Software Is Eating Your Hardware

Satish Mugulavalli, Director - IT, YourNest Venture Capital FundA technology entrepreneur, advisor and mentor for several high technology, hardware/IOT startups, incubators and accelerators, Satish has over 20 years of experience in architecting high-performance systems in voice, video and data networking products

The first wave of connected products appeared nearly 10 years ago, almost simultaneously with the launch of the iPhone. These products tethered to a mobile phone are now very mature with a few of them raising huge amounts of venture capital and have helped build very large companies behind them.

Two factors that accelerated their success are reduced cost of hardware development and the proliferation of smartphone supply chains; together, they enabled startups to engineer such products on a global scale. However rapid commoditization has resulted in many copycat products significantly reduced margins over time and has even destroyed companies that had only a one-off-sale revenue model.

Most of these products were consumer gadgets and user experience played a significant role in their success. Some popular examples include Fitbit, Jawbone and GoPro. On the other hand, high pricing, higher customer acquisition cost and poor capital efficiency resulted in many failures after their backers raised a significant amount of capital, e.g. Jawbone, Juicero. These products are also at `China-scale' manufacturing ability, thus eliminating any low-cost plays. The Chinese startup turned giant, Xiaomi, has built most consumer gadgets at extremely low costs making it near impossible for a startup from India or the west to compete on price.

While it has been easier than ever to launch a consumer hardware product, it is harder than ever to build a sustainable business behind one today. This paradox is the new paradigm.
Internet-of-Things (IOT) broadly refers to a network of inter-and Internet-connected objects. These objects are embedded with sensors and other electronics and communication circuits and collect, transfer and analyze information. Attaching a sensor to a physical object makes it function like a digital object emitting data about its state, usage and location. Thus, instead of being a piece of dumb hardware it can now be tracked, controlled and personalized. Coupling all the data collected with deep learning algorithms, the object can now become intelligent, predictive and - in the best possible case - completely autonomous.

While it has been easier than ever to launch a consumer hardware product, it is harder than ever to build a sustainable business behind one today

Such objects, now called smart-connected products, are expanding the functionality of hitherto stand-alone products in an exponential way, creating new opportunities and disrupting traditional business models as is happening with most industrial IoT companies.

We are at the beginning of a computing shift, with connected devices and their ability to connect directly to a digital network without being tethered to a computer or a mobile. The opportunities are in building Deep Technologies like Communication Technologies, Sensor Networks for applications like Autonomous Driving, Artificial Intelligence, Robotics, and in building systems that include an array of inter-connected products.

In my opinion, hardware startups that exhibit the following characteristics have a greater opportunity to build a stronger business than their predecessors:

1. Vertically integrated products with both Hardware and Software to build a moat.

2. The ability to build a recurring revenue model without having to subsidize hardware costs.

3. Built-in data driven network effects.

This is the very reason Internet software giants like Google, Amazon and Facebook are building, making investments or acquiring startups in hardware products. They understand connectivity; they own colossal amounts of data and have a proven ability to build a software subscription business. A hardware product is a means to improve user experience and interaction beyond the traditional computing device like a laptop or a mobile phone. As new user experience paradigms rely less on smartphones and move towards the next generation of devices, newer forms of human machine interactions will evolve.

Contrary as it may seem, the key to building a great hardware startup lies in the software that powers it. As Alan Kay, best known for his pioneering work on object-oriented programming and windowing graphical user interface design, famously said "People who are serious about Software should make their own Hardware."