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Crowdfunding: Hardware Startups Beware

Hardware startups are one area I spend a fair amount of time with in my life as a VC, and while I love working with hardware companies, it should go without saying that hardware startups are incredibly difficult to do. They require knowhow across multiple disciplines — software, electrical engineering, industrial design, manufacturing, channel, etc. – and, as a result, have challenges and upfront capital needs that most software/web companies lack. This has led many angels and VCs to be wary of investments involving building hardware so its no small wonder, then, that many hardware entrepreneurs have turned to crowdfunding websites like Kickstarter and Indiegogo to try to raise funds for development.

While crowdfunding can be a great fit for certain projects, I think early stage hardware startups should beware. Yes, crowdfunding sites can generate upfront capital that can fund development, but unlike traditional equity/debt investments (like the kind an angel or VC or bank will give you), “crowdfunding capital” has a particularly onerous type of “string attached”: it’s a presale.

Obviously, the entrepreneurs trying to raise crowdfunding capital want to push their projects towards real sales – so why might a presale be a bad thing? For hardware companies:

  • Raw production costs are a major percentage of sales – so even if you raised $1 million, you probably are going to be able to keep max $500,000 after the cost of materials/manufacturing
  • These pre-sales are oftentimes discounted – so you are generating lower margins on each unit making these particularly painful sales to make
  • Except in a few instances, the number of presales tends to not be high enough to meaningfully change the cost of manufacturing (i.e. upfront tooling costs or supply procurement) – which further eats into the amount of capital you have left to deploy on development since you probably have to pay the low volume price
  • It means you need to keep to some level of deadline. There is a risk that you won’t make your own deadline and there’s also risk that the time pressure might lead to tradeoffs (leave out a certain feature or asset, run fewer tests, etc.) which could hurt your reputation since the public will be getting its first impressions of your company based on that initial launch.
  • It publicly commits you to a particular product even if you learn that your initial idea is wrong or needs tweaking.
  • It tips off the market and potential competition earlier since you likely are doing this at a point before your product is ready and need to provide a fair amount of detail to get supporters.

In the end this “capital” ends up being a very real “liability”, and is a big part of why serious hardware startups that do crowdfunding almost all go back to the traditional VC/Angel community – it is simply not practical to scale up a meaningful hardware business on crowdfunded capital alone.

That said, there are definitely cases where it makes sense for hardware companies to use crowdfunding – and they are cases where the above problems are irrelevant:

  • If your cost of production is tiny relative to the price (think pharmaceuticals, software, music, movie, etc. – trivial cost of production per unit sold)
  • If you’ve already completed the vast majority of development or managed to get capital from another source and are simply using crowdfunding to either gauge customer interest or raise publicity
  • If your intention is to raise money from a VC/angel using a crowdfunding success story (that you’re positive you will get) to show that a large market exists for your product
  • You couldn’t raise money from VCs period and have no other choice

In the first case, a very low cost of production means that more dollars raised can actually go into development, irrespective of volume of production and discounts. In the second case, the pre-sale becomes a good thing: a market signal or a heavily publicized pre-sale for a product which is/is almost done. The third is very risky – because I would maintain its nigh impossible to know if a crowdfunding attempt will “go viral” and even if it does, you are still left with the liability of these presales that you need to fulfill. The last is self-explanatory :-).

If you are an aspiring hardware entrepreneur, in almost all cases your best bet will be to go with traditional equity/debt financing first. Obviously, I am in part biased by my current choice of profession but while VCs and angels can be annoying to deal with and raise money from, the lack of the pre-sale liability and their potential for connecting you with potential hires and partners makes them a much better fit.

Got any questions? Disagree? I want to hear from you!

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A Month with the Chromebook Pixel

Last month, I had the pleasure of attending Google I/O – Google’s annual developer conference and product geekfest. To put it simply, it was probably the nerdiest conference I’ve been to (and yours truly has been to some really nerdy conferences) with Google Glass users everywhere and flying, internet-controlled, camera-connected dirigible floating above the conference floor among the attractions.

One of the things that Google tried to emphasize to I/O attendees was the growing idea of Chrome, Google’s web browser, as a key platform for developers to embrace. Part of that message, of course, came from the talks and sessions where Google promoted Chrome’s widespread adoption (if you count mobile deployments, Google claims 750 million users worldwide) and proudly touted Chrome’s support of both sophisticated open technologies like HTML5, WebRTC, and WebGL, as well as proprietary-to-Chrome technologies like Native Client and their new Packaged Apps capability.

Equally (or perhaps more) effective was the conference’s giveaway of its Chromebook Pixel (not to mention some pretty interesting artistic displays showing off the device and its capabilities, see below).

My generally positive take on the Pixel’s predecessor Samsung’s Series 5 Chromebook is one of the more popular posts on this blog and so I thought I would share my take on Google’s latest and greatest. In a nutshell, I will say that the Chromebook Pixel is light years ahead of its predecessors and is an amazing device which hints at the potential of well-built Chrome OS hardware, albeit one which is probably not worth the $1200+ price tag:

    • Good, not good enough, performance: While the Series 5 routinely stumbled and hiccuped, the dual-core Ivy Bridge processor in the Pixel, while not the fastest chip around, was up to the task of almost any large web workload I threw at it – multiple tabs with Netflix and complex webapps like Tweetdeck and Gmail and Feedly running. Even Evernote, which I had not been able to get working on the older Chromebook, worked without any problems on the Pixel.
    • Amazing display: In the same way that other remarkably high resolution displays make you want to view more content (Nexus 10, Retina Display Macbook Pros), the Pixel has actually managed to steal web browsing and video watching time from my tablets, something I didn’t expect would happen.
    • Touch: I used to be a big skeptic of the importance of touchscreen displays on laptop form factors – no more. As cheesy as it sounds, the type of relationship you have with content is different when you can use touch gestures to zoom in/out and scroll up/down versus using arrow keys or a mouse. I can’t say that I primarily use the touchscreen in navigation, but it’s a nice touch (pun intended).
    • Much better industrial design: I don’t claim to be an ID expert, but the attention to detail on the machine is decidedly impressive for a company that many in the tech industry for years felt just didn’t care about design quality. The touchpad beats most of what the PC industry has put out in feel and responsiveness (although that’s a low bar to beat) and, taking a page from Apple’s playbook, supports multi-finger gestures. The device body is smooth aluminum with only a groove on the body for cool-looking LED lights to come out as a signal that the device is on and an interesting piano hinge for the display which someone engineered to function not only as a hinge but as a heat sink and Wi-Fi antenna. Simply put: it doesn’t feel or look cheap.

Couple that with the advantages I described to all Chrome OS systems (rapid boot, easy multi-user support, frequent and automatic updates, syncing tabs/histories/passwords with all your other Chrome browsers), and I think you have a fairly compelling device.

That said, three major problems are worth calling attention towards:

    • This is still just a browser: granted, most of what we do today is in or can easily be replaced by web-based applications of some form or the other, but, this won’t be playing Starcraft or running Excel or operating a server or doing software build work.
    • Underwhelming Battery life: for an operating system that is effectively a browser, I am surprised that my typical battery life is somewhere in the 3-4 hour range, and significantly lower if I’m using Netflix or YouTube. I can’t tell if this is simply an issue where Google included too small of a battery to save costs, if this is the energy from the extra processing power and backlight needed to run such a high-resolution screen, or if this is a operating system/firmware bug where the video codecs aren’t being used properly, but this is something that will likely need real improvement.
    • Extremely high price: while this is a fantastic device, its usage limitations (to basically being a big browser) and storage and memory and battery life limitations don’t make this a $1200+ machine. Interestingly, I do feel that if they included a dual-boot to Linux option, the screen and industrial design could very well justify a higher price (compare with Linux laptop vendor System76’s new Galago UltraPro)

So, the verdict? I am extremely happy I got this device for free from Google. It’s something I use regularly because it is a delight to use and really does put forward Chrome in a fantastic light for developers (which is really the purpose of the giveaway at Google I/O). This device is also probably more than enough for what the average computer user needs (who is mainly interested in checking email, reading articles, watching videos, and playing webgames) and has unique advantages for enterprise/educational settings. But, the fact that Chrome OS still can’t do everything that I need it to do and has limitations in battery life and storage and memory make it difficult to justify the high price for a regular consumer purchase.

Any other Chromebook Pixel users out there care to share their perspectives?

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Android Bluetooth (Smart) Blues

Readers of this blog will know that I’m a devout Fandroid, and the past few years of watching Android rise in market share across all segments and geographies and watching the platform go from curiosity for nerds and less-well-off individuals to must-support platform has been very gratifying to see.

Yet despite all that, there is one prominent area in which I find iOS so much better in that even I – a proud Fandroid venture capitalist – have been forced to encourage startups I meet with and work with to develop iOS-first: support for Bluetooth Smart.

LogoBluetoothSmart

In a nutshell, Bluetooth Smart (previously known as Bluetooth Low Energy) is a new kind of wireless technology which lets electronics connect wirelessly to phones, tablets, and computers. As its previous name suggests, the focus is on very low power usage which will let new devices like smart watches and fitness devices and low power sensors go longer without needing to dock or swap batteries – something that I – as a tech geek — am very interested in seeing get built and I – as a venture capitalist — am excited to help fund.

While Bluetooth Smart has made it much easier for new companies to build new connected hardware to the market, the technology needs device endpoints to support it. And therein lies the problem. Apple added support for Bluetooth Smart in the iPhone 4S and 5 – meaning that two generations of iOS products support this new technology. Google, however, has yet to add any such support to the Android operating system – leaving Bluetooth Smart support on the Android side to be shoddy and highly fragmented despite many Android devices possessing the hardware necessary to support it.

To be fair, part of this is probably due to the differences in how Apple and Google approached Bluetooth. While Android has fantastic support for Bluetooth 4.0 (what is called “Bluetooth Classic”) and has done a great job of making that open and easy to access for hardware makers, Apple made it much more difficult for hardware makers to do novel things with Bluetooth 4.0 (requiring an expensive and time-consuming MFi license – two things which will trip up any startup). Possibly in response to complaints about that, Apple had the vision to make their Bluetooth Smart implementation much more startup-friendly and, given the advantages of using Bluetooth Smart over Bluetooth Classic, many startups have opted to go in that direction.

The result is that for many new connected hardware startups I meet, the only sensible course of action for them is to build for iOS first, or else face the crippling need to either support Android devices one at a time (due to the immaturity and fragmentation in Bluetooth Smart support) or get an MFi license and work with technology that is not as well suited for low power applications. Consequently, I am forced to watch my chosen ecosystem become a second-class citizen for a very exciting new class of startups and products.

I’m hoping that at Google I/O this year (something I thankfully snagged a ticket for :-)), in addition to exciting announcements of new devices and services and software, Google will make time to announce support for Bluetooth Smart in the Android operating system and help this Fandroid VC not have to tell the startups he meets to build iOS-first.

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