Investing in hardware

What is hardware?

Techno trends

Investing in hardware

Unicorns in HW

Venture model & business model

Role of crowdfunding

Hardware startup

What is consumer hardware product?Hardware product is a connected device with a

set of features. Hardware is a platform.

Software does not exist without hardware.

PCB + Industrial Design + Algorithm + Cloud

Hardware device components

Sensors Connectivity Brains

blood, air, etc. ZigBee, Bluetooth, WiFi

Microcontrollers Microprocessors

New hardware startups on Angelist

3500 - 6000 HW startups

globally

200-400 HW startups

in Russia

Drivers of growth - IoT, Moore’s Law & beyond

3D printing & prototyping technology

open hardware

connectivity of devices - IoT,

sensors

Nanotechnology

Cheap sensors, Cheap bandwidth, Cheap processing

Semiconductors’ price falling

100x times decrease

Components price

decrease

100x times decrease2015 vs. 2012

Microcontrollers' market growth

CAGR 11%

Drivers of growth - IoT, Moore’s Law & beyond

crowdfunding 10,000,000 backers

1.5 billion smartphones as

controllers(IDC)

Pipes & apps

Techno trends

Internet of Things: Technology Roadmap

2000 2010 2020 Time

RFID tags (routing, inventorying, loss

prevention)

Surveillance, security, healthcare, transport ,

document management

Locating people & everyday objects

Teleoperation & Telepresence

Advanced sensor fusion

Miniaturisation, power-efficient

electronics

Indoor communication

Tech

nolo

gy re

ach

we are here

CES trends 2016

CES, also known as the Consumer Electronics Show, is an internationally renowned electronics and technology

trade show, attracting major companies and industry professionals worldwide. Inaugurated in 1967, it hosts 140 000 attendees & nearly 1000 companies.

New products & technologies are often debuted on CES.

CES Innovation Awards (large companies)Diet sensor based on SCIO Smart fish finder Vehicle intelligence by Ford

360 degree camera Ricoh Theta S

OURA - Smart ring with biosignal tracking Video headphones

Lily drone Musical seaboard RIDE Robotic bartender

Gartner: Which technologies will get adopted at scale?

Smart robots Human augmentation

Connected home Autonomous vehicles

Smart workplace Quantified self

IoT Wearables 3D printing

3D printing innovation - new materials, incl.

advanced nickel alloys, carbon fiber, glass,

conductive ink, electronics,

pharmaceuticals and biological materials

Connected things - Digital Mesh

AI: autonomous learning (DNN) &

agents

User need & demand

USER NEEDTechnology Push Market Pull

push through R&D, production & sales

function

response to an identified market

need

x

AR Smart watches

need to test market & user needs

can be validated via crowdfunding

Investing in Hardware - Facts

Investment in HW rocketed in 2012-2013Hardware startups by the year of funding

Source: O’Reilly «Hardware by the numbers» (2015)

Hardware is boomingChances to find/build unicorn hardware startup is 2x times higher than

pure software startup. There are still few: 6000 hardware startups - 11+ unicorns

investment hardware startups is booming

Source: TechCrunch, Bolt

$3.5 bln

IoT investments soar

Share of HW investment in total investment?

US data

$48 billion

$3.5 billion

4,356 deals

200+ deals

$19.8 billion 1,799 deals

100%

4.6%

41%

100%

7.3%

41%

Global VC funding vs. HW VC funding

Total VC

HW VC

Soft VC

Source: PWC MoneyTree (2015), bolt.io (2015)

Hardware ecosystem growthCommunity Accelerators Fablabs

over 1000 hackerspaces

worldwide

Physical things are great. They just haven't been as great a way

to start a rapidly growing business as software.

Paul Graham

Most funded hardware startups & exits

Features of hardware unicorns• Software is a key: there is (almost) no hardware without software

• Exit: mostly M&A, only 1 IPO

• Most companies are B2C. Robotics are mostly B2B

• Wearables and smartwatches are a smaller percentage

• Crowdfunding is becoming a platform for top hardware startups

• Hardware unicorns are growing faster

• Unicorns ship productsSource: http://techcrunch.com/2014/11/17/lean-hardware-breeding-hardware-unicorns/

Business Model in Hardware

Other business models - unlock Venture Model & stable cash flows

Jawbone

Portfolio model

Pebble

Hardware-as-a-Platform

Kindle Dropcam

Hardware-enabled servicesSoftware

$46 m$818 m $48 m

HESHaaP

Other business models - unlock Venture Model & stable cash flows

CreoPop Petnet

Consumables Ecosystem

Makerbot$4m $10m

Economies of scale in HWBO

M m

ark-

up p

rice

1

1,25

1,5

1,75

2

1 10 100 1000 1000000

Units

depends on product demand

2015 2020

7,1

2,7

IoT Market Challenge: «Things» is a small slice…Internet of Things Total Market

(in USD billion)Hardware vs. Software IoT Sales in

B2B by 2020

Hardware 10 %

Software 90 %

Source: IDC, 2014 Source: Business Insider (BI), 2014

• 23 billion active IoT devices is expected by the year 2019, which is expected to push down device pricing.

• Most of the spending will go to software & services, while hardware sales will account for a very small slice.

• Barriers to entry are high cost & time associated with setting up IoT systems.

Software is key!

Crowdfunding: funding or validation?

Top hardware startups & crowdfunding

Source: http://techcrunch.com/2014/11/17/lean-hardware-breeding-hardware-unicorns/

Top hardware startups & crowdfunding

Source: http://techcrunch.com/2014/11/17/lean-hardware-breeding-hardware-unicorns/

- top crowdfunded

Crowdfunding is becoming a systematic

validation method for hardware

startups

VC funding or Crowdfunding first?

Crowdfunding campaigns are launched after the VC round

Case-study: Canary

http://www.fastcolabs.com/3035852/how-vcs-use-crowdfunding-to-make-sure-their-hardware-startups-pay-out

The all-in-one home security system you

control from your phone. It’s built to learn and sends intelligent alerts

with HD video and audio directly to

your phone.

2013 $1.2 million seed

2013 $2 million on Indiegogo with a goal of $100,000

2014 $10 million from Khosla

2015 $30 million from Walden

Crowdfunding - Unlocking Venture Model

0

4

8

12

16

Pre-seed Seed Pre-Round A Round A

Company value growth 4-10x after

crowdfunding

Product validation

Marketing

Valuation growth

1

2

3

Crowdfunding - findings by CB Insights• $321 million – Total VC financing to-date to crowdfunded hardware projects • 9.5% – The percentage of crowdfunded hardware campaigns that have gone

onto raise VC • 2013 – The momentum has been building as might be expected and 2013 was a

big year for funding. 2014, if the current run-rate continues, we will see a new deal high for crowdfunded hardware campaigns.

• Misfit, Formlabs and SmartThings – The top 3 most well-funded crowdfunded hardware startups (un-exited)

• Unrelated – Surprisingly, there doesn’t appear to be a relationship between the amount a campaign raises on a crowdfunding platform and the amount it raises from VCs.

Unrelated crowdfunding vs. VC funding size

Key takeaways• Crowdfunding is a model of validation & value growth

• Hardware unicorns - software+hardware monetization model

• Crowdfunding is launched after seed funding

• Hardware startups & investment boomed after 2012

• Key hardware market drivers - cheap components, technology shifts, crowdfunding, smartphones

Alexa Zotova az@ruvento.com

Checklist of a successful hardware startup• Business model - recurring revenue

• CEO is proven leader

• Domain expertise

• Speed of execution

• Product ecosystem change for roadmap of future products

• Product economics

• Market & dynamics

• Innovation