European Consumer Hardware Start-ups:Fad or Trend?

I have seen a growing trend of more and more European Consumer Hardware startups. My former partners at Balderton have recently invested in Roli. I am personally in love with Kano (congrats to Saul Klein for discovering the company).

Are European hardware based entrepreneurial projects just a fad (fashion of the time) or a new structural opportunity ?

To debate this topic and understand the key drivers of such phenomenon, I have asked for help to my friend Martin Källström, CEO and founder of Narrative: a stamp-size wearable camera.

Roberto: We met for the first time when you had just an idea and a small plastic box without electronics. I am sure you must have seen a lot of investors in that period. How was it to convince folks of your vision?

Martin: You know, the hard part was actually convincing myself of my vision. I worked a lot with ideation and the idea of a wearable camera just made all the other concepts pale in comparison. Because of my own emotional connection but also because it merged the mega-trends of photos in social media and wearable technology.

Roberto: I get the emotional connection but hardware? Really? In Europe? Didn’t you feel all the odds against you?

Martin: I did. When I realised what crazy project I was going to undertake, I got paralyzed by fear for a full week. I was going to invest all my contacts, my reputation, my network in something that would in all likelihood fail. But then I realized what drives me: it’s not money, it’s not reputation, but to work on the best idea I have and learn something new every day. And even if I failed with Narrative, in no way could I ever learn more than doing hardware+software.

Roberto: OK, I get the motivation thing, by the way that is fairly clear to whoever meets you for more than 15 min but let’s start to get into some specifics here that could be helpful to other entrepreneurs. A prove of concept for a consumer internet service is a well known process: create a MVP, start driving traffic and measure results. Often the upfront investment is null or close to null. Once you had the original idea of Narrative how did you do about testing the concept?

Martin: You mentioned the plastic prototype I had. It was actually key to convincing people of my vision. 3D printing was just starting to get headlines in 2011, and almost no one had personally held something 3D printed back then. It was super simple to create, after a few weeks of sketching with pen and paper I downloaded Google Sketchup and 4 hours later I had submitted a first design for printing to Shapeways.com. For $25 I had something that most people I showed it to thought would cost $3000 and a lot of industrial design.

Roberto: Interesting, could we then say that 3D printing is a first new game change in the world of consumer hardware? I buy that! However, one thing is to test if people like the form factor of an idea another thing is to understand their feedback in terms of consumer experience. Did you do any software prototype at the same time?

Martin: I was actually lucky enough that the software prototype existed. A startup in the Netherlands had built an app called Lifelog which took a timelapse and rendered to a movie. It burnt through the battery of your phone in 2 hours which made less usable for everyday use, but it was the proof of concept I needed. Around then I realized that to make it believable that I could pull it off I needed a hardware-oriented CTO to join me.

Roberto: Ah that is pretty cool. Are you saying that you have piggybacked on someone’s else software to test your value proposition? Quite interesting! This reminds me of the Pretotyping approach evangelised by Alberto Savoia.

Martin: Yes, there was actually a lot of hobbyist efforts to create both hardware and software for lifelogging. Just that no one had applied the latest consumer hardware components on solving the challenges. I realized the need for an MVP having grown into entrepreneurship with Eric Ries’ Lean Startup concept as one of my ten commands.

Roberto: Let’s talk a bit about Kickstarter. I felt for you was an amazing tool to test your MVP. Would you recommend other entrepreneurs to use it? And more importantly, when is the right time to use Kickstarter? I have the impression that sometimes entrepreneurs use it in the wrong time.

Martin: Kickstarter is a platform to acquire three important things in my view: funding, marketing and validation. You need all three to start a new company and you can get them in a lot of different ways, but with crowd funding you can at least partially find all three from one single effort. In 2012 we came to the conclusion that Kickstarter was the right channel. A lot of different factors played into the decision.

Roberto: Can we then consider Kickstarter another game changer? What other key new game changes do you see that can really help to forge an ecosystem in support of European Consumer Hardware companies?

Martin: Yes it’s definitely a game changer, although it still takes a great effort to pull through a successful Kickstarter campaign. You get very little for free. The biggest other game changer is that there are literally thousands of excellent hardware engineers locked up in the prisons of large corporations that are starting to get tired of building yet another wifi router. There are immense talent pools available to be tapped by startups.

Roberto: I would like to discuss a last point on validation: SXSW . We re-met there and is exactly there that I made my decision that you were into something interesting. I do not think I ever told you this. But it’s true. SXSW was a place where I could see in people eyes the reaction to your product. Was this just me or for you that conference in 2013 meant something too? Are similar events helpful or just a waste of time and money?

Martin: SXSW 2013 was a surreal experience for us, we saw almost nothing of the conference but had interviews back to back for 5 days straight and on top of that an NBC crew that followed us around filming us doing interviews with other crews. It was crazy and the media impact generated a lot of sales and recognition. Starting to get recognized in the streets (even though just for the duration of the conference) built confidence in us. Conferences are valuable for ideas and networking in some phases and for marketing in others. When you’re looking for new ideas, nothing interesting ever happens back home in the office. You need to get out. And when you’re looking for attention to your product, conferences are made up of early adopters that are easy to reach.

Roberto: No products are perfect. In consumer internet we are now custom to fast development cycles, A/B testing, analytics to understand user behaviour etc. How do you translate all of this in the world of hardware? Startups are about adapting, learning, moving fast. How do you do that in the world of consumer hardware?

Martin: This I think is a key question. In some ways, iterations over hardware are incredibly stretched out in time, once released you will not get a chance to make major improvements to your product in two years or more (ignoring smaller hardware/firmware revisions that need to take place regularly). But Internet of Things changes all that. By having a connected device with a service attached, now you can iterate over the user experience very rapidly. Startups that get that will be able to compete with the existing giants in the industry, because they have not yet rebuilt their organizations for the new environment.

Roberto: To scale software is very cheap in these days. To scale hardware implies significantly more cash. Is equity the best way to finance consumer hardware companies? Do you have a view on equity v/s debt to finance your working capital?

Martin: The reason hardware startups is more expensive is not actually the hardware in itself, because if you have the right people in the team even large-scale manufacturers will actually help you a lot without charging for their time. They are competing to find the next big startup. But what makes it expensive in the early stage is that you need both hardware and backend teams, and probably app developers on top of that.

Roberto: OK Martin but to add 10M users to Narrative you need to produce 10M cameras. You need to agree with me that this is slightly more capital intensive than to open up some new servers on AWS. Is there such thing as consumer HW on demand?

Martin: We brought in $500k from Kickstarter and that was enough to finance the production start upfront. But scaling can be another beast, you can end up with expensive components in your product that has a lead time of 12 or even 24 weeks which creates cashflow problems when you grow. So far we’ve been able to handle that with a combination of equity and debt financing, with debt mainly bridging our equity rounds.

Roberto: I wonder if there is a business opportunity around this. I see a lot of fintech initiatives right now in Europe, perhaps somebody will focus on some sort of growth platform growthstarter v/s kickstarter?

Martin: I believe there’s an opportunity for VCs normally doing late stage financing to look at hardware startups at a slightly earlier stage because they are a bit different financially with higher capital demand and gains when growing. I think a crowd funded growth funding platform would be hard to put together because the capital needed is so immense. Or you can say it already exists and is called the stock exchange ☺

Roberto: This is cool. I love when entrepreneur give advices to the venture community. Let’s get some later stage VCs gong after the European Consumer Hardware opportunity. ☺ Martin, last question: how do you see Europe for consumer hardware? Is there a difference from building a company in Stockholm or London or any other European city? And how do you look at the US?

Martin: My main advice would be to start where you are. If you live in Europe, Europe is better. If you live in US, US is better. Stockholm and Sweden is best because of the governmental support and safety net that co-exist with really talented people here. US has been ahead of Europe in startups because they solved the chicken and egg problem between capital and talent earlier. But Europe has a bright future because the large corporations are starting to be replaced by smaller ones here as well. There is another industrial revolution ahead of us. If you are a hardware engineer I would encourage you to start your own company now and be part of the revolution.

Roberto: Martin, thank you very much. Looking forward to see Narrative becoming a huge company that can acquire a few US companies ☺

In the meanwhile… Just last week I met a young Italian entrepreneur who is working on a new hardware company called BrainControl that uses a brain-computer interface (BCI) technology to interpret the electrical signals corresponding with certain brain activity. Not yet mass market but amazing impact on the life of people suffering from severe pathologies such as Amyotrophic Lateral Sclerosis (ALS).