Hardware is NOT the New Software

Hardware is not for the faint of heart

It’s January: time for gym memberships to increase and lofty generalized predictions to be made. The hardware startup world isn’t immune in the slightest, especially after the major acquisitions of Makerbot (by Stratasys) and Nest (by Google). It seems hardware is gaining the attention of nearly everyone, especially private investors. Everywhere I turn, someone is saying “hardware is the new software.” Here’s why they’re wrong.

Software

Software is wonderful. It can be deployed to millions of people instantly. It is highly implementation agnostic; one language/library for one developer is probably relevant for many other developers. This means tons of developers can find and provide help online, for free. It is intellectually deep yet relatively easily accessible. This means you can get into some fascinating problems/theory without years of classes and training. It’s extremely high margin. This means it’s easy for investors to get excited about scale, especially when eyeballs matter more than dollars for early traction. For these reasons, and many more, software is eating the world.

One minor caveat: humans don’t interact with the world through pure software (at least not yet). By definition, we need atoms to tap into the extraordinary power of bits. As computing units become smaller and more distributed, the room for startups to disrupt markets of all shapes and sizes becomes unfathomably large.

Traditional Hardware

Despite the fact that 9 of the top 10 largest tech companies in the world (by revenue) are hardware companies AND most of the early venture firms made the vast majority of their returns on hardware, it has been one of the third rails of the startup world for as long as I can remember. When you compare hardware and software on paper, it’s fairly justifiable: cost of goods is much higher, development time is longer, iterations are harder, manufacturing must be done, distribution channels are expensive, teams need more experience, cash flow is constrained, AND you still have to build a software product. But much of this is changing.

New Trends

There are some wonderful trends spurring new kinds of hardware companies. Everything from Arduino to 3D printing to FIRST Robotics are helping get a new generation of young people excited about building things again. But these trends are not directly responsible for promoting this new hardware startup ecosystem, despite all the hoopla. There are however some big (far less sexy) ones that are:

Data access ubiquity Contract manufacturing Multi-function SoCs (system on a chip) Falling component costs Battery/power optimizations Access to early-stage capital Distribution channels opening up

I’ll leave diving deeper for another post, but without a question, it has become far easier over the past ~5 years for under-capitalized startups to build high-quality hardware products and begin to disrupt big markets. This means there is giant room for building great companies.

…But

By no means is building a hardware product the same as building a software product, now or ever. Bits are inherently easier/cheaper to develop and distribute than atoms. This translates into plenty of differences for young hardware companies, but here are a few things to pay particularly close attention to:

Build smarter prototypes—Conduct prototype builds as science experiments not engineering exercises. Have a hypothesis about one specific thing, build something to test that hypothesis, test it, and then analyze your results. Too often startups build a full functional prototype before testing basic assumptions they’re making about their users. Reduce your prototype iteration time as much as possible, and then a bit more. Master your COGS —You BOM (bill of materials) and COGS (cost of goods sold) dominate consumer products. Most consumer product MSRPs (manufacturer suggest retail price) are between 2.5x and 4x of what the product costs to make. This means a $1 increase in a part can be as much as a $4 increase in the shelf price that the consumer sees. Know and master these numbers for your product. It drives your entire business. Manufacturing can be easy — If you were to ask GoPro what are the top 10 challenges they face this year, I guarantee you manufacturing won’t be on that list. Like many things in life, manufacturing is easy if you know what you’re doing and nearly impossible if you don’t. Rather than guess and check, work with someone who knows what they’re doing. Ideally this person/company has manufactured products from a variety of CMs (contract manufacturers) building relevant products. We can’t say enough good things about our friends at Dragon Innovation. Distribute wisely—Consumer product companies used to have to raise millions of dollars to test market fit. No longer. With lean manufacturing, high-quality rapid prototyping tools, and crowdfunding, startups can see if their product has relevancy without breaking the bank. This is now common, but it goes without saying: do not start selling your product into Target on day one. Smart distribution means slow growth in the beginning. Start by selling direct but understand the differences between e-tailers, special retailers and big box stores so your margins are setup appropriately from day 1. Understand that you will make make mistakes with your design/manufacturing early on and your distribution mechanism only amplifies these mistakes. By going slowly, you can work out kinks in everything from ideation to customer service. It also has a nice side effect of maintaining (and sometimes increasing) demand. B2B—So many hardware companies are trying to build a sexy wearable consumer fitness tracker. Don’t be scared of less-than-sexy but huge markets. If you’re a consumer product company, you can’t win big unless you’re the market leader. There are so many fantastically important B2B/enterprise problems that go painfully neglected because they’re not sexy. Solve some of them, they’re HUGE!

Hardware will never be as easy as software, but as long as startups and investors are prepared for these differences, the potential to build world-changing hardware companies is higher than ever.