Published On: Fri, May 11th, 2018

The many twists and turns of hardware

Note: This is a final essay in a three-part array on gratefulness thoughts for common sectors of venture-capital investment. The initial article, that attempts to make clarity of a SaaS income multiple, can be found here; the second, on open marketplaces can be found here.

Over a past year, a VC-backed hardware difficulty got a vast boost — Roku was a best-performing tech IPO of 2017 and Ring was acquired by Amazon for a cost rumored to surpass $1 billion. In further to offered into large, vital markets, both companies have glorious business models. Ring sells a high-margin subscription opposite a high commission of a patron bottom and Roku successfully monetizes a 19 million users by ads and chartering fees.

In a context of these splashy exits, it is engaging to cruise a pivotal factors that have finished for essential hardware companies opposite a backdrop of an investment zone that has mostly been maligned by a years, as I’m certain we’ve all listened a trope that “hardware is hard.” Despite this perception, hardware investment has grown many faster than a altogether VC marketplace given 2010, as shown below.

Source: TechCrunch

A vast partial of this investment expansion has to do with a fact that we’ve seen incomparable exits in hardware over a past few years than ever before. Starting with Dropcam’s* $555 million merger in 2014, we’ve seen a series of considerable outcomes in a category, from vast acquisitions like Oculus ($2 billion), Beats ($3 billion) and Nest ($3.2 billion) to IPOs like GoPro ($1.2 billion), Fitbit ($3 billion) and Roku* ($1.3 billion)**. Unfortunately for a sector, a few of these companies have underperformed given exit; notably, GoPro and Fitbit have both cratered in a open markets. 

As of Apr 3, 2018, both bonds traded during reduction than 1x trailing revenue, a distant cry from a multiples of brazen income given to other tech companies. Roku, on a other hand, continues to perform as a batch marketplace darling, trade during approximately 6x trailing income and a marketplace top of $3.1 billion. What sets them so distant apart?

The elementary answer is their business indication — Roku generates a poignant volume of high sum domain height revenue, while GoPro and Fitbit are reliant on continued hardware sales to expostulate destiny business, a income tide that has been low to declining. However, Roku’s height is one successful hardware business model; in this essay I’ll try 4 others — Attach, Replacement, Razor and Blades and Chunk.


“Attaching” a high sum domain payments tide from a subscription to a hardware sale is a idea for many hardware startups. However, this is mostly easier pronounced than finished — as it’s vicious to spike a fixing of a subscription use to a core value tender of a hardware.

For example, Fitbit rolled out coaching, though people buy Fitbit to lane activity and nap — and this mismatch resulted in a low insert rate. On a other hand, Ring’s subscription allows users to perspective past doorbell activity, that aligns ideally with business looking to urge home security. Similarly, Dropcam sole a subscription for video storage, and during an estimate 40 percent insert rate created a clever mercantile model. Generally, we’ve found that a insert rate required to emanate a viable business should be during slightest in a 15-20 percent range.


Unlike a “Attach” business indication that sells services directly associated to improving a core functionality of a hardware device, “Platform” business models emanate subordinate income streams that manifest when users frequently rivet with their hardware. we cruise Roku or Apple to be in this category; by carrying us glued to a smartphones or TV screens, these companies acquire a payoff of monetizing an app store or portion us targeted advertisements. Here, a income tide is not tied directly to a initial sale, and can feasible scale good over a hardware domain that is generated.

In fact, AWS is one of a some-more successful new examples of a hardware height — by creatively tillage out a ability from existent servers in use by a company, Amazon has generated an enormously essential business, with some-more than $5 billion in quarterly revenue.


Despite a extraordinary economics of Apple’s App Store, as of a company’s latest quarterly gain report, reduction than 10 percent of their scarcely $80 billion in quarterly income came from a “Services” category, that includes their digital calm and services such as a App Store.

What unequivocally drives value to Apple is a deputy rate of their core money-maker — a iPhone. With a normal consumer upgrading their iPhone any dual to 3 years, Apple creates a vast repeated income tide that continues to devalue with expansion in a implement base. Contrast this with GoPro, where partial of a reason for a bad marketplace opening has been a inability to get business to buy a new camera — once we have a camera that works “well enough” there is small inducement to come behind for more.

Razor and Blades

The best instance of this is Dollar Shave Club, that utterly literally sole razors and blades on a proceed to a $1 billion merger by Unilever. This business indication customarily involves a low or 0 sum domain sale on a initial “Razor” followed by a long-term repeated subscription of “Blades,” though that a strange hardware product wouldn’t work. Recent try examples embody categories like 3D printers, though this indication isn’t anything new — cruise of your coffee machine!


Is it still probable to build a vast hardware business if we don’t have any of a repeated income models mentioned above? Yes — only try to make thousands of dollars in sum distinction any time we sell something — like Tesla does. At 23 percent sum domain and an normal offered cost in a $100,000 range, you’d need some-more than a lifetime of iPhones to even proceed one car’s value of margin!

So, while we don’t cruise anyone would remonstrate that building a successful hardware business has utterly literally many some-more relocating tools than software, it’s engaging to cruise a nuances of opposite hardware business models.

While it’s transparent that in many cases, repeated income is king, it’s formidable to contend that any of these models are alone some-more superior, as vast businesses have been built in any of a 5 categories lonesome above. However, if forced to choose, a “Platform” indication seems to offer a many unconditional upside as it’s demonstrative of a aloft rendezvous product and isn’t indexed to a strange value of a product (some people positively spend some-more on a App Store than on a iPhone purchase).

While it’s easy to take a slight perspective of VC-hardware investing formed on a outcome of a few splashy tech gadgets, broadening a orifice only a bit shows us that vast hardware businesses have been built opposite a accumulation of industries and business models, and many some-more successes are nonetheless to come.

*Indicates a Menlo Ventures investment

**Initial value during IPO

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