20VC Why Hardware Is Actually Software Wrapped In Plastic & Of Course Hardware Is Hard, Everything Is Hard with Ben Einstein, Founder & General Partner @ Bolt VC



In a special two-part feature on hardware, Harry Stebings of the 20 Minute VC podcast is joined by Ben Einstein, founder and general partner at Bolt, a venture fund that invests in early-stage hardware and software startups. They discuss the renaissance of hardware investing, driven by factors such as contract manufacturing and the proliferation of smartphone component supply chains, rather than the flashier trends like crowdfunding and 3D printing. Einstein emphasizes the importance of brand in consumer hardware and how successful companies integrate recurring revenue models and services into their products. He also highlights common misconceptions about hardware, such as the oversimplified notion that "hardware is hard," and stresses the need for more investors willing to understand the unique challenges of the sector. Throughout the conversation, the role of software in enhancing and monetizing hardware is a recurring theme, with Einstein sharing insights on various business models that leverage this interplay.

Summary Notes

Introduction to the Podcast

  • Harry Stebings introduces himself and the special two-part series on hardware.
  • He mentions his newfound interest in hardware inspired by a blog written by a VC.
  • Harry welcomes Ben Einstein, founder and general partner at Bolt, onto the show.

"Now, why hardware? I hear you ask? Well, because I found this incredible blog the other day on hardware that's really inspired a love of the subject for me and its changing relationship with software."

This quote sets the stage for the podcast, explaining Harry's recent interest in hardware and the reason for the episode's focus.

Bolt's Mission and Investment Strategy

  • Ben Einstein's Bolt focuses on early-stage startups at the intersection of hardware and software.
  • Bolt invests up to $500,000 in pre-seed, pre-product companies.
  • Companies funded by Bolt have received later funding from prominent firms.

"Bolt is a fund designed to address the unique needs of early-stage startups at the intersection of hardware and software, investing up to $500,000 in pre-seed pre-product companies."

Ben Einstein's quote describes the purpose and investment approach of Bolt, highlighting its specialized support for hardware and software startups.

Ben Einstein's Background and Entry into VC

  • Ben Einstein has a strong product background and history of fixing things since childhood.
  • He ran a product design consultancy before founding Bolt.
  • Small companies had difficulty affording consultancy fees, leading Ben to rethink his approach.

"I'm a product guy. I've been a product guy since I was a small child fixing like dishwashers and lawnmowers and stuff."

Ben's quote reflects his lifelong passion for products and problem-solving, which underpins his professional journey.

The Genesis of Bolt

  • Ben sought a better way to work with small hardware companies.
  • He engaged in customer development and consulted with founders and VCs.
  • Ben discovered hardware startups had broader issues beyond product design, such as hiring, prototyping, and fundraising.

"It's really hard for us to raise money. Most investors tell us to get the hell out of their office as soon as the word hardware is mentioned."

This quote highlights the challenges hardware startups face in securing funding and the negative perception of hardware in the investment community.

The Misconception of Hardware Being "Hard"

  • Ben believes the phrase "hardware is hard" is misleading.
  • The difficulty comes from a lack of experience and knowledge in the startup community.
  • Knowledge transfer and asking the right questions are crucial for hardware startups.

"The big problem with hardware being quote unquote hard is not the inherent nature of hardware. It's the fact that most people that are in the startup community have never done it before."

Ben's quote challenges the common belief that hardware is inherently difficult, attributing the challenges to inexperience rather than the nature of hardware itself.

Growth in Hardware Investing

  • Hardware investing has increased significantly in the last five years.
  • Ben questions the true drivers of this growth beyond trendy topics like crowdfunding and 3D printing.

"In the last five years, hardware investing has increased 30 x according to stats."

Harry's quote points out the remarkable growth in hardware investing, setting the stage for a deeper exploration of its causes.

Real Drivers of Hardware Investment Growth

  • Ben asserts that contract manufacturing is a key driver of the hardware boom.
  • The shift from companies building their own manufacturing facilities to outsourcing is significant.
  • Hardware encompasses everything outside of software, and its importance is being recognized differently now.

"The real reasons, in my opinion, that hardware has become a much more interesting field... I think people forget that hardware really is everything. It's really everything other than software."

Ben's quote emphasizes the fundamental role of hardware in technology and how the evolution of manufacturing practices has fueled investment growth.## SaaS for Hardware

  • Small, cash-strapped companies can build products at high quality using a service fee model akin to SaaS.
  • This model acts as an enabler for the hardware ecosystem.

"I'm going to pay you a fee, a service fee to build this thing. For me, it's sort of like SaaS for hardware."

The quote explains the concept of paying a service fee to build hardware products, drawing a parallel to the Software as a Service (SaaS) model, which is a facilitator for small companies to create high-quality hardware.

Supply Chain Management

  • Owning the full supply chain ensures quality but managing it remotely introduces complexity.
  • The trade-off of outsourcing manufacturing includes dealing with supply chain issues versus the benefits of not managing direct labor and capital expenditures.
  • As hardware companies grow, their focus shifts from manufacturing to mastering their supply chain, including forecasting and negotiating with suppliers.

"But the cost benefit analysis of not having to deal with hiring and firing workers and people stealing stuff and all the capex you need in order to build it, and yada, yada, yada is totally worth it, versus the supply chain management issues that you have to go through."

Ben Einstein suggests that the benefits of outsourcing manufacturing and avoiding direct management of labor and capital expenditures outweigh the challenges of supply chain management.

Influence of Supply Chain on Business Operations

  • Expertise in supply chain allows companies to make significant deals and understand market dynamics.
  • Companies like Apple have transitioned from manufacturing to supply chain mastery, exemplified by Tim Cook's focus on supply chain deals.
  • The smartphone supply chain has enabled small companies to access advanced technology affordably.

"Tim Cook is a supply chain guy. He's brokering deals for billions of dollars worth of processing power and memory, which changes the way in which a company can operate because they have sort of lateral movement ability in the supply chain space."

The quote emphasizes how expertise in supply chain, as demonstrated by Tim Cook of Apple, can significantly change a company's operational capabilities and strategic advantages.

Hardware as a Foundation for Growth

  • The infrastructure of hardware has been significantly impacted by elements like the smartphone supply chain, which is less discussed but foundational.
  • Small companies benefit from the economies of scale in the smartphone supply chain, gaining access to components at lower costs.

"There's a whole series of things like that that have really changed the sort of infrastructure of hardware. And they are far less sexy than 3d printing and crowdfunding. But I think in my opinion, they're the real bedrock of how this hardware sort of growth has been built."

Ben Einstein points out that the underlying changes in the hardware infrastructure, particularly the smartphone supply chain, are crucial to the growth and success of hardware companies.

Transition to Recurring Revenue Models

  • Hardware business models are shifting from consumer electronics to recurring revenue and software services.
  • Successful hardware companies are increasingly integrating software into their offerings.
  • Fitbit is an example of a hardware company with a significant software subscription revenue stream.

"So really, hardware is this really great trojan horse to get software into places that it can't currently exist."

The quote implies that hardware serves as a vehicle to introduce software-based services into markets, creating opportunities for recurring revenue and expanding the reach of software.

Software-Centric Business Models

  • Hardware is increasingly seen as a delivery mechanism for software services.
  • Recurring revenue models are preferred, such as those that sell consumables for a device, following a model similar to Keurig.
  • This approach aligns with venture business models seeking recurring and high-margin revenues.

"It's not hardware, it's software wrapped in plastic."

The quote, attributed to Brad Feld, encapsulates the concept that modern hardware businesses are often centered around the software services they deliver, rather than the physical device itself.

Challenges for Incumbents and Success for New Entrants

  • Large companies struggle to adapt to the shift towards software-centric models, often burdened by the need to hire extensive software teams.
  • Newer companies like Dropcam and Ring have successfully adopted business models centered on recurring service fees, with high customer lifetime value.

"And then I think drop Cam had about a 35% attach rate on a $10 a month service. It's pretty astounding as a business."

Ben Einstein highlights Dropcam's success with a substantial percentage of customers subscribing to their monthly service, which represents a successful application of a recurring revenue model in hardware.## Hardware as a Service

  • Hardware as a Service (HaaS) is characterized by the hardware sale being less important than the ongoing software license revenue.
  • Companies like Meraki, acquired by Cisco, exemplify HaaS with their cloud-managed networking infrastructure.
  • Customers pay upfront for the hardware but the real profit comes from the recurring software license fees.
  • HaaS businesses are optimized to make money on software, even if they lose money on the initial hardware sale.

"And so if you look at a company like Meraki, which I think is a company that not too many people know, but Cisco acquired for, I think it was about $800 million, I think, two or three years ago. You do pay upfront for the hardware, but that's not the reason that business is doing so well. It's because you're paying a couple of year for each one of those boxes to function in their software license."

The quote highlights the business model of Meraki as an example of Hardware as a Service, where the profitability is driven by software licenses rather than the initial hardware sale.

Consumables Business Model

  • The consumables business model is where the primary reason for purchasing the hardware is the consumable content it delivers.
  • This model is akin to content businesses where the hardware facilitates the delivery of consumable products or content.
  • Examples include Keurig for coffee, Cuvet for wine, and Amazon's Kindle for books.
  • The hardware is a means to sell the consumable content, which is the main driver of the business.

"And then there's a business category, which is a little bit what I talked about with Keurig, which is sort of around this idea of consumables. And so this is a thing that the reason you buy the product is not for the product itself. It's for the stuff that comes into the product."

Ben Einstein describes the consumables business model, emphasizing that the hardware is purchased not for its own sake but for the consumable products it uses, such as coffee for a coffee machine.

Hardware Enabled Services

  • Hardware Enabled Services are companies where the main business is to monetize digital software content through a subscription model.
  • This category includes companies like Dropcam and Mural, which offer digital content services through their hardware.
  • The hardware serves as a platform for delivering digital content, such as data, image processing, or digital art, to consumers.
  • This model is prevalent in consumer spaces and relies on recurring revenue from digital content subscriptions.

"And then there's a category which is probably the most interesting, and we'll see the most devices, especially in the consumer space, which we call sort of hardware enabled services. These are companies like Dropcam. We have a company called Mural, which is a connected picture frame for art. These are companies where the primary business is really to monetize the content."

Ben Einstein explains the concept of Hardware Enabled Services, where the device facilitates access to digital content that generates recurring revenue through subscriptions.

Importance of Brand in Consumer Hardware

  • Brand is the most critical aspect for consumer hardware startups, encompassing the entire company's promise to the consumer.
  • Building a brand involves product quality, advertising, customer service, and support.
  • Successful consumer hardware companies, like Fitbit and GoPro, have built strong brands focused on specific consumer identities and aspirations.
  • Understanding the psychology of the consumer and their emotional connection to the brand is essential.

"When it comes to consumer products, that brand is, it's actually the most important thing. And it's a little bit of a red herring because brand encompasses so much of what a company is."

Ben Einstein agrees with Harry Stebings on the paramount importance of brand for consumer hardware, emphasizing that brand is more than just visual identity—it represents the company's promise and how it delivers on that promise.

"Fitbit is laser focused on a brand built around fitness and health. And when users think of Fitbit, they immediately jump to, yes, totally. Yeah, totally. I'm going to be healthy by buying this product."

The quote illustrates how Fitbit successfully built a brand centered on health and fitness, creating a strong association in consumers' minds between the product and personal health goals.

"It's really interesting sort of psychology of how users think. And that's really the fundamental underpinnings of brand understanding, how your users are thinking."

Ben Einstein discusses the psychological aspect of branding, which involves understanding and connecting with the consumer's mindset and emotions, a key factor in the success of consumer hardware brands.## Favorite Book and Its Impact

  • Ben Einstein reads about a book a week.
  • "The Box" is his recent favorite, detailing the invention of the shipping container.
  • The book illustrates how standardization revolutionized global trade and logistics.

"I read about a book a week, I think most recent book I've read that I've totally fallen in love with is called the Box, which not too many people know, but it's about the invention of the shipping container, which totally fundamentally changed the world."

The quote explains Ben's fascination with "The Box" and its subject matter, the shipping container, which he credits with fundamentally changing global logistics.

Desire for Curious Investors in Hardware

  • Ben wishes for more investors willing to understand hardware.
  • He values investors who are curious about the intricacies of hardware, not just those with superficial experience.
  • Ben takes investors to China annually to educate them on manufacturing processes.

"I would love to have more investors that are genuinely curious about what drives hardware and not just, hey, I invested in this company once and I know what I'm doing."

This quote highlights Ben's desire for investors to have a deep and genuine curiosity about the hardware industry, rather than a superficial or one-time investment experience.

Misconceptions About Hardware

  • Ben is frustrated by the phrase "hardware is hard."
  • He believes that while hardware is challenging, so are many other endeavors.
  • Ben advocates for asking the right questions and seeking help from knowledgeable sources.

"Definitely this hardware is hard phrase. It's that people sort of almost whine that it's challenging."

The quote expresses Ben's annoyance with the common complaint that hardware development is difficult, suggesting that challenges are normal and can be overcome with the right approach.

Favorite Blog or Newsletter

  • Ben's favorite blog/newsletter is by Benedict Evans.
  • He appreciates Evans' analytical perspective, especially concerning hardware startups.

"Benedict Evans definitely without question, one of the more interesting thinkers in this sort of analytical world, especially for hardware startups."

Ben praises Benedict Evans for his insightful analysis, which he finds particularly relevant to the hardware startup sector.

Prototyping in Hardware Development

  • Prototyping is essential and should be done more than anticipated.
  • Early prototypes should focus on speed rather than quality.
  • Prototypes are crucial for user feedback on product usage.

"Always build more. Build more than you ever think. Definitely caring less about quality and more about speed, especially in the beginning."

The quote stresses the importance of creating numerous prototypes quickly to facilitate early user interaction and feedback, rather than focusing on the quality of initial prototypes.

Fundraising Strategies for Hardware Startups

  • Raising too much money early can be harmful.
  • As a company grows, securing more funding becomes critical.
  • Understanding debt financing and credit terms with manufacturers is key to success.

"Too much money can actually be more dangerous than too little money, which is counterintuitive."

Ben explains that excessive funding in the early stages of a startup can be detrimental, implying that a balanced approach to fundraising is necessary.

Challenges in Venture Capital

  • Ben is adapting to the venture capital (VC) industry, which differs from traditional business.
  • The VC industry lacks standard business metrics like revenue and predictability.
  • Feedback for a young VC's performance is scarce and delayed.

"We don't use the term revenue. There isn't really any predictability in how a company is going to do."

This quote illustrates the unique nature of the VC industry, highlighting the absence of traditional business metrics and the difficulty in measuring success.

Most Recent Investment Project

  • Ben's latest investment is in Grove, a smart gardening system.
  • Grove targets urban dwellers with limited space for traditional gardening.
  • The system simplifies gardening with technology, such as sensors and automated watering.

"They're building a smart gardening system for your outdoors... It really just makes the experience of gardening a hell of a lot more enjoyable for folks like me."

Ben describes his investment in Grove, emphasizing the appeal of a smart gardening system that accommodates the constraints of urban living and enhances the gardening experience.

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