Corporate VCs still like hardware with the right focus

Venture capital deals continue to climb in 2017, but the total number of deals could decline for a third year in a row, according to PitchBook. In the third quarter, 1,700 companies raised $21.5 billion in VC, bringing the total number of deals for the year up to 5,948. This is down 11 percent from the same time last year.

(Source: PitchBook)

The bad news for startups is that investors are getting pickier, so there’s more competition for funding. The good news is that there’s still plenty of money being thrown around. Unfortunately, it looks like investors are less enthused about hardware than they used to be, at least in the US.

The IT hardware sector makes up a smaller portion of US VC funding than five years ago. The same is true of health care devices and supplies. This doesn’t mean all investors are just excited about software, though. Among corporate VCs, software investment has remained flat in recent years.

Some markets heavily involved in hardware continue to generate a lot of excitement. Corporate investors are especially interested in virtual and augmented reality. VR/AR has all the components investors love. It requires consumers to buy expensive devices but also has the potential to continue generating revenue through the use of services.

In the case of Oculus Rift, this ongoing revenue comes in the form of gaming. This potential is why Facebook acquired the company for $2 billion.

Microsoft is betting on the promise of AR with its Hololens device and other AR hardware partners. The biggest potential for AR is services to help people with DIY home projects or corporate uses.

The excitement over mixed reality is so high that Magic Leap continues to pull in millions of dollars in investment even though it has yet to publicly show off a working product. The company raised another $502 million in Series D fundraising just last month, according to Crunchbase. It has now raised nearly $1.9 billion total.

Of the 17 hardware unicorns identified by HAX, 2/3 are Chinese. Razer just completed an IPO and now has a market cap of more than $5 billion.

Even as interest in hardware in the US is subdued, that’s not necessarily the case elsewhere. Of 17 hardware unicorns (private companies valued over $1 billion) identified by HAX, 11 are based in China. It’s hard to compete against China’s manufacturing prowess and fast-paced product iteration.

This is why creating valuable intellectual property housed in a brand consumers are excited about is so important. This often means hardware married with services or least hardware that’s part of a larger ecosystem of devices that keeps consumers coming back for more.

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