HaaS - An Investment Thesis for Hardware Startups
+BONUS: Announcing the first 2 hardware investments at Point Nine Cap!
Historically, innovation tends to happen in waves:
- 1970s: it was all about PCs — Intel (1968), Microsoft (1975), Apple (1976) — and enterprise software — Oracle (1977), SAP (1972)
- 1980s: hardware for communications — Cisco (1984), Qualcolmm (1984)
- 1990s: consumer internet — Google (1998), Amazon (1994), Yahoo (1994)
- 2005s: social — Facebook (2004), Twitter (2006)
As an investor, our job is to try to find which companies can define the next wave of innovation — and make sure we invest in them!
Today: SaaS is sexy again? Fintech? Mobile? Big data? … It’s not clear which one will make the next $100bn business.
Tomorrow: could it be hardware again?
If you compare hardware to software, you will get why it is “hard”:
Lean is not easy, at all!
Longer and costly development cycles: in software you can prototype quickly and iterate several times with limited capital — sometimes even a single developer can make it! Hardware requires iterating on physical products, which means upfront capital investment to develop and longer development cycles.
Harder to get customer feedback: in software, you can create a website, buy some ads and start getting visitors who generate feedback which allows you to learn and iterate. In hardware, even if you manage to build a prototype, it’s not obvious how you get this product in the hands of thousands of potential customers to collect their feedback in order to iterate.
Unique skills: the founding team is always key for the success of a startup, but while starting software can be done with 3 kinds of talent: product, marketing, sales; hardware requires an extra degree of diversity that pushes companies to be larger from day zero: product design, electrical engineering, operations, marketing, sales, etc.
Lower margins
In software the most relevant costs of delivering your product come from servers and third party services. In hardware, you need to take into account that a big chunk of the final price goes to paying the producers, the transportation companies and the distributors of the product.
Intensive in upfront capital
In hardware investments, extra patience is required: it not only takes time and money to build a product, it also takes upfront investment to get the product into distribution channels — you need to invest money to deliver the products to the retailers, who at the same time will pay you with +30 days delay.
For those reasons, among others, you might be able to understand why VCs have been avoiding hardware investments and focusing their efforts on purely software startups.
Why is hardware the new cool kid in the town?
While software is eating the world, we (still) spend most of our life interacting with the real and physical world.
Smartphones aside, the physical world is still a lot less smart and connected than the online one, which means, plenty of opportunities for innovation!
Others pointed before some of the trends that are lowering the barriers to entry into hardware, making it leaner and solving some of the financing issues:
- Prototyping platforms (arduino, raspberry, sparkcore, edison, etc.) and 3D printing allow hardware entrepreneurs to iterate faster and to cheaply find product-market fit
- Those prototyping platforms also leverage common software languages, which allow web developers to “recycle” into hardware developers very quickly
- Technology (battery efficiency, communications, etc.) is improving quickly while reducing its costs.
- Smartphones are ubiquitous, they get updated/replaced very often and are becoming the most powerful sensor platform out there.
- Pre-ordering online (kickstarter, indiegogo) allows quicker and cheaper early distribution for small batches, which brings earlier customer feedback and some financing upfront.
- Supply chain-as-a-service (PCH, …) takes care of financing and production at scale.
- Online eCommerce/Software distribution channels also work for hardware products
Entrepreneurs and capital are now jumping into hardware at an accelerated pace. It also helps that some hardware companies are IPOing — goPro, jawbone, etc. ;-)
HaaS: Hardware as a Service
So far, the early successes in hardware have been on the consumer front. But individual consumers are very unpredictable when they buy for themselves, while business customers tend to be a lot more “rational” (predictable?) when they buy for their companies — ie. would that product improve my business?
Hardware is already complicated enough on its own to add the unpredictable behaviour of consumers. At Point Nine we have an easier time understanding B2B models and we have been investing very early in great SaaS companies. When we started looking at hardware, we tried to find opportunities where the dynamics we understand in SaaS also apply, including:
- Subscription/recurring business models
- Online direct distribution channels — content marketing, SEM, etc.
- Products that are “almost software” — where most of the “intelligence” is on the software side, not the hardware device.
Show me the money: announcing our first hardware investments
We not only believe in these opportunities, but we are putting our money where our mouth is. In the last weeks, two of the first hardware investments of Point Nine were announced — in alphabetical order:
Automile.io all cars connected
We’re very impressed by Jens and his team — together, they have built an elegantly simple and API-first solution to manage a fleet of vehicles.
The opportunity is clear: cars and trucks are an integral part of the transportation infrastructure, automile’s product is amazing and the team is unique!
KISI Forget about keys
Bernhard-ware and the team have built a solution that allows companies to control access to their buildings with a device we always carry: our smartphones! Of course, the system also provides APIs which allow you to generate virtual keys, with an expiration date, on the fly.
What do those two companies have in common?
We followed the same criteria we use to evaluate other investments:
a) Great markets: both of them tackle massive B2B markets.
b) Great products: as mentioned before, in hardware, building a product that “just works” smoothly is even more complex than in software. Automile and KISI have both cracked it! It works, it’s easy to use, it’s easy to on-board …
c) Early traction: both companies managed to build some early traction, both have enthusiastic early adopters, and even more interestingly: both managed to sell directly online to their customers.
In summary, all three aspects are the result of extremely talented teams that have managed to build a commercial product in a very lean way.
