The rise of hardware startups: why croudsourced gear is the future

10th Jul 2013 | 16:32

The rise of hardware startups: why croudsourced gear is the future

Hardware launches are changing

A huge number of hardware startups are emerging all over the place at the moment, so where have they come from and what do they mean for us?

We hear about software startups no end, with the latest apps and social networks grabbing the headlines with hackneyed platitudes such as 'the next Facebook?' before disappearing into the ether. But bubbling under the software hyperbole, there's a volcanic rise of hardware startups that will change the face of consumer electronics forever.

The development of third-party software exploded with the advent of the internet. It was, and still is, easy for skilled individuals to make their own software and even start a software company. The initial costs will always be relatively low, needing only a computer, time, a particular skill set and some staff.

In comparison, the initial upfront costs of starting a hardware company are huge. COO of Miura Systems, Richard Goodlad, says that his initial costs were US$4.3m (around £2.8m / AU$4.7m), which includes manufacturing and sourcing of materials.

Ian Hogarth, CEO and co-founder of Songkick, explained to us that his startup costs were around £15k (around US$23k / AU$25k), which pales in comparison.

With the gulf in startup costs this extreme, starting up a hardware company is a serious financial risk, which is why hardware has been left, traditionally, to the big players such as Sony, Apple, Samsung and Google.

Competitive pricing

The rise of hardware startups

But three things have changed in recent years that have levelled the playing field. Firstly, the battle for supremacy between the big players has crashed the price of materials. The smartphone war and the never-ending conveyor belt of budget smartphones has driven down prices of components and made them affordable for a small or medium-sized business, which, ironically, has increased competition.

Companies such as Google have introduced disruptive pricing models, such as a £239 / US$299 / AU$349 Nexus 4, that has forced down the price of components and made other companies follow suit.

According to iSuppli Research, a Samsung Galaxy S3 cost US$204 to make in 2012, whereas the Samsung Galaxy S4, a phone with an upgraded quad-core 1.6GHz Cortex-A15 processor and a 1080 x 1920 pixel 4-inch screen, among other improvements, cost US$233.

So you can see a significant drop in the cost of materials. iSuppli estimates that the percentage share of DRAM - an important component of smartphones - on the overall cost of materials dropped from 14% in Q1 2011 to almost 6% in Q1 2012.

Crowdfunding

The rise of hardware startups

The second thing that has changed is access to finance, or, more specifically the rise of crowdfunding websites such as Kickstarter and Indiegogo. These websites have been a revelation for entrepreneurs in recent years, connecting them directly to other enthusiasts who understand the problem they're trying to solve and are willing to fund the entire process.

Projects that may have never got off of the ground through traditional finance streams are judged and voted for by the public, in a modern interpretation of Athenian democracy.

Products such as Fitbit, Pebble and Ouya have significantly benefitted from this funding model and produced products that might have seen the bottom of the waste paper basket in a central London boardroom.

But the traditional finance streams still play an important role. Accelerator programmes, where companies receive funding and work space, are springing up around the country. These accelerator programmes offer more than just money, they offer work space, which is often shared with other companies and can offer expert advice.

Paul Smith, director of the Ignite 100 accelerator programme in Newcastle, UK, told us: "It's difficult to put a number on [how many hardware startups there are in the North East of England]; there's probably a dozen or so, if by startups you mean small, early-stage teams. A few notable ones include Screenreach, Earsoft and Bubblepix.

The rise of hardware startups

"In an accelerator programme like Ignite 100, a hardware startup has an advantage that others who opt for crowdfunding may not enjoy - shared workspace. Research and development, marketing and design are all significant costs a hardware company will have to bear, it helps to have those services available in the same room for next to nothing."

Smith said that the rising popularity of starting a hardware company is because of "changing attitudes in technology, the realisation that our understanding improves as we measure and quantify the world around us." He adds: "The fact that small teams that can now afford the raw materials and equipment to build working prototypes means we can begin to explore this domain."

Recognising the importance and popularity of hardware startups, some investment firms are tailoring their accelerator programmes specifically for hardware companies, such as the recently launched Taiwan Mobile Innovation programme, or the oddly named Haxlr8r, which is based in Shenzhen, China.

The people behind the Taiwan Mobile Innovation programme explained that the reason they created it was because entrepreneurs were unable to provide proof of concept or a working prototype to investors, often asking investors to take a leap of faith.

Prototyping

The rise of hardware startups

This feeds into the third reason why things have changed for hardware startups: the production of prototypes. The 3D printing boom has seen affordable 3D printing devices turn up on the market, and companies can now feasibly get an object 3D printed, or buy a machine itself, for a relatively low cost.

Access to expertise, too, has become easier via websites such as Science Exchange, where people can pay for scientists to conduct experiments for them.

Goodlad agreed that 3D printing has had an effect, explaining: "3D printing is in its infancy, but there's lots of potential there [as well as] the openness of manufacturers and sourcing who are using their web as a way of marketing their manufacturing services and products."

These changing factors have created a healthy environment for hardware startups to grow and succeed. In the UK, Cambridge's history in science and engineering (both in academia and business) attracts hardware companies to an established startup ecosystem - most notably ARM.

Smaller companies also migrate there to begin their startup journey. Currently, there are 155 physical science and engineering companies in Cambridge, with a turnover of £1.7bn and over 9,000 employees.

Future hardware startups

The rise of hardware startups

But what does this mean for the future?

The big boys will be taking note and watching carefully. There's clearly a consumer appetite for independent devices, and there's always space for an invention that solves a day-to-day problem.

Innovation can't be monopolised by conglomerates, because, ultimately it will stifle creativity. We're now seeing useful devices being created by normal people with regular day jobs. Indy games console Ouya was created by an ex-games exec, and 3D mouse pointer Mycestro was invented by an engineer.

Goodlad, however, thinks that the big companies will still be pulling the strings: "Every market will have market leaders creating the rules, whether that be Apple, Microsoft or in our case, the payment card issuers. The successful independents will be the ones that establish strong partnerships with them, who gain trust and credibility through creativity and their ability to add value to their partner's business."

Regardless, there are still exciting devices such as Omni, a virtual reality peripheral that enables you to walk on the spot, and a 20 second phone charger that was invented by a US student. These devices that were first dreamed up in someone's bedroom will change the face of technology.

But what's most exciting is that the intrigue, scientific exploration and available technology that fuelled the app surge now exists for hardware. We can look forward to an age where hardware companies are popping up with new devices as quickly as apps do on the Google Play Store. The resultant impact on our future is meaningful but, more importantly, it's mechanical.

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