Are investors becoming less reluctant to invest in hardware startups?

Until recently, if you asked shrewd tech investors about the best place to inject a substantial amount of funding capital, the most likely answer would be along the lines of “Pump those dollars into software”. Nowadays, however, a current (and also surprising) surge of hardware startups – often at the grassroot level – makes them an ideal target for financiers keen to ride an impending investment trend.

Hardware startups, as companies that actually produce tangible goods, have habitually had a difficult time luring prospective investors to back their products. As a rule, software entrepreneurs have had a much easier time garnering bankable interest from funders, even considering the current slump in the value of web companies such as Groupon, Zynga or Facebook.

Venture Capitalists have consistently rushed to fund software products that deliver strong ROI: with the Andreessen Horowitz Effect pushing up valuations before financing is even assured, it’s no wonder hardware startups have found it difficult to obtain funding. For investors seeking to push beyond software-centric funding strategies and move towards a market that’s less saturated and innovation-heavy, at first look the hardware sector may seem like a downright idiosyncratic choice.

For starters, hardware startups traditionally face larger outlay due to the constraints of necessary infrastructure required to produce objects and devices, extended insurance costs, the length of time taken to produce finished products, safety issues, and rigorous bug-testing prior to product releases (unlike software, fixes can’t simply be patched through convenient updates). Luckily, today’s breed of hardware companies have a vastly increased chance at success now that the software investment stranglehold is rapidly changing.

Previously, investing in hardware companies has fallen into a higher-risk category, with only brave financiers taking the gamble to predict, select and (only then) fund hardware startups that corner a market niche worthy of substantiative returns. Software has been widely viewed as a more stable and scalable (hence reliable) option. The reason for this perceived reliability of software investment is lower cost of production, especially given outsourcing and the fact contemporary software companies rarely rely on the physical shipments of mechanical or electronic components.

Another challenging aspect involved in hardware production is the reality of complex manufacturing processes, involving multiple fabrication and retail distribution (dealing with 3^rd parties for construction, and double handling of machined parts before final assembly can even begin).

Thankfully, software investment dominance has started to break down with advancements in 3D printing/rapid prototyping and DIY maker culture, where manageable niche production and fast, low-cost hardware construction becomes the norm.  Open source and long-tail manufacturing also helps encourage investment in hardware startups, with crowdsourcing schemes and hardware incubators such as Lemnos Labs, Bolt, HAXLR8R and PCH Accelerator definitely boosting a chance at locking down funding.

Let’s not forget the fact that gadget consumers really do love the shiny: just as early-adopters are determined to jump on any new app or social media platform that reaches “critical mass” in the media (where marketers push the product pre-launch to stratospheric heights), gadget addicts can display similar slavering puchasing behaviour patterns for the next phone, tablet or device. Hardware startups also have a higher chance of producing cloneproof products, with the likelihood of duplication lower in terms of actual product execution – a definite plus in terms of investment.

Let’s face it – investment is a tricky art. Competent investors become successful via their ability to pick the right product to fund, whereas great investors also know precisely the exact time to throw that money at it. No-one wants to back a low performing one-trick product “pony” (whether it’s produced by either a software or hardware startup) so investors: perhaps it time to look at a fresh new hardware company, and be correspondingly savvy about exactly who you choose to finance.

Image Credit: Jessica C