The “Hard” in Hardware

**Originally published 10/7/2013

So the world is now flocking to hear the music of hardware startups. Kickstarter is rockin’ with all types of makers testing the market for prototype demand and feedback. The press is full of flowing prose for founding teams that are “taking the offline online” and creating “the internet of things.” Is this all “sensor-y” overload? (thank you, here all week).

Well, believe the hype.

At Promus Ventures, we are out-of-our-boots excited with our investments into hardware startups that are indeed changing the world. We are backing companies that combine deep software with proprietary hardware for unmanned aerial systems (UAS), wearable computing, quantified-self devices, retail 2.0, and precision agriculture. These companies have massive visions with far-reaching IP that covers both the software and hardware sides of their business.

But grasshopper, lest not be fooled: hardware is hard. Just like a symphony, many different instruments must be in tune and play well together to produce success. It is a long road that requires buckets of experience, patience, and capital. I have invested in numerous hardware companies and still sit on these boards — it is not for the feint of heart:

• Supply chain management is never easy, and often times you outrun your coverage. When this happens, you may end up having to invest downstream to guarantee supply of a key best-of-breed component. Not good — plan your supply chain carefully. China is not one town over.
• While the cost to bring hardware to the market has decreased, it is still difficult to scale good ole’ manufacturing. Unfortunately there are no Amazon Web Services for production and fulfillment. The sharing of expensive testing equipment in university or accelerator settings is helpful in a startup’s early days, but scaling component manufacturing takes time and precision.
• Hardware betas are different than software betas. Hitting rollout dates is tricky and difficult to control. It should not surprise anyone of the long delays in many of the current crowdfunded hardware projects.
• Strong financial controls are a must. Inventory levels and turns, AP/AR, contribution margin, bookings, and backlog are only a few of the key dashboard readings that must be real-time managed. Cash burn can easily fluctuate wildly as the company ramps to fill large orders and balance milestone payments. It is hard to fathom just how much cash is consumed by raw material and WIP in these cycles.
• Large government grants for product development are enticing, but be careful in taking the bait. The time spent in grant writing and process approvals are arduous, and take precious time away from bus dev in other large commercial sectors. Appropriations seem to always be delayed and committee personnel/administrations come and go.

There is plenty more to expand upon and I unfortunately (or fortunately) have learned many lessons the hard way. Starting any type of company is difficult, but hardware is especially so and let’s be clear about the challenges. But when it works, oh it is a symphony to behold and the results and sense of accomplishment are magical.

So cue up the orchestra. Let the music play on.