Normaly me neither. In that particular case so it makes sense. Hardware development costs tons of money, especially when done by throwing highly paid engineers at the problem as the only idea. And when it is easier to get funding through a listing, but not enough yet, the company doesn't have a product yet but is public. Not an ideal place to be, for sure.
I agree completely, but I still think it's interesting to explore the data behind WHY hardware is hard. As a hardware founder who went the Kickstarter path (along with 56% of hardware companies), a lot of what the article says about early funding resonates - crowdfunding isn't enough, unless you're wildly successful (and even then, not always). It may seem obvious to you, but it's something most aspiring hardware founders I talk to don't understand (and I didn't really grasp either).
The crowdfunding platforms bill themselves as just that - funding platforms. Once you raise on Kickstarter or Indiegogo, you're supposed to be able to take off like a rocket. The only problem with the story they sell you is that most startups don't take off, even after a successful campaign. You could say maybe they didn't raise enough money (and in most cases, I think you'd be right), but that still doesn't solve their problem - they raised what they could. If they couldn't raise enough money through crowdfunding, is crowdfunding really a viable option for hardware? And if not, why do over half of hardware startups choose to go that route?
On the other hand, maybe the horrible survivor rate for hardware startups is partially due to crowdfunding. After all, it allows companies to raise funds without being vetted in the same ways that a VC-backed company might be. Maybe it allows a lower quality of product/company/founding team through the gates, and as a result, we see a lower success rate for hardware.
The bottom line is I have no idea, but it's interesting to get a peek at the mechanisms behind "hardware is hard", rather than just falling back on the mantra and ending the discussion there.
Hardware startups have been bought before. This isn't a unique event.
I worked for a hardware startup for a couple of years and VCs being cautious about the category is very well deserved.
It is easily an order of magnitude harder to develop a successful hardware product than a success software product. And even after you've sold a million of them a design defect could show itself that makes all million of them break and destroys your entire company overnight.
This is the thing that gets me. There are plenty of people who would be willing to design around existing constraints, just because they think the tech is cool and they want to see what they can do with it.
But the cost of entry is mid-4-figures, between the hardware itself and the required development equipment. It's obvious that the people making the hardware and platform aren't a wide-enough cross-section of the public to create what business interests or consumers don't know that they want yet. They're shooting themselves in the foot, trying to maintain control over the platform.
The following is a guess, I can't speak for sure the true reasoning if there is one.
I think it's not that incubators and investors aren't willing to invest in hardware development companies but its much easier to:
A] Understand the software business as most investors/incubators probably have strong knowledge on software development than they do hardware development.
B] Prototyping, iterating, and testing software/web/mobile base ideas these days are much more low risk, quick development time, and relatively easy to measure results (rather quicker to test).
C] It's a very expensive risk to back a first time entrepreneur who is unable to prototype out some initial version of their hardware device themselves. Even most kickstarter projects (at least the successful ones I've seen) have managed to go out of their way to model a working prototype on their own.
D] This is probably the most likely answer... majority of the companies applying are very software/web/mobile centric. It's not that YC or other incubators are biased just like how they wish more women would start companies, but the market are mostly people focusing on ideas in the software/web/mobile space.
With that said, I realize it takes a lot more than 1-2 guys to prototype out an iPod, generally speaking. Afterall, Apple probably had a decent size team of experts working on the iPod for 1-2 years before the first product was introduced.
To be fair, there are some hardware base companies that did raise funding without a product but the ones I know of are usually backed by proven entrepreneurs (not saying that yet-to-be-proven entrepreneurs can't). Ooma is an example that comes to mind.
There are hackerspaces that do hardware development but I guess there just isn't as many hardware guys as there are software guys. Not to mention the barrier of entry is probably a lot harder (not just in time and cost but also in picking up hardware knowledge vs learning to program). From talking to my friend who graduated as an EE major, most hardware projects are very specialize and require multiple people to work on to produce where as software can be done with 1 guy building the prototype in most cases.
I have never taken a hardware product to market, but I did have key roles at VC-funded companies, co-founded a company we got funded, and in 2005 did the VC tour on a hardware product.
What I'll say --- and again, don't take my word for it --- is that what you're saying may be the opposite of true. Hardware companies have a higher cost of sales, supply chain issues, worse margins, and must carry inventory (sometimes millions of dollars worth) to fulfill customers. The "hardware" part of what we were doing was, for the VCs that got into real due diligence, the least attractive part of what we were doing.
You may have a resume that is a mile long in hardware, and that may mitigate some of the concern.
Yes, we will fund hardware companies with only an idea in some cases. However, the cost and time required to make a prototype has come down so much that most applicants have something built.
Because hardware is hard. Because product/artistic vision isn't the skillset same as marketing/sales. Because angel investors and founders had irreconcilable differences.
(Also because 95% of the functionality of the ~$60BOM hardware we spent 12-18 months getting into manufacture could be replicated with new components with a BOM of around $10 by the time we had the product in our hands...)
I think there are plenty of reasons one does not see more hardware startups, but I would argue that 'lack of funds' is more likely being used as an excuse to mask deeper problems.
One can expect bad things in any venture where the development costs exceed the expected return. If anything, this would be an argument for general purpose computing and not shouldering the cost of developing an ASIC.
If you would like to see a Kickstarter with better project accountability and a hardware focus I suggest looking at Christie Street: https://christiestreet.com
As is commonly the case, hardware vendors are more concerned with selling you the hardware and probably spend bottom-dollar for their software developers. I can't say that I've worked in such an environment, but my impression is that management at such companies probably see software dev as a cost-centre rather than something to actually spend money on for quality.
The reasons that these products fail is usually feature creep. Whether due to Kickstarter stretch goals, or pressure from VCs, people don't know when to draw the line and ship. That's followed closely by underestimating costs and under-pricing products. After that you have the risk of developing the product you want, not the product that everyone else needs. I would never suggest anyone starts a hardware business until they've worked in one to get a feel for cost estimation.
This is no different to software, but it's a lot more problematic with hardware. Unless you plan very well, patching hardware is expensive and/or impractical. You're often much better off releasing a basic, but very functional product (i.e. your MVP) and iteratively addressing customer demands with later version.
The second is that selling complex products to consumers is really hard. If you sell stuff to industry the benchmark for smartness is often much much lower.
The problem with hardware business is that it’s capital intensive: large, expensive product runs needed. Not many are happy to upfront the bill for a new, unproven, company. Whileas in software business, the upfront cost is fractions, and thus VCs love it more.
Thus, in hardware, funding comes from the existing players who already know the hardware business with its cyclic business and other associated risks.
I am so glad to read something about hardware startups here. As a engaged hardware engineer who aims to build my own company soon, I miss reading more about hardware startups.
Funny thing, I read the whole OP thinking about how all these ideas would work in a hardware startup, and came to conclusions similar to his before reaching the point about it in the article.
Crowdfunding brought some fresh air to this world, but I still miss an active community as the software startup one is. Maybe I am missing something?
It's not just cost, it's also cycle time (as mentioned in the article.) To "do" hardware requires a company to be fully formed, with engineers of all kinds, before they can even really begin. They can get a minimal MVP using a Teensy board or something from mbed, but beyond that, for anything of any serious complexity, they have to build out a company.
"Can you found a hardware firm with the same low investment as for software?"
If you were to say, build a <b>crude</b> prototype with the hopes of selling it for mass production would you have a hope of getting this done, or is this one of those areas that <i>need</i> big money VC funding to even get off the ground?
This is not surprising to me. I've worked in this space, and I think consumer hardware startups are just incredibly hard. I just finished my stint at one (https://www.electricobjects.com/) last year after we failed to raise series B.
Why are consumer hardware startups hard?
- Consumers have high expectations and want high quality products from the get go.
- Quality products are incredibly capital intensive, resulting in much shorter runways.
- Building a quality product often times means partnering with an expensive design firm + hiring the engineering talent to back it up.
- Margins are much lower than a typical SAAS. This makes it less appealing for VCs than a pure software play.
- Scaling hardware is harder than scaling software. Lead times are long. The right decisions have to be made ahead of time. Any missteps or problems with your suppliers will delay your launch. If this happens around Black Friday / Christmas -- it's a big deal.
- Not only do delays impact your sales, they will also delay fundraises for much needed cash infusions.
Big corporations are ok with costs of creating a low margin hardware product because it is loss leader to other products and services with higher margins.
Bringing a hardware product to market costs a minimum of $7m in the US. At Seed/Series A, this is a huge amount of money for investors to swallow.
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