By Joseph Flaherty — Director, Content & Community
David Pierce has written an excellent post-mortem recording the last days of a hardware startup called Doppler Labs. The post carefully details all the challenges in launching a consumer product, and Doppler Labs co-founder Noah Kraft provides a colorful summary of the experience:
“We fucking started a hardware business! There’s nothing else to talk about. We shouldn’t have done that.”
Building a hardware startup is hard, but trying to build one that competes with Apple is nearly impossible. Startups that try to head-off what would be a clear product extension for Apple (E.g., Pebble and Doppler), or try to simulate Apple’s fastidious approach to fit and finish (E.g., Juicero), are going to have a tough time.
Thankfully, it’s not the only way to build a hardware company. As useful as post-mortems are, it’s also helpful to try and understand how hardware startups can work. For instance, how did DJI launch the $8.5B consumer drone market from a dorm room? How did SimpliSafe quietly rewire the alarm business? There’s no clear instruction manual for success, but there are a few principles that successful startups seem to follow:
Doppler’s product was ambitious, gorgeous, and by all accounts, it worked well, but it didn’t provide the magical experience the Airpods did. Almost no startup could! That “magic” is the cumulative product of decades of R&D and manufacturing expertise. Jawbone raised nearly a billion dollars in capital and still couldn’t work out the manufacturing kinks. Even if a startup manages to compete on features, Apple’s scale provides them with an almost unassailable pricing advantage. To succeed, startups need to “think different,” which often means building a less powerful, or less polished product.
Misfit succeeded (if you’ll accept a “mere” $260M acquisition as success) because they made a series of design choices purposefully at odds with the dominant gadget paradigm. Their products eschewed all “speeds and feeds” benchmarks, even skipping a screen, in favor of fashion-driven decision making.
In its marketing, Misfit didn’t tout the number of SDKs available to developers; instead, they talked up partnerships with companies like Swarovski. The result was a product that felt like something new and unique in tech, not a pale imitation or a first draft that Apple would soon improve.
Likewise, MakerBot’s first product came unassembled as a heap of laser-singed plywood and hex bolts in a rough cardboard box. They were channeling Steve Jobs from 1976, not 2006. Compared to the printers made by the market leaders, the original MakerBot looked like a hobby project, but this humble offering generated revenue, paved the way to more polished products, and a $403M exit.
Keurig is a fixture on millions of American countertops and is largely responsible for the fact that a third of the coffee that Americans consume comes from pods. As a result, the company has a $14B market cap.
Still, few know that the product was originally a B2B offering. Early versions of the product were expensive, prone to malfunction, and required a plumber to install. The founders of Keurig worked with “Office Coffee Services” to distribute the product to office parks for over a decade before they felt confident that they could build a model that would work in consumer’s kitchens.
Keurig isn’t the only example. Oculus earned PR mentions like a consumer company, but their business model up until the Facebook acquisition was primarily selling development kits to engineers. DJI took flight by producing sub-assemblies for larger manufacturers. Even though it launched at the height of the consumer 3-D printing bubble, Formlabs never bought into the hype and stayed laser-focused on building laser-powered printers for professionals. Niches hold riches.
When people say “hardware is hard,” many often mean “It’s hard to build a billion-dollar hardware business in less than five years.” Startups willing to compromise on either dimension can do quite well.
For instance, Anova earned a $250M exit price, and the only money the company raised was on Kickstarter. Based on their sales, Anova could have raised more money from venture capitalists to try and build an even bigger company. But it’s not clear that it would have won them a larger exit in the end. Perhaps they would have ended up like Jawbone, owning a portfolio of great products, but unable to justify the massive valuation that would come with funding.
That’s not to say it’s impossible to build a big consumer product brand; it just takes time. SimpliSafe is arguably the largest stand-alone Internet of Things startup in the world. The company’s only financing for its first eight years was a single “friends & family” round. It turned out to be all the capital the company needed until founder Chad Laurans decided to take $58M from Sequoia. If the company went out to raise more money today, It would almost certainly command a billion dollar valuation, but it has taken a decade to reach that level of maturity.
In his article, Pierce runs down a list of hardware startups that have gone under this year. Excluding the Jawbone, which was an outlier, here’s how much money each company raised.
Obviously, this is a lot of capital lost, but in total, it’s still less than ecommerce company Fab burned through on its own. Startups losing money isn’t exactly exclusive to hardware companies.
It’s also important to put these losses in perspective. In another story at Wired, ecigarette maker NJoy is called out as a notable hardware failure for losing $181M in VC. That’s a big miss, but lets not forget that despite all it’s déclassé aesthetics, vaping is on its way to becoming a $27B hardware category that could save EIGHTY-SIX MILLION PERSON YEARS OF LIFE! Viewed through that lens a couple hundred million dollars of losses is regrettable, but understandable given the scope of the opportunity.