Hardware Was Just The Beginning

An evening with Anthony Wood: How Roku’s device strategy set the stage for a new ad platform

A saying commonly repeated by entrepreneurs and investors in the hardware community goes something like this: “Hardware is hard.” Compared with the relatively low upfront costs and compact development cycles faced by software startups, hardware companies tend to have significant capital expenditures early in their life cycles. Add to that the fact that physical product development tends to take more time and hardware revenue models tend to be less predictable than software models, it’s no surprise that building a successful company in the hardware space isn’t easy. But after sitting down with Roku CEO Anthony Wood, it’s pretty clear that hardware was just the beginning of his plan.

Roku is a video-streaming platform that built its customer base by selling digital streaming devices, which arguably was at the forefront of the “smart TV” revolution. As of March 31, 2018, Roku reported more than 20 million active accounts and is flying high after a very successful initial public offering last September. While hardware may be hard, Anthony has proven that building a successful company from the ground up, starting with hardware, isn’t impossible, either.

To learn more about Roku’s path to success, we had a lively discussion with Anthony during an intimate Silicon Valley Bank dinner that included several CEOs of early-stage consumer-focused companies. We’ve condensed the many insights shared that evening into four key tenets that will help put your consumer hardware company on the path to success.

Build a lasting model for a lasting business

From the start, Roku saw hardware as a means to an end: to build the leading platform for streaming video. Today, the majority of Roku’s revenue is from advertising, subscriptions and licensing. The company’s active account base comes from three sources: stand-alone players, “Roku powered” cable systems and Roku TVs from multiple manufacturers. In Q1 2018, one in four smart TVs sold in the United States was a Roku TV.

Almost every hardware company faces a similar question: Can it find a path to sustainable revenue beyond hardware sales? Pure hardware companies find it difficult to attract investor interest, and they generally trade at multiples of 2× revenue or less. Platform companies, on the other hand, often trade at 6× or 7× revenues. Early on, Roku was focused on building a multipronged platform strategy that included advertising, subscriptions and licensing — and the strong growth in platform revenue has paid off in the form of a strong IPO.

Just ship it? Not so fast…

One of the key takeaways of the evening was the idea that a smooth first launch is critical to the long-term success of a consumer hardware company. As Anthony said, “The first consumer product to market cannot have issues or bugs.”

Roku’s initial product might not have had all the bells and whistles, but it worked very well and had a simple and intuitive user interface. As a result, first adopters were quite happy, and excellent consumer reviews led to broader market adoption. While online reviews may seem trivial, Anthony was adamant that a few negative reviews on Amazon early in a product’s launch could completely derail a consumer-facing company. With that in mind, it’s important to take your time to ensure that the first product is rock solid in its functionality. If it’s not, your company’s reputation in the market is at risk. This is especially true for hardware, where a small design flaw cannot simply be “patched” the way it often can be with software. If you’re trying to build a successful consumer hardware company, it’s essential to make sure that the first product on the shelves not only works but works well, even if it’s not an ideal product.

Build it (right), and they will come

From the very beginning, Roku had a vision of building revenues beyond hardware sales. Roku’s goal was to use hardware as a means to acquire a sizable client base and drive advertising and other non-hardware revenue through the platform. More recently, the company has expanded its platform strategy with the launch of The Roku Channel, a free ad-supported video channel that has rapidly attracted viewers and advertisers alike.

Given Roku’s platform strategy, acquiring clients at a reasonable cost was critical to the company’s long-term success. For Roku, having a solid product helped keep its client acquisition costs down, as it led to word-of-mouth promotion. While this organic approach is perhaps underappreciated when compared with radio, TV and billboard advertising, it remains the most cost-effective method of gaining new customers.

That said, spending money on client acquisition is not a bad thing if it’s done strategically. As Anthony made clear, while expenditures on radio and billboards made almost no difference to Roku’s client acquisition, spending money with its retail partners for end-cap displays and shelf placement made a significant difference. No matter what you spend on marketing, client acquisition often ties back to the product itself: Customers will evangelize a great product, which is the best form of hardware marketing.

Cost management is king

When it comes to product development, a good leadership team is cost-conscious while refusing to sacrifice functionality or performance. If this balance sounds difficult to achieve, it is — but it’s also key to a successful hardware business. Because Roku’s ultimate plan was to generate revenue via advertising on the platform, some would argue that giving the hardware away for free would be the quickest path to acquiring a sizable client base. While this model would have been feasible for Roku, management decided to continue selling the hardware — and were able to do so at fairly impressive margins because of their cost-conscious approach.

By focusing on managing the bill of materials and cutting costs without sacrificing quality, Roku was able to sell its units at an attractive price. This focus on controlling costs allowed Roku to get the hardware into the customers’ homes, building its client base and driving revenue in the process.

Where does your hardware company go from here?

Although Roku has been a smashing success, the journey was not without challenges. Roku was able to keep costs down, consistently grow its user base and increase advertising and other non-hardware revenue, but fundraising was never easy. After the successful IPO last fall, Roku will undoubtedly face new challenges. With that in mind, it’s important to remember that while these four tenets will help your consumer hardware startup on the path to success, the real challenges are often mental, not physical. To build a successful consumer hardware company from the ground up, you must be prepared and resolute — and sometimes rely on plain old grit. So, while hardware may be hard, there is another saying the bold entrepreneur should remember: “Nothing worth having comes easily.”