The Hardware Startup Movement

In light of Internet Week and Walkabout NYC, Undercurrent’s office has been buzzing about local startups. The roster of tech startups that are opening their doors on 5/18 are a familiar ilk: SaaS companies, apps, and e-commerce sites.

It’s not surprising, especially if you look at the recent YC list: the reigning model for entrepreneurs seems to be (1) make software-based (predominately, web-based) tools and (2) scale it up.

I see few entrepreneurs pursuing hardware startups, and for good reason. Challenging the Samsungs, Apples, and GEs of the world seems onerous without generous capital, long lead times, IP, and research budgets. While I’m bullish on hardware companies like Nest and Jawbone, they face far more challenges than the average software startup (ignoring the daunting competition that both received from incumbents Honeywell and Nike, respectively).

Thankfully, there’s an opportunity for the next ebb and flow of startups to be far more successful in hardware. The next startup bubble, perhaps in 7-10 years, could be a hardware bubble. It’s fueled by the thriving maker movement, a return to making physical stuff by a growing population of hobbyists and engineers.

Today, software is an easier course of action for entrepreneurs. The barriers to entry are low, with frameworks (Rails, Jquery) and services (Heroku, AWS) making it dead simple for anyone to take on the technical burden of building an app. Equipment is easy: a laptop and server. Combine this with the lean startup ideology and a small, young team can build just about anything within a reasonable timeframe. It’s no surprise that Instagram can pull off an amazing app with eight people and an insane tech stack, all impossible five years ago.

What’s interesting is that the same dynamics are beginning to shape hardware too. The forces that made software so alluring to entrepreneurs are finally permeating to hardware: open source platforms, lower capital requirements, and easier development.

Open Source Hardware

While open source software platforms have been commonplace for decades, I’m finally seeing significant progress in hardware. It’s allowing for amateurs to build and manufacture products without significant professional expertise, akin to emergence of web frameworks that democratized web development over the past decade. Recent estimates approximate 350 open source hardware projects, the most significant including Arduino (physical computing platform), Makerbot (3D printing), and Sparkfun (electronics).

Many hardware developers are opening up their designs (e.g., CAD files) and firmware to allow for a sort of remix culture for hardware. We’re not at the point of “APIs” for hardware, but small communities are quickly building amazing open source projects. Wikispeed, an open-source car, and Open-source Ecology, industrial machinery, are great examples of this.

Personal fabrication

Hardware startups can operate on the same principles as lean software startups, quickly iterating and operating with only a few thousands of dollars in capital. Prototyping was always problematic—a one-batch run of a product can be incredibly costly to fabricate, yet it’s a necessity to secure funding. While traditional manufacturing requires labor-intensive tooling and setup, new technologies such as additive manufacturing and CNC tools operate like desktop printers, taking in files and outputting physical objects. Every garage is a potential high tech factory, making it much easier for an entrepreneur to move from hardware idea to finished product.

Makerbot, a $2,000 3D plastic printer, democratizes manufacturing at the consumer level. The company has managed to drop materials costs down to pennies per cubic centimeter, a big difference from the industrial printers running at $300,000 per machine and $100 per cubic centimeter of plastic. Mid-tier priced equipment allows for “Kinko’s of manufacturing.” Techshop, Fablab, and 100K Garages are all examples of small, decentralized manufacturing operations where individuals can fabricate prototypes and end products without approaching traditional factories.

Long Tail Manufacturing

As with software, lower costs and easier manufacturing will allow access to new markets for hardware. We’re predicting a long tail of manufacturing—niche hardware products made possible by low volume fabrication, on-demand manufacturing (and consequently, no inventory), and a shorter learning curve. Economies of scale is no longer an issue.

This is substantiated by the numerous hardware projects on Kickstarter without mass appeal, but sustainable at lower volumes due to greatly reduced costs. The Pebble Watch project on Kickstarter is a great example of this new breed of hardware startups, prototyping and producing a first run with relatively lower capital to a market that wouldn’t be valuable to large manufactures.

Realizing this future and its potential has a lot to do with the maker movement. Education seems to be the biggest hurdle, as technology is finally at a place where cost and capability are not barriers to entry. The Maker Faire, just a few days away on 5/19 in SF, will be a hotbed for discussion on how to raise awareness for new technologies and educate the next wave of entrepreneurs on opportunities in hardware.