We held a team offsite in New York last month. If you know any of us at Spark, you’d guess that we spent most of the time debating with each other, like a family where everyone argues passionately but loves each other at the end of the day. (I‘m guessing most of us at Spark grew up in a family like that. I certainly did.)
While we were all together, one topic we spent a lot of time discussing was how digital startups can build long-term competitive barriers. My partner Jeremy Philips led the conversation, and you can read more about his thoughts in a piece he published in the New York Times in August (here).
A couple of us also applied the thinking that came out of our offsite discussion to hardware. The main thing we all agree on: hardware startups can build true competitive barriers, but they have to be careful to avoid simply creating a “toaster.”
When we say a toaster, we mean a product that the market demands, but where margins get eaten away over time due to low barriers to entry and fierce competition. This analogy was popularized by Professor Bruce Greenwald at Columbia Business School (and mentioned by Jeremy in the New York Times article linked above).
It’s worth pausing for a minute on this. Some people think that highly-differentiated products will give a company a long-term competitive advantage. But without barriers, we’ve seen that all useful differentiation gets copied in the long-term. Today, intellectual property rarely creates a true barrier in hardware, where copycats emerge out of thin air after a funding announcement. Highly differentiated product ideas are what drive initial customer interest in hardware startups, but competitive barriers are necessary to build a valuable business in the long-run.
This subject is important to us at Spark, where we invest very actively in hardware startups. We led Series A rounds for Oculus, Cruise, Thalmic Labs, Superpedestrian, Freight Farms, and many more. We’re strong believers in the potential for hardware startups to create magical new product experiences, make a big impact on society, and generate venture scale returns for their investors in the process.
So: for a high-growth hardware startup, how do you create competitive barriers and not end up as a toaster company?
From our experience at Spark, the best hardware companies use superior hardware execution as a trojan horse for building a long-term relationship with their customers through software and data-driven experiences. Here are three successful strategies we’ve seen.
Early-stage venture capital isn’t all about focusing on the creation of long-term competitive barriers. First and foremost, we invest in products we love and teams that inspire us. Sometimes it’s not clear how a market will develop or how a business will mature on the startup roller-coaster journey, and that’s just fine.
On the other hand, it’s important for us to invest in companies that have a clear vision for the future and the role they will play in it. So we get especially excited when we encounter a hardware team that’s not only maniacally focused on their product and customers, but also thinking proactively about how to protect their company from competitors in the long-run.
We love both investing in hardware startups and talking about them. Please let me know what you think about this piece, and give me a shout at [email protected]
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