Five trends driving the hardware boom

commentary For years, venture investors and entrepreneurs were all about software. Now, more and more money is flowing into hardware.

The Pebble smartwatch CNET
Editors' note: This is a guest column. See Boris Wertz's bio below.

Hardware startups have long taken a backseat to the glitz and fast track of software, which has been the path to success in Silicon Valley and tech circles elsewhere.

Yet today, it seems that everybody is talking about the so-called "Maker Movement." The top two Y Combinator winter 2013 startups voted most likely to succeed were both hardware companies. Dropcam, a San-Francisco startup that makes a camera that streams and records to the cloud, just announced it raised another $30 million in funding . A maker conference called XOXO popped up last year in Portland, Ore., and was so successful that the founder instituted a screening process to decide who gets to attend.

Hardware startup meetups are on the rise from New York to San Francisco, Stockholm to Toronto. Even venture capitalists once turned off by hardware's high startup costs and lengthy start times, are slowly making their way to hardware.

Through my $20 million fund, Version One Ventures, I have invested in several maker-type companies, including the crowdfunding site Indiegogo . Why the excitement over hardware? The way I see it, there are five key trends driving the hardware renaissance:

(1) Hacking hardware is becoming easier for software people. Numerous innovations are making it easier than ever to develop hardware. The benefits of 3D printing (quicker and cheaper prototyping) are well publicized, but there are other innovations too. For example, there's the Arduino Robot Kit to experiment with projects that move; UDOO, which combines Android, Linux, and Arduino in a tiny single-board computer to interface with sensors and actuators; and Spark Core, which is the easiest and most open way of creating cloud-connected hardware experiments.

These innovations give software developers the freedom to stretch beyond their limits of three screens (PC, smartphone, tablet) without worrying about getting burned by soldering guns.

(2) Connectivity changes the customer expectation. The common hardware purchase model was always "one and done"; customers bought their hardware and that was it. With today's influx of connected devices, consumers expect more than great hardware. Connected software now defines the hardware experience. Examples include wireless wearable devices that track a person's activities or connected home devices that encourage a greener lifestyle.

The merging of hardware and software poses a significant challenge for large hardware giants like Sony or Panasonic that primarily have focused on hardware. Their hardware might be brilliant, yet the software experience is often lagging. This gives startups a great opportunity to create better connected experiences.

(3) Crowdfunding has changed the relationship between brands and retailers. Crowdfunding sites like Kickstarter and Indiegogo have helped fill the funding void for hardware projects. These sites are also giving brands a direct route to the customer. Traditionally, the retailer sat as a gatekeeper between hardware brand and customer. Now, brands can build a customer base, regardless of distribution channel. Additionally, as we have seen often, such as with the Pebble smart watch, customers are willing to purchase a concept well before the product exists. This gives unknown brands and young startups an unprecedented ability to compete.

(4) Open hardware increases the speed of innovation. The open source movement when applied to hardware accelerates innovation, enabling developers to build derivatives of the original design, such as alternate use cases and accessories. With open source hardware, developers and startups don't need to seek the approval of the creator. They can just start working, without any patent or licensing hoops to jump through.

(5) The maker movement is increasing the talent pool. The increased focus on hardware brought about by the maker movement is rapidly bringing a new influx of hardware developers to the market. With access to a bigger talent pool, startups (and established companies too) can develop products more quickly and at a lower cost. The associated lower costs and faster time to market can be a game changer.

Hardware is sexy again
With further refinement of design, prototyping, and manufacturing tools, the costs and risks traditionally associated with hardware will keep falling. Now an entrepreneur can walk into a VC meeting with a prototype from a 3D printer and proven market interest on Kickstarter. That's changing the game, and VCs are taking notice.

Products from 3D printing firm Shapeways, which in April raised $30 million. Shapeways
VCs proactively are seeking promising, young hardware companies, funding hardware companies like LUMOback (whose first product is a sensor to help your posture), gesture-control products Leap Motion and Thalmic Labs, the Pebble smart watch, and 3D printing marketplace Shapeways.

Perhaps the decades-long drought in hardware investment has created pent-up demand, as consumers are looking everywhere for everyday things connected to the Internet. In many ways, flying robots and a smart thermostat are the perfect antidote to the onset of fatigue that's facing social media and the other "it" startups from the past decades.

I would like to thank Joe Heitzeberg of the blog Currently Obsessed, Emile Petrone of Tindie, and Marc Barros at MarcBarros.com for their contributions to this post.

 

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