Hardware startups have power in numbers

One of the most difficult aspects of building a hardware startup is the low margins in hardware itself. It’s now more important than ever to create a business model with recurring revenue streams. As Brinc.io head of finance Jessie Lam put it, “Build a business, not a product… Don’t just create something that’s in SkyMall or QVC.”

If you’re working in a hardware startup, this is probably not something of which you need to be reminded. Hardware is hard. Worse, it’s easy to copy and many manufacturers are happy to do it.

Lam emphasizes that successful hardware businesses need desirability, feasibility and viability. All these components need to be working together. Without one, a startup runs the risk of quickly becoming irrelevant.

There are multiple ways of achieving long term viability as a hardware startup. Subscription services is perhaps the most obvious way of achieving recurring revenue.

By this point, consumers are familiar with paying for services online. Now that people are more comfortable paying for these services, companies are increasingly using hardware to hook consumers.

Security systems and Internet of Things devices are best known for this business model. A security camera might have facial recognition and alerts that require a paid service. This is how a company like Nest was able to grow until it became an attractive acquisition target for Google.

Other hardware companies are able to keep moving without a subscription model, though. China is leading the way for how hardware-focused startups can survive going forward. Think of companies like Xiaomi, OnePlus, DJI and Ubtech.

Xiaomi’s business model is not entirely separate from software and services. When the company started out, though, it was selling smartphones a razor-thin margins with the hope of making up for it through its own Android app store and other software.

Instead, Xiaomi has growth to largely rely on hardware revenue. It made a big bet on IoT and started making connected lights, TVs, rice cookers and air purifiers. It has since branched out into clothing and luggage, among other things. The company has become a full-fledged lifestyle brand, and it relies on this as a source of continued revenue. Every year, more phones, tablets, TVs and more innovative products like a laser projector continue to come out.

Like Xiaomi, OnePlus also got into the low-margin smartphone game, but the company was (and still is) coy about its parent company Oppo. Nonetheless, OnePlus has served as a means for Oppo to extend its reach beyond China. The brand built a dedicated fanbase abroad and maintains momentum with just two major smartphone releases each year.

Unlike other Android smartphone makers, OnePlus keeps its software close to stock, as Google intended it. The company doesn’t peddle its own services on its smartphones. Google Play is the default app store on its international software. The company does sell other items like bags, cases and power banks on its website, though.

Unlike Xiaomi, those other items don’t seem to be a big part of OnePlus’ business strategy. Instead, the company started refreshing its flagship phone within six months of release instead of waiting a full year. The company did this for the first time in 2016 and continued it again this year with the OnePlus 5T, although the company insists this wasn’t the plan. It maintains that it just saw an opportunity to improve the phone with a slightly more modern design.

OnePlus is slowly increasing the price of its phones, and consumers largely seem to be going along with it as each new release gets better and better reviews. Whether the company’s current hardware strategy is viable over the long term remains an open question, but Oppo seems content with how OnePlus is doing so far.

There are other Chinese companies outside smartphones that are also seeing incredible success. DJI is credited with largely creating the consumer drone market. It’s by far the largest consumer drone company in the world.

In addition to quickly putting out new drones to address competitors, DJI has branched out to the commercial sector. Commercial drones are becoming big business, making that an important revenue stream for the company.

DJI has now built a hardware ecosystem to support its drones, including cameras, gimbals and other accessories. The company does have some proprietary software solutions, but it’s all done to support the hardware, which is the company’s real moneymaker.

Not all included software needs to come from in-house, though. Ubtech’s newly launched Lynx robot is shipping outside China with Alexa built in. Ubtech is one of China’s most successful consumer robotics companies and just recently raised $400,000 million in its latest funding round.

Companies in China and the U.S. are competing hard in artificial intelligence, but the market largely remains bifurcated for now. It makes sense for Ubtech to include a well-known digital assistant like Alexa in its products for international users. Not having its own, proprietary AI assistant does not seem to be slowing Ubtech down at all, although it could make it susceptible to competition from Amazon or others down the line.

Superior hardware can still win out in the market, though. This is true even for startups that don’t have a subscription service to sell, but it’s getting harder to pull this off. These specific companies have chosen to address this by boosting their hardware ecosystem by increasing the number of products they offer. More research and development funding does need to go into software these days, but a strong hardware ecosystem can thrive. Startups just need to remember they’re building a business, not a product.

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