Fixing what’s wrong with hardware startups

Five pointers to increase the odds of engineering a great hardware startup.


Attend Shahin Farshchi’s free webcast “5 Tools for Building Value Into Your Hardware Startups,” being held May 19 at 10 a.m. PT.

It is an amazing time to be a hardware entrepreneur: Companies like Arduino and ElectricImp are abstracting away tedious device and back-end development; Shapeways (disclaimer: my firm Lux Capital is an investor) and Advanced Circuits are turning around beautiful prototypes in days; while AngelList and IndieGogo are democratizing access to sophisticated investors, which in turn facilitate access to money, partners, and amazing talent.

In their rush to introduce the next Jawbone, Beats, Nest, FuelBand, GoPro, and Dropcam, many fledgling hardware startups — and their investors — seem to be simply rolling the dice. Rather than truly understanding the dynamics of their prospective markets, they are producing marketing videos that could otherwise pass for Super Bowl ads. Rather than understanding their competitive landscape, they are producing designs and out-of-box experiences that would make Steve Jobs proud. Many aspire to achieve Oculus’ visibility, and the acquisition offer that ensued. This puts incumbent consumer electronics companies in an enviable position: free market research and product experiments with an option to acquire any breakaway company. Although there is always an element of luck in every startup, here are a few pointers to increase the odds of success.

Emphasize “product” over “gadget”

Hardware entrepreneurs have a lot to learn from their software counterparts with respect to product development. Having coded for a mix of small and large software companies, I’ve appreciated their maniacal and obsessive focus on delivering product. A collection of features is not a product. Performance does not translate to product. Clever marketing is certainly not product. A product is a solution that creates tangible and measurable value for a customer. Software developers are religious about product. They are aware of the infinite ways to implement a function, and it is only a matter of time before they are outperformed, with typically no patent protection. Their survival depends on delivering a product that their customers will use, love, and refuse to set aside for the inevitable new-and-improved offering — ideally as a result of high switching costs and learning curves. A beautiful and novel gadget in clever packaging does not represent value, nor is it a valuable product.

Build a pipeline of great products

Many hardware entrepreneurs are under the impression that a successful product translates to a successful company. Most have been witness to the acquisitions of hardware companies driven by great product — hence the obsessive focus on product. Although it is absolutely necessary to develop a great product, it is not sufficient for building a great business. In addition to product, a great business enjoys attractive economics from a growing pipeline and variety of great products that enjoy a sustained advantage over its competitors’. Make the case as to how your company’s first product will fit into a growing portfolio of amazing products, and how this will be the underpinning of an amazing business.

Understand competitive advantage

Few hardware startups I have interacted with understand their competitive landscape. With their emphasis on features and aesthetics, they fail to appreciate the few basic factors that account for competitive advantage: supply, demand, and economics of scale. The supply of cheap components, rapid prototyping, capital through crowdfunding campaigns, computer-aided design tools, and rapid manufacturing are common to all hardware startups. The existence of iBeacon, WiFi, Bluetooth, USB, and other interoperability standards, while reducing friction, cause disproportionately lower changeover costs to copycats for whom the trail has been blazed by the pioneers — with each successive entrant having access to better technology at lower cost. As a startup, it is naive to expect to achieve the economies of scale of giants such as Apple, Samsung, and Sony, who can churn out amazing product and deploy armies of the best marketing talent on a whim. The behemoths benefit from spreading their R&D and marketing expenses over a huge number of global customers, thereby placing the upstarts at a fundamental competitive disadvantage. Do a pre-mortem assuming the scenario where cash-rich incumbents attempt to encroach on your market.

Remember to capture value for your shareholders

Though many public and private investors are enchanted by beautiful product, they have a responsibility toward their investors and employees to generate outsized returns. Therefore, hardware companies need to show compelling evidence that there will be growing demand for their current products, while charting the path for future revenue streams. Future revenue streams can come from services offered via current products, such as iTunes services on iPod/iPhone devices, or future products. GoPro and Nest have built — and reaped the rewards from — rich, growing communities that have catalyzed their transcendence from simply being a portable camera and thermostat, to being media and platform companies, respectively. Unfortunately, GoPro and Nest are the exception rather than the rule, while many other hardware companies remain relegated to being gadgets that face obsolescence from the day they enter the market. How will you maintain margin on your product, given the inevitable onslaught of copycats benefitting from cheaper and more powerful components? What is the future product pipeline that will underpin the continuous growth of the company? Although your product may be smart and beautiful, why would it be the basis of a valuable company?

Don’t ignore the obvious signals

Many hardware companies, especially those operating under the “IoT” banner, talk about the virtues of sensing and tracking assets. RFID made similar promises, but evidence from the recent acquisition of Motorola Solutions’ Enterprise business by Zebra shows that customers and investors don’t reward asset tracking solutions. Although the value proposition impacts all of us, from checking out at grocery stands to opening our garage doors to boarding airplanes, returns to investors have been elusive. What’s your value proposition? Why will the M&A and public markets value your company?

Cropped image on article and category pages by Mishimoto on Flickr, used under a Creative Commons license.

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