Investing in hardware and the data layer

Over the past couple of months, we have written about a range of themes that have been interesting to us lately. Through public brainstorming, we have met some inspiring entrepreneurs, been introduced to some cool companies and received some great feedback. All in all, we have been enjoying the process of refining our thesis in areas like:

This week, we want to explore hardware. It’s hard to believe that it has been nearly five (!!) years since Boris wrote about the hardware renaissance gaining speed. At the time, we had just made investments in platforms that provide help with funding, selling, or developing hardware, i.e. Indiegogo, Tindie, Upverter.

Today, hardware continues to capture the imagination of many entrepreneurs and investors, and while it is still a difficult pursuit, we all have collectively learned a lot along the way.

For us at V1, we understand the risk of building hardware (i.e. supply chain, capital intensity, etc.), but we are excited about it, and any physical product for that matter, when the big differentiator is in the data collected / software layer which can lend itself to network effects – regardless of whether the hardware is developed in-house or bought off the shelf. We’ve identified two key paths:

  1. Unique product with strong IP

It’s always helpful to be the first to market so that you can be the category leader and build a strong brand, i.e. Nest and Ring. Then, find ways to take advantage of all the data you’re collecting. In Ring’s case, this could be face/people recognition; with social networks like Fitbit, this could be the individuals that are using it for friendly competition.

We recently made an investment in a consumer hardware product in the beauty space that will leverage both social (i.e. community around beauty/artistic creation can be seen all over Instagram, Pinterest, Facebook already) and marketplace dynamics (i.e. people selling/sharing their designs).

On a related note, we see how building a unique product with strong IP can align with the health space (with the added challenge of FDA approval). To date, we have invested in two clinical-grade D2C devices that collect bio sample data which can then be leveraged for network effects to offer personalized and actionable insights on one’s health.

  1. Existing / commoditized hardware

Hardware startups don’t necessarily need to build their own hardware. You can leverage “un-smart” hardware already on the market and “retrofit” it with AI/ML, i.e. add an intelligence layer.  

We’ve seen some companies take off-the-shelf robots (i.e. Universal Robots) and make them “smart”, whether the application is in fulfillment or pizza making. We recently invested in a company that is working on packaging handling. As another example, startups can take advantage of the ubiquity of smartphones and their sensors. In fact, I just met a company that uses the back camera of a phone to measure blood pressure.

If you’re building a hardware product with network effects, please come talk to us!

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