Rusbase. Peter Dudin's column.

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17/10/17

"Iron" trend: what is the future of hardware startups

With the development of virtual reality, we are paying much less attention to reality itself. That’s why there are not so many hardware startups offering innovative inventions in the world. Peter Dudin, head of business development at EnCata, talks about the future of hardware startups.

A modern hardware startup is not just a bunch of some guys creating some stuff from iron in a garage that can improve our world or change it for the better. It is an advanced, close-knit team of people thinking alike that offers the world market a ready product - a high-tech device with its own software and Internet connection. Perhaps in a couple of years you will buy a gyro scooter that will drive off-the-road on its own, and in a decade ... oh, well, use your imagination.

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Today, devices with permanent Internet connection and complex embedded software can’t surprise anyone. Applications are just pleasant additions to the existing technologies. There’s a growing popularity of hardware startups among the software developers – as a new trend on hardware products encourages to invest into qualified teams.

It is not surprising that scientific startups are inherently very similar to hardware development, as the ideas of scientific startups are usually realized in products or material technologies. However, not all projects become real-life products, as not all developers and scientists are talented entrepreneurs.  The process of raising funds for them often becomes an insoluble problem.

What do you need to know about investments?

Investments can be divided into three stages:

Preseeding (pre-seed)

The startup is at the level of laboratory technology or concept. They need investments to finalize the development and to manufacture the pre-production prototype. Professional investors at this stage almost never risk investing in a project or technology. Therefore, a potential startup should count on its own savings, government grants, business angels (who are harder to find at this stage than biblical ones) and crowdfunding. This preseeding stage of development requires as much as 100 thousand $ of investment in post-soviet countries and up to 200-300 thousand $ - in the countries of Western Europe and the USA.

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Kickstarter is one of the most popular platforms for startups on the preseeding stage. It is possible to raise the funds necessary to implement the project, but keep in mind the following: it is necessary to have a ready product and know the exact dates and sums required for serial production. These are the weak points of most startups, as they go to Kickstarter without a final design and prototype.

Seed

The actual seeding stage in scientific and hardware projects finances the start of mass production given that the startup has a set of design documentation (drawings). Startups in the sphere of the Internet of things and devices, ideally, should start from Kickstarter, to test the potential demand for the product. Highly-specialized scientific projects won’t last on Kickstarter.

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It is necessary to calculate the real cost-price of the product. It’ll give a clearer understanding of the needed investment.Seed stage is the best time to start searching for investors. Today it is possible to find business angels investing in hardware in special hubs – like those in San-Francisco, Boston, Shenzhen, and Berlin. Investors are aware of the risks and can invest from 2 to 5 million dollars to launch serial production and sales for the startup. The seeding stage of the hardware startup should end with sales launch and the first profit. Ideally, the revenue should be spent on the recruitment of new employees and refinement of the product.

Stage of active business scaling - investment round A

The project has already launched mass production and it is now busy trying to scale it (for example, it introduces its products to the world market through Amazon service and other retailers and partners). The startup is turning into a full-scale growing business, which needs investments for further growth. Large-scale venture funds (Sequoia Capital, Baseline Ventures, Lowercase Capital and others) invest into scalling. They calculate how to accelerate the growth of the startup and to broaden the markets with the help of investment.Another scenario is possible when at the end of the seed stage a technological startup launches selling and gets on the radars of large companies such as Google, IBM, Intel, Snapchat, Facebook, General Electric, etc., who want to buy out the finished product. Yes, many of them have research centers and create their products, but even corporations are not protected from failed investments at their own R&Ds.

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Buying the same startup as a "strategist" guarantees them profitable investments in the form of a team, new technologies and products that are already in demand by the market. If we take into account the statistics of failed internal projects, the cost of acquisition will be as high as company’s own spin-offs, or even lower.We are speaking about real deals – deals for 30-40 million $.

How to get an investment?

In order to achieve a deal with an investor or introduce a product to the market independently, it is necessary to to build a consistent approach  towards commercialization. But 3 out of 4 projects will not get to this stage. It's not even about financing - a start-up can become successful only if it has the following;

  • A professional team. Competent professionals who sincerely believe in the enterprise are the key to success of the future project.
  • Investment. Use every opportunity to get feedback from the target audience of the project: start-up battles, meetups, events, exhibitions, etc.
  • The idea. Your product should be customer-oriented. It should improve or facilitate greatly the lives of its users.

If speaking about the business model of scientific and hardware startups, the most interesting for investors are startups from the niche segment or startups with a potentially huge market. But there are  some BUTs: it is well-known that the only ones to survive are companies of premium or mass segment. For example, in the segment of gadgets today it is difficult to compete with massive Chinese projects, which sometimes grow to the level of Xiaomi. Therefore, most hardware projects should pay attention to the competition strategy in their niche market.

There are two simple business models based on the principle of a “moat”

  • Sales on subscription with linking to the ecosystem. Apart from implementing just subscription business model, use another one, which is highly popular with the investors. You need to link your gadget with the special soft, which brings constant profit from the customers’ purchases inside the application. A vivid example is a link of Iphone and AppStore.
  • The product can conquer the market only by being unique. It must be based on a technology that no one else has, a technology that gives a significant benefit from its use. It is the uniqueness of the technical component of the project that will be the basis of the high added value of the product, and, consequently, will allow the hardware startup to remain a leader in the segment for a long time with Asian imitators lagging far behind.

Despite the difficulties, the future of hardware startups is not seen as vague. There are new investors and funds (Bolt, Hackspace Capital), people from the hardware and IT industry are already working in this direction, and in the future their number will only increase. So do not worry, in a couple of years, Amazon will definitely deliver your gyro scooter to the client.

https://rb.ru/opinion/iron-trend/