Some thoughts below on interesting and evolving hardware/deeptech investing landscape.
Lately such startups have captured the buzz in Silicon Valley — from the promise of flying cars to drone delivery to landing man on Mars. They inspire confidence that the technology innovation of Silicon Valley is not just limited to selfie-filters, and that private industry/startups are pushing the frontier forward in technology, healthcare etc even if government and large corporations appear to be pulling back.
But deeptech investments require capital to build, grow, manufacture, and distribute — and where is that going to come from? Lots of discussion these days on interesting foreign sources of capital getting attracted to such moonshot ideas, but perhaps also US based late stage investors? fwiw, I think well-built hardware startups are poised to be attractive late stage investments for US and foreign investors, especially if they can extend their business model past just hardware sales, and into value add services as well — either on their own or in partnership with other major tech companies. That’s true for home automation and wearables to autonomous cars, drones and VR etc — the entire gamut.
I was with my good friend Matt Witheiler in NYC this week that sparked this line of thought. He has a unique perspective on this given his past experience as an early stage hardware VC, and now doing late stage, pre-IPO private/growth investing at Wellington Capital.
Matt raised a good point that while there was considerable excitement for ‘DeepTech/FrontierTech’ among early stage VCs, that excitement level had not yet reached traditional late stage/growth investors, and public market investors. We pondered if there was a structural problem in how fundamentals looked for hardware startups, or was it just a matter of timing/coincidence.
Recent/public failures of some hardware related startups (e.g. Pebble, Quirky etc), combined with how some hardware public market stocks have done (e.g. FitBit, GoPro) has also depressed some of the excitement for hardware, especially among investors who consider an IPO to be the desired exit. But there are int’g other dynamics at play that can’t be ignored. For example, hardware is not being developed by startups, but is now also interesting to large tech companies like Google, Facebook, Amazon, Snapchat, etc. That is infusing enthusiasm and excitement among entrepreneurs and technologists alike. Hardware is starting to become a gateway into peoples’ homes and their everyday lives — a way to make them more engaged with otherwise software only offerings. There are more overall dollars that become available for hardware enterprises if it becomes a path to unlocking value in software and hardware enabled services.
One thing I like to point to investors who ask questions like revenue traction, business model prove-points from early stage companies is to think about big successes for early stage investors in companies like SpaceX, Tesla, NEST, Oculus etc. These are all deeptech companies that had bold ambitions and took big, audacious bets. But these are also companies that took in quite a bit of capital before they could establish revenue lines and clear go-to-market strategies. Investors had to believe in the opportunity and the teams, and those who did were handsomely rewarded.
In addition to above-mentioned companies, there is also a new set of exit comps emerging in companies like Cruise (acquired by GM for ~$1B), Otto (acquired by Uber for ~$680M) etc. These were both pre-revenue companies acquired for their deep technology backgrounds, expertise, networks among the hard-to-find engineering talent in Silicon Valley, and the speed with which they were executing. Incumbents are also realizing that acquiring such companies may be a better way to kick off their own programs than to build from scratch. This stuff is hard to do, and kick-ass teams that can execute well in these spaces are hard to build, not to mention the kind of inspiring leadership that is required to keep them together. It is good to see (from an investors’ point of view) that strategic partnerships (and M&A) is becoming more common than before. Bodes well towards attracting more capital into deeptech startups.
Regardless, there are fun times ahead for all of us involved in such companies…best thing is that while all this gets played out, innovation continues to marches on. Maybe we will get those flying cars we were promised!