COMMENTARY | COLUMNISTS | PHIL BAKER

Advances encourage hardware development

2013 was in many ways a watershed year for consumer tech hardware. A “perfect storm” of events is resulting in an abundance of new hardware gadgets that will continue in 2014. What’s the reason?

First, it’s becoming easier for entrepreneurs to develop hardware. Websites such as Kickstarter and Indiegogo are being used to raise the needed funding; interested customers prepay for a product with no guarantee it will ever be built. While few companies come close to the success of the Pebble Watch that raised $10 million on Kickstarter, many ventures have raised $100,000 and more.

Second, technology advancements — such as Bluetooth 4.0, tiny accelerometers and other sensors, and the dropping costs of memory, displays and processors — all enable these new inventions, with some of this technology already incorporated into activity monitors and smart watches.

And third, with the advent of 3D printers, it’s now faster and less costly to make prototype designs and quickly improve upon them. A new concept can be iterated in hours, rather than what used to take weeks.

Apple has shown that great hardware can be as profitable as software, particularly if it’s combined with a service to satisfy a compelling need. That’s led to a development of many new ideas that involve hardware, along with an app.

This year there’s also been a number of new hardware incubators that provide a facility, engineering and business help, to take an idea, develop a prototype, refine it and help get it funded. One example is Highway1 (highway1.io) in San Francisco, where I’ve helped mentor some of the first eleven startups.

"New, open platforms such as Arduino and MakerBot make it easier for anyone to make something,” said Brady Forest, who runs the incubator. “However, a startup needs to learn how to create something that can be made — when they aren't in the factory and do it tens of thousands of times. Mistakes in manufacturing can be costly and the wrong misstep can kill a company before it even gets to market."

The most important contributor, of course, is the entrepreneur, whose enthusiasm, single-mindedness and inventiveness have created projects at Highway1 ranging from an electronic band-aid, electronic jewelry and painkiller to a new kind of bicycle lock. Birdi, a home monitor to measure air quality, is now raising money on Indiegogo. (indiegogo.com/projects/birdi).

Incubators also prepare these entrepreneurs for raising funding from VCs, although many VCs have shied away from hardware investments in the past, because it’s a risk they choose to avoid. While inventory for software is next to nothing, it can be hundreds of thousands of dollars for a hardware device.

But that may be changing. Derek Footer, managing partner of Origo Venture Capital LLC, which recently opened an office in San Diego, explained to me that his company is interested in hardware.

“Because consumer hardware companies are extremely monetizable because of both the front-end solution and the back-end data they collect, they are a new field for startups and there are plenty of entry-level opportunities in which to invest,” Footer said. “They provide an opening for the San Diego/Baja region to develop a real entrepreneurial sector solidly based on local advantage."

One of the big challenges all of these young companies face is getting their invention to market. As hard as it is to invent, engineer and manufacture a product, finding a way for it to be seen and purchased can be many times harder. And new solutions need to be found.

Sales from a website provide only a small fraction of the potential of most products. A former VP of marketing for a moderately successful startup consumer tech company explained to me that he thought his company’s sales were doing pretty well from the website until it did a promotion at Target. Sales in one weekend surpassed a year’s worth of sales from both their site and Amazon combined.

But large retail stores rarely want to work with entrepreneurs with a single product; it’s too much risk and more costly. And it’s getting worse. Retailers have become more focused on selling space in their stores to big companies, and even allowing them to conduct their own sales. Best Buy is adding Samsung-run departments with Samsung employees, which squeezes out room for entrepreneurs’ new products.

For product innovation in consumer tech to prosper, we need new ways to bypass these clogged channels. Not only does it affect the success of the startups, but it also effects innovation in America. A friend who’s an executive in a large company in China that develops consumer hardware says our retail institutions may be this country’s greatest obstacle to growth in innovation.

But there’s reason to be optimistic for our country. With so many new products being developed by so many innovators new channels will be found. As I told the class at Highway 1, there’s never been a better time to develop hardware products.

As this year comes to a close, have a very happy and healthy New Year.

Baker is the author of "From Concept to Consumer," published by Financial Times Press. Send comments to phil.baker@sddt.com. Comments may be published online or as Letters to the Editor.

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