Bending iron in a facebook world

Posted by Brad on October 6th, 2010

I like software companies. I really do. In fact, I sit on the board of a software company, consult to another, advise a couple more and I am in the early stages of building a web based business. Super Angels such as Ron Conway are investing into up to four businesses (generally software/social media plays) a month looking for the next facebook or more likely the next company sold to facebook, Google and the like.

I spend a lot of my time in a different world running BPG Motors, a start-up that is building a compact self-balancing motorcycle. My team spends their days bending and cutting metal, whirling motors and designing systems that encompass long lead-time parts. Rapid prototyping a product for us usually takes months if not years and not days. This is not a business where you set up a good developer with a case of Coke, and a Mac Book Pro and you get a working demonstration of your product finished over the weekend. In this post, I want to explore the parallel universe that hardware start-up companies live in. My colleague Matthias also has some poignant views on building hardware companies that are worth reviewing.

Hardware start-up companies – The Good 1. Tend to have defendible IP. If you have the tenacity to build a hardware product, you are probably doing something novel and you can successfully patent what you are doing. 2. Hardware development takes longer and requires more resources so there are fewer products developed and it is easier to defend your market position. 3. Hardware companies produce tangible goods. Time and again, engineers and investors tell me how satisfying it is to be working on something that is real and not virtual. 4. Hardware companies are not generally all-or-nothing propositions like most Web2.0 start- ups. 5. 3D modeling, FEA and other software design tools, low cost global suppliers, free online collaborative tools, better connectivity have all contributed to dramatically lowered development costs for hardware companies.

Hardware start-up companies – The Bad 1. Capital Efficiency (a rallying cry for early stage investors these days) is lower than for software companies and has to be measured on a different scale. $50,000 will feed and nurture a lean software start-up for six months and often be enough to reach a significant business proof point. $50,000 often wont cover the material costs of an early hardware prototype. Budding hardware entrepreneurs must understand early on that even with 100% sweat equity they will need more investment dollars to make an alpha, beta, prototype and final product then a software company. 2. At least in BPG Motor’s case, there is no easy way to gather quantifiable customer feedback without building a working prototype. We did a ton of CAD work, but ultimately we only get real customer feedback when we have people sitting on the bike and riding it. 3. Getting it right requires a lot of pieces to come together. Not just on the engineering side, but also on the product side. There is less and less technical risk in software-based start-ups, so much more of their resources can be focused on defining and marketing their product. Hardware companies ultimately require just as much marketing support, but are less likely to have the capital to invest heavily in marketing. 4. Hardware companies tend to have lower margins since cost of goods sold (COGS) is not zero. 5. Hardware businesses are out of favor with investors. Largely because of my first four points above: investors, particularly early stage investors, are migrating towards web 2.0 businesses. This makes the pool of investment dollars smaller and makes it that much harder to a launch a hardware business.

OK – So why start a hardware company? 1. I really enjoy it. 2. While it is harder to raise money, it is not impossible. You are just looking at a different pool of investors. 3. Ultimately, an entrepreneur can be successful in any industry, even selling puppy turds. You just need to be passionate about what you are doing and find enough people that show similar passion for buying your product.

There are plenty of growing hardware companies in the Boston area. Some of my favorites are: Kiva Systems, WiTricity and Sand9. You can do it too, but you need to understand that the timeline and funding requirements are very different then the vast majority of facebook-like startups you read about.

What is your experience building a hardware business in a facebook crazed world ?