The hardware news of the past 24h is that Basis, the smart watch that did everything from count your steps to count your heartbeat, was sold to Intel for “around” $100M. With $33M raised over 3 years, not quite the Nest outcome all of us cheerleaders of the hardware startup ecosystem were hoping for. I’m not sure exactly what went on behind the scenes here but I do think there are some observations on the deal that are worth noting.
Hardware Takes Capital
It may take less capital to get a hardware startup started these days but it still takes meaningful capital to scale hardware businesses. It took Nest $80M and has so far has taken Oculus $93M, Fitbit $66M and Pebble $25M. There are a few alternative ways to grow hardware companies, including loans against orders, but old fashioned equity seems to always be a key part of the equation. To take Basis to the next level, meaning a totally new product, would have likely required an amount of capital that just wasn’t obtainable given the company’s trajectory.
Hardware is a Commodity
With few exceptions, there is absolutely nothing unique about what a specific hardware startup is building. Unless you are like Samsung, Apple or Intel you have access to the exact same building blocks as everyone else out there. You may be able to stick the blocks together in an innovative way or come up with a different way of using those blocks but there is nothing about your pieces on the hardware level that no one else can copy. The hardware is a commodity and without a specific value proposition, key differentiation and powerful software, it doesn’t matter how good your hardware is; it’s no different than what someone else can build. Said another way, technology alone doesn’t win the day - sticking a “optical blood flow sensor” on the bottom of a watch doesn’t get you very far.
Because hardware is expensive to build and the hardware alone isn’t super valuable as an asset, for consumer facing hardware startups traction really matters. It is traction that got Nest a cool $3.2B and makes assets like Coin and Fitbit attractive. Absent consumer traction, there is a valley of death that hardware startups face due to the fact they are expensive to scale. This death valley falls around the series-B / series-C level with $20-40M raised. See, in the early days (seed / series-A), the hardware startup can sell on the vision of what will be. As the company matures, if the traction isn’t there and a new product is required it can take another $10M+ to get something to market. But lacking the consumer traction, raising that amount of capital becomes difficult/impossible. A similar dynamic exists in the software startup world but the issue is magnified here thanks to the capital intensity of hardware - a software startup may be able to develop a new product with a fraction of the capital required for a hardware startup (i.e. Twitter). Traction matters if your hardware startup is consumer facing.
With Basis out of the mix, what does the future hold for wearables? I remain bullish but don’t think getting there will be easy.