That’s Why They Call it Hardware

Tony Fadell, father of the iPod, was right. “There is a reason they call it hardware—it is hard,” he said at the LeWeb conference in Paris last year. But that hasn’t stopped many tech entrepreneurs from eschewing software for physical products.

What is behind the renaissance in hardware? According to entrepreneurs, a number of things have coincided to lower the barriers for hardware startups and speed up development: the growth of the silicone bracelet, the rise of 3-D printing and, to a lesser extent, the impact of new funding models.

In much the same way that mobile devices have disrupted the desktop, they have liberated hardware products from having their own interfaces, allowing companies to create devices that can communicate with a smartphone. Shamus Husheer is chief executive officer of Cambridge Temperature Concepts Limited, which offers a service to help women detect the moment of ovulation. The company was founded in 2006, before the smartphone revolution. “We had to build a hand-held wireless device. But for unregulated sectors it is just obvious that you use a smartphone. The speed of development is blinding and the quality of interface is so far beyond anything you could hope to produce yourself.”

The smartphone also hints at one of the big changes in what someone somewhere has almost certainly christened “hardware 2.0″: while they are physical products, their real value lies in the software that drives them and the data they produce, rather than the device itself. The “quantified self” movement—the idea that people record every aspect of their lives from how long they sleep to how many steps they take—has driven a whole new category of health-data related devices.

The other big technology enabler is the availability of 3-D printers. These devices work a bit like a bubble-jet printer, but instead of squirting drops of ink on paper from a printer head, they exude plastic, building up a 3-D object a layer at a time and allowing highly accurate prototypes to be made in well under an hour. “I don’t know how many iterations we made of our card reader but 3-D printing was essential for us,” said Jacob De Geer, CEO of Stockholm-based iZettle AB, which allows retailers to take card payments either through a device plugged into a smartphone, or a stand-alone CHIP and PIN reader. “In just a couple of minutes we can have a new version just to look at a new surface texture, or changing the roundness of a corner.”

The role of crowdfunding site Kickstarter, which lets the public buy products before they have been built, has had some impact on the growing popularity of hardware. Sweden’s Memoto AB—which is making a miniature camera worn on the lapel that takes a picture every 30 seconds—received $550,189 on Kickstarter last year, after asking for $50,000. However, the company’s CEO Martin K?llstr?m said its importance should not be overestimated.”It is a very good channel for getting information from the market about how it will receive your product but it doesn’t solve all the problems. You need to have a finished prototype before you can launch your campaign. That means you need to already have the funding to build a prototype before you can use Kickstarter.”

But what do the investors make of this hardware renaissance? Unfortunately, not a lot. [Mike Volpi], a partner at London venture capital firm Index Ventures, which has a number of hardware investments, said most hardware startups just don’t have a compelling business case. The conditions for success, he said, are rare. “While it is trendy to do hardware at the moment, we are not super positive on the category.”

Mr. Volpi was skeptical about Kickstarter’s significance. “The problem is none of the success stories are at a scale I would feel good about. A couple of million in orders is really nothing in the custom keychain. You really need to think in the tens of millions.”

He said there were three things Index looked for in a hardware product. “The first is it must be more than just a connected device. There have been a lot of things that just connect to your phone. That is not very exciting. It is easy to copy and commoditize. We look for things that may be embodied in hardware, but have a very significant software component.

“The second thing we look for is that it is not a single unit, but a system of some kind. The business model that follows from that is that the more of them you buy, the better off the system is. We are looking for a platform, not a one-off buy.”

“The last thing we look for is some kind of cloud-based service that sits behind it. The way we think of it is that the hardware is our monetization method—where you get the charge, but a lot of the virtues of the product actually come from the software.”

So why focus on hardware at all? For many the hardness of hardware is a reward in itself. Mr. K?llstr?m said “the main attraction comes from the uniqueness you get from creating a physical device. In software now there is very little innovation.” This point is echoed by Jon Bradford, CEO of Springboard, the U.K.’s first program dedicated to helping hardware startups grow their business. “The smartest people in the room are trying to create something different—and hardware represents the manifestation of that.”