the maker of the product, that means your brand is growing in brand awareness and you're reaching new people.

I think that feeling is just so different compared to if you're making an app or some server-side infra. Well, thanks for working on it. And if anything, I'm kind of surprised that there aren't more. I think it's a testament to how hard it is to create what you've created. So thanks for joining us. Thank you for having me, and hopefully somebody watching this we'll create the next one.

You know it.