#DigitalSkeptic: JOBS Act Maker Investors Face Major Retail Hurdle

FLUSHING MEADOW PARK, QUEENS, N.Y. ( TheStreet) -- Austin Frawley didn't need to make the trip here to the New York Hall of Science, this year's site for the World Maker Faire, to figure out the big business problem lurking in the big "maker movement."

"With these new startups you can tell pretty quickly that they're only in it for themselves," Frawley told me on the phone last week, long before the weekend's festivities.

A new generation of investors, let loose this week by the deregulation of private investment via the JOBS Act, will want to pay close heed to Frawley. He's director of operations for Kidding Around, a chain of three upscale specialty toy stores in Manhattan and Northern New Jersey. Frawley grew up in the world of actually selling pricey, hip gadgets to kids and young adults and as such offers a unique perspective on the red-hot market of privately financed pricey, hip products enabled by a new generation of 3-D printers such as MakerBot, open-source chip development platforms such as Arduino and Raspberry Pi and computer numerical control tools such as ShopBot.

His mother started the business 23 years ago, and over the past two decades this 30-year-old has witnessed one major business innovation onslaught after another.

"We got so beat up on price with Walmart ( WMT), Toys R Us and Amazon ( AMZN)," he explained, "that you learn the hard way that even the greatest product in the world will not be something you can touch if the price is wrong."

Frawley is blunt about the pricing challenges the new generation of smart products faces.

"We are really excited about some of the toys coming out of these companies," he said. For example, Frawley was initially attracted to a line of snap-together circuits and control kits from a Manhattan-based company called littleBits.

"They are here in town. It's a great toy," he said. "But we took a look at what they are selling it for online, and there is no room left for the retailer."

Makers don't have much room to make any money
To get a feel for just how serious the retail pricing challenge will be for the larger maker movement, I made the trip out here to check in with some of the maker movement's biggest movers. And sure enough, Frawley's take on the challenges of making money as a "maker" hit a bullseye.

"It's true. It's a problem," Ayah Bdeir admitted to me in front of her very crowded littleBits fair booth. "It's not really the price, it's the margins. There is not much profit for retailers."

Bdeir, an MIT grad who has presented about the inner workings of the maker movement at New York University, CERN, TED and many others, explained that she -- and most small, smart-product startups -- are caught in a brutal global supply chain bind where the economies demanded by our race-to-the-bottom retail infrastructure have little room for the custom, small-lot orders her company places.

"We produce basically at the one- to 10,000-product level, and retailers need us to be at the 100,000- or million-product level," she said. "I feel I can get littleBits to that point. But I wanted to make sure my product was dead-on perfect before we made that jump. It's something we are going to have to solve. But retail is going to have to wait for us."

Bdeir however, was adamant that both her company and companies such as Apple ( AAPL) have a solid track record for getting people to pay for quality. She estimates that roughly 65% of the kits she will sell this year will be littleBits' most expensive, at $199.

"That tells me there is more price elasticity in products than people want to admit," she said. "People don't want crap for their kids."

Retails still needed for scale
Before Web-intoxicated investors dismiss Frawley's and Bdeir's perspective as unique to toys, he warned that some of the smart-product industry's smartest people confirm that a deep and bitter battle looms between smart-product makers and the people who will sell them.

"I think all startups need to work out their details online," said Haytham Elhaway, executive director of the Zahn Center for Entrepreneurship, one of New York City's rapidly expanding hardware incubators, located at City College of New York in upper Manhattan. Elhaway explained that Web or no Web, retail is still critical for getting the large orders needed to create a truly low-cost product.

"If you want to scale you have to go through retail," he said. "And there are big challenges there" -- which, by the way, is exactly what Frawley has been saying all along.

"If you can only make a product for a wholesale price that is the same as your retail price," he said. "Who do you expect to do business with you?"

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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