“Hardware is hard.” Anyone building a business in IoT, robotics or electronics can expect to hear this frequently from investors and other entrepreneurs.
The original quote gets credited to Marc Andreessen, whose op-ed, “Why software is eating the world,” outlines the many advantages that software companies hold over physical product companies.
Marc Andreessen isn’t wrong. Hardware companies are difficult to start — and even more difficult to scale. Whereas talented software developers can spin up applications from their couches, mechanical and electrical engineers often need to spend tens of thousands of dollars to build their early prototypes. The capital intensity gets even worse when a product is already in the market. If software companies find bugs post-launch, they push an update. When hardware companies discover a product flaw, they enter the stressful, logistically complex and potentially bankrupting process of recalls and field retrofits.
In spite of the harsh realities, we hardware entrepreneurs get some benefits that our friends in the software world don’t enjoy, particularly when we’re first-movers in our markets:
1. Tangible products yield tangible impact. For environmental or other mission-driven entrepreneurs, hardware startups provide an opportunity to make real change in the real world. It’s no wonder that most of the companies most ambitiously tackling renewable energy, space travel, nutrition and animal welfare make physical products. While the journey as a hardware entrepreneur is indeed a grind, your reward is to create a tangibly better world.
2. Hardware product lines stay simple. In order to succeed in enterprise sales, early-stage SaaS companies often have to customize their product for each client. When an important client demands a modified version of a software product, entrepreneurs often have to agree in order to secure the deal, but this can create problems down the road when many custom features for many clients need to be supported year after year. Too much customization can also mislead entrepreneurs into thinking they’ve found product/market fit, when in reality each customer wants a somewhat different product.
On the other hand, in hardware businesses, one-off customization of the physical product is simply too expensive to be feasible, and our clients understand this. This simplifies our business model and makes it easier to scale.
It also means that we know with certainty when we’ve found product/market fit, because multiple customers are buying exactly the same thing.
3. Hardware startups see competitors coming. I learned in the Netflix documentary “Generation Iron” that in strongman competitions, new athletes never take the competition by storm. It takes so many years of training for up-and-coming athletes to build sufficient muscle mass to reach the podium that they always work their way up the ranks slowly, giving the reigning champions time to prepare for them.
This immediately resonated with me, not because of my deadlift skills, but because the competitive landscape in hardware businesses is similar. Because the cost of errors is so high in hardware compared to software (since the latter can be quickly and inexpensively fixed post-launch), product development cycles are much longer and require more field testing. Even giant companies tend to beta-test their hardware products for a year or so before ramping up. This gives first-movers in hardware more time to react.
This is arguably the biggest advantage of being a first-mover in hardware vs. software, where a few great developers in a garage (or more likely in an accelerator program) can raise millions, swoop in and quickly take your market.
4. Higher switching costs in hardware businesses protect the first-mover. In software, competitors are so dangerous because (with some exceptions) the costs of trying an alternative solution are low or nil. A daily user of one food delivery app could easily try another for a discount or just for fun, and switch between the two in a heartbeat.
In hardware, competitors have a much greater challenge than convincing your customers to try a different website. They’ll need to convince them to physically install a new product and to remove and return or dispose of your product. Switching costs are higher.
In order to accept these switching costs and deal with the physical disruption of moving from your product to a competitor’s, your customers will have to believe that your competitor’s product is significantly better or significantly cheaper than yours.
5. Hardware companies have downside protection. If in the end a software company fails to dominate the marketplace, all is often lost. Many software businesses operate in truly winner-takes-all or winner-takes-most markets, so that in a downside scenario, the companies would be worth $0.
In hardware companies, even in the sad situation that a competitor ultimately wins and your product loses, there’s often money left for shareholders to salvage. As long as the physical assets you’ve built can still deliver value, they’re worth something.
Knowing that in a downside scenario your business will still be worth a positive number provides solace to entrepreneurs and investors, particularly at a later stage when the dollar value of your assets is higher. And even if no one will pay for our hardware products, we can turn them into strange contemporary art or furniture. (I’ve definitely pondered turning Bevi machines into wardrobes, benches, alien phone booths, etc.)
It’s true that hardware is hard, but I hope knowing about these unique advantages helps other hardware entrepreneurs in their journeys.