After quality misfire, Dropcam begins selling new HD camera

Dropcam founder and CEO Greg Duffy argues passionately that cloud is creating huge opportunities for startups to build hardware, just as his company does.

He's also learning first hand just how hard that can be.

This morning the company began taking general orders for its newest cloud-based home-monitoring camera -- about two months behind schedule. The setback stemmed from a good problem (big customer demand) and a painful one (sloppy manufacturing by the factory in China).

And so Duffy and his team have spent the last few months scrambling to figure out why the image quality wasn't up to snuff. He oversaw the switch to a new manufacturer in China, and he did a ton of damage control, telling any customer with a pre-ordered camera that they can have a replacement without having to return the old one.

"I've been quoted as saying, 'Don't ship until it's ready,'" said Duffy. "This is definitely our test of customer service mettle as a startup."

Dropcam rolled out its latest camera at CES in January, and the response was huge. The camera adds a bunch of features -- such as HD and night vision -- that you can read about here. To do that and more -- all while bringing down the price down to $149 from $199 -- Duffy decided that Dropcam would begin manufacturing the device itself, ending its partnership with Axis Communications.

To oversee that, he made a big hire, bringing on Doug Chan as vice president of operations. Chan ran manufacturing for Pure Digital, the company that made the Flip videocam before it sold to Cisco.

Duffy was psyched about all the improvements. The camera got sweet coverage at CES, and the orders came flying in. In the first few weeks -- you can see my video with Duffy from CES here -- Duffy said Dropcam received more preorders than it received for orders overall for 2011. He won't disclose specific numbers, but he did reveal that last Dropcam's revenue last year was well over $1 million, so clearly the post-CES sales were strong.

The problem was discovered soon after some people received their preorders. "We immediately noticed customers giving feedback about the image quality," said Duffy.

Part of the problem, Duffy said, was that the factory he was using in Shanghai was good at small runs. But as the volume increased -- and demand was 10 to 15 times what he had expected -- quality went the other way.

He and Chan decided to route the devices through Dropcam's San Francisco headquarters, where they inspected them. That's when they discovered how big the problem was and decided to find a new factory.

"Doug flew to China and started things all over," said Duffy.

They switched to a factory in Shenzen, going with the same one that made Flip Cameras and where Chan had a relationship. In the process, Dropcam upgraded the lens, and a few days ago the company again began fulfilling preorders.

"It's probably one of the best problems that a startup can have -- chasing demand," said Duffy.

And so now, with a ton learned about the challenges of making a device in China, Dropcam is officially shipping what it bills as the "world's smallest Wi-Fi monitoring camera."