Here's How to Make Hardware Startups More Than Just a Fad

Everyone is talking about hardware. Dozens of articles have shared all kinds of optimism about how hardware -- recently labeled "the double black diamond of startups" -- is cool again.

We’ve already heard the reasons why: The cost to bring hardware to market is cheaper than ever before. Crowdfunding enables brands nobody has heard of to become overnight successes. More people than ever before have a computer in their pockets with high speed internet at their fingertips, creating an ecosystem of smartphone-connected devices. E-tail is crushing retail, which means hardware companies don’t always have to rely on big-box retailers.

But here’s what we don’t know, and what we really need to talk about if we want the current hardware renaissance to be more than just a fad reserved only for niche products. The below things need to change for what's going on right now to truly become a "hardware revolution"...

With hardware, you can’t get away with a minimum viable product that sucks.

The purpose of a minimum viable product or “MVP” is to get to market quickly, learn from customers, and iterate based on the results. Unlike in software, though, a hardware MVP isn’t about searching for a repeatable business model: People either buy the product, or they don’t.

A great hardware MVP is about the fastest path to cash -- while still delivering a simple but good product. Because hardware is a cash-flow business, and that filter drives a lot of product decisions.

We can’t ship “beta” hardware and then iterate on features until someone buys it, as we do with software MVPs. And promising features on Kickstarter that hardware companies can’t deliver on isn’t a way to validate what should go in the box, either.

What most hardware entrepreneurs underestimate is just how hard it is to bring a whole system -- engineering, design, testing, packaging, supply chain, certifications, documentation, logistics, and so on -- together into a product ready for mass adoption. It takes multiple iterations to make a hardware product truly amazing, so it’s a mistake to expect hardware startups to deliver Apple-like quality when they don't have that type of experience. That’s why we always hear stories about much-hyped Kickstarter projects' failed deadlines.

The key to a great hardware MVP is focusing on a single feature (delivering it better than anyone else) and getting to market quickly (most companies have no idea how well a hardware product will sell until customers start paying) -- all while driving positive cashflows. For example:

• Fitbit started with a single pedometer that wasn’t wireless and didn’t have subscription revenue.
• DropCam started with an overpriced internet protocol camera that was easier to use and had better software than incumbent products.
• Even Amazon initially released its Kindle product line as an e-reader without color or internet browsing, and Apple’s iPhone began as an iPod with limited controls.

...Other hardware companies or products failed because their first products tried to do too much.

Nest is another great example of such restraint, especially because they were well-staffed and well-funded enough before they launched to pack all kinds of features into their product.

It could have been a lot more things -- a security center for the home a hub to network several cameras, a control center for all the lights -- but they were very diligent about delivering a product that did just one thing better than anyone: automatically regulating the heat in one’s house. They shipped version one, iterated quickly on the software, and shipped a second version that did exactly what version one did, better, within just 12 months.

Hardware startups need access to … the best components.

Amazon Web Services (AWS) changed the game for software startups. By enabling them to have access to the same high-quality servers that multi-billion dollar corporations use, AWS and other tools leveled the playing field. Just imagine telling a software startup now that their product can only run on crappy servers, slower networks, and old consumer devices.

Yet that’s what the current experience for hardware companies is like. It's why we often hear people say that we need an “AWS for hardware.” That kind of democratization has to happen with hardware, too.

Hardware startups can dream all they want about changing the world. But if they don't have access to the same components as the established companies, they will never be able to change the way life should be through their products.

Take cameras, for example. To make an amazing product you need: (1) a quality lens, (2) the latest image sensor, and (3) a powerful processor.

The best lenses are made in Japan (often by the camera makers themselves), so access to these components begins with $500K up front in engineering services and a guaranteed minimum order well into the thousands. Meanwhile image sensor companies are quickly being consolidated -- so if a purchasing company isn’t a big name, it can’t even get access to the good stuff. For processors at least, the U.S. companies who created them are willing to provide access (to their true roadmap, SDK documentation, and engineering services), because they understand the importance of helping entrepreneurs build a product that maximizes their platform.

Overall, however, this lack of components means a hardware startup has to build volume with a crappy camera before they can make a really good one.

And of course, the established hardware players know their advantage in components is a massive barrier to entry. A few of them, like Sony and Samsung, are willing to sell other companies the same components used in their products as long as they don’t directly compete with them. Other companies, like Canon, build their own components to get ahead of the competition. Apple, meanwhile, outright buys companies that produce its key components.

Another reason these established hardware companies have been reluctant to resell their components is because they market their “specs” or technical specifications. Impressive hardware specs garner media attention, reaching millions of customers who don’t really understand the performance differences. This behavior only gets reinforced in the tech media narrative when companies like Apple market things like their A7 chip or Nokia tries to make a comeback with “41 megapixels” in its smartphone camera.

What if software startups could only compete if they created new types of code running on old servers, and then had to market their products based on the specs of their servers and the quality of the code itself? That would be the end of the lean startup revolution. But it’s essentially what’s happening with hardware and components.

The only way the competitive landscape around components will change is if new startups break up the monopoly, or big players like Apple, Samsung, and Sony become more willing to sell their components. The latter path limits hardware startups’ paths to success, so hopefully more startups like Electric Imp (which produces a wi-fi chip with cloud infrastructure) and Ambarella (which produces a video processor) are successfully funded to make components for everyone.

Software is already eating some of the world. But for hardware to succeed, software needs to eat manufacturing, too.

Marc Andreessen was right, software is eating the world. But if it doesn’t eat manufacturing too, hardware will forever remain a cash-guzzling, volume-demanding machine.

The well-documented delays by almost every crowdfunded product tell us that manufacturing is hard. Incredibly hard. If hardware startups have any hope of competing with the big established hardware players, we’ll need a new breed of supplier: one that is automated and real-time.

Currently, suppliers’ reliance on manual labor means they can only work on products that leverage the same labor, processes, and testing equipment. This makes suppliers susceptible to becoming obsolete when their category of expertise becomes irrelevant or when their customers grow beyond their capabilities. The lack of automation also limits hardware production to countries with cheap work forces, forcing small startups to become global entities before they even get to market.

Instead of relying on forecasts six months in advance that are based on non-existent data, these suppliers must also be able to make the 500 items a hardware company sold yesterday and have them delivered to the customer’s door tomorrow. This is a huge challenge, one that also requires all the other moving parts -- including the entire supply chain of components -- to be delivered in sync.

Finally, suppliers need new tools that enable them to work closer with their customers. Let’s take an analogy from software: The current designed-in-the-U.S. but made-overseas situation for hardware is like separating front-end developers from back-end developers by thousands of miles and double-digit time zones. That may not seem like a big deal in software, but in hardware, the chasm between design and manufacturing can result in defects that cost millions of dollars and endless delays.

To this in perspective, a Contour camera has over 200 parts inside. That’s over 200 opportunities to make a product that is misaligned, loose, or dead on arrival. This is why we need new collaboration tools that could dramatically reduce the inevitable friction between design and manufacturing.

Without these changes, getting to market will still be incredibly expensive -- at least for most startups. It forces small companies to forever rely on the large amounts of capital, cheap labor, and deep supply chain expertise that only the entrenched, well-funded players have. Even the rise of services that provide deep supply-chain expertise is not enough to prevent a well-funded startup from messing up.

It may seem counterintuitive, but hardware companies need to become better at building emotional brand experiences.

Brand awareness doesn’t start with technology specs. It starts by deeply understanding consumer motivations and what inspires them to buy, use, and talk about a product. Often referred to as “lifestyle companies,” the best consumer brands have nothing to do with hardware or software -- they have to do with creating sticky customer experiences.

The importance of building “brand first, distribution second” was an expensive lesson I learned at Contour.

Spending our money to get into a retailer, we quickly realized we had nothing left to drive consumer demand in a meaningful way. We lost to a company that built a much stronger brand, allowing its customers to emotionally connect with it. For years, our competitor GoPro’s insanely focused approach on inspiring consumers went well beyond the technical performance and functional specs of its cameras, enabling them to create a movement rivaled by few companies in the world.

Silicon Valley’s fondness for technical founders and engineers may be a good choice when it comes to software. But with hardware, success is all about creating an amazing brand experience across every touch point. The only hardware startups that will survive are the ones that build their brand.

Successful exits need to happen more often, and more consistently.

In an inverse formula to software companies, the more success you have with hardware, the more working capital it takes to scale. The amount of capital required to turn a hardware startup into a mature business is still very high.

That’s why it’s great that investors are clamoring to back hardware startups. This won’t last, though, if they lose their money. The dearth of repeatable exits across the entire lifecycle of a hardware startup highlights a glaring question here: “Has anyone made money with hardware yet?”

Renee DiResta’s “Hardware, By The Numbers” data shows a positive increase in the number of hardware startups, but the number of exits needs to grow in a similar direction. While there are some promising signs -- such as the $604 million dollar exit of Makerbot and category-leading successes (such as FitBit, Jawbone, Nest, GoPro, Drop Cam, Sonos, and Vizio) -- the poor public market performance of brands like Skullcandy (down 75 percent since its IPO) and Tivo, low acquisition price for Boxee, and recent ending of my own company Contour reinforces the difficulty of making money in hardware.

An investor return on capital is critical to the long-term success of hardware startups.

While it’s common in software for big companies to buy startups, that’s not as true for established hardware companies that believe they can repeat the successes of startups. This mindset has to change if investors are going to see a return and consumers are going to continue to see their products. Otherwise, the only path for hardware startups is to build a multi-billion dollar, stand alone business.

So one important trend to watch is if long-established hardware companies start buying instead of building. One notable case is Cisco’s $590M acquisition and subsequent closing of Flip Video (even though the company was doing well); Kodak could have bought them even before they hit millions of units. Sony could have bought Skullcandy, Turtle Beach, or Beats to stay relevant in headphones. Garmin is now trying to build its own action camera instead of buying a smaller brand. Samsung bought Boxee on the way down instead of on the way up, wasting valuable time it could have used to build connected TV.

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The resurgence of hardware not only has the opportunity to shake up entire industries, but the potential to forever change the definition of a hardware company. But only if these new startups can cross the above barriers. If they do, the new hardware company will soon begin to look just like a software company: a small collection of builders widely influencing how we interact with the world.

Editor: Sonal Chokshi @smc90