Hardware by the numbers: Startups

Learn the most pertinent data behind the latest IoT trends.

By Renee DiResta
November 11, 2015
(source: O'Reilly)

Hardware by the Numbers

Last year, we started our Hardware by the Numbers trend report by looking at the origin story of hardware startups. We charted the rise of the Maker Movement as a foundational shift, and examined how the awareness it brought to the possibilities of “hacking the physical world” had inspired thousands to come together and form hardware communities across the world. These communities resided in an ever-increasing number of hackerspaces, and became ecosystems that spawned “Maker Pros.” Many of these Maker Pros went on to start hardware companies, moving from projects to full-fledged products that were to be sold to a mainstream audience.

In January 2014, The Economist declared a “Cambrian moment” for startups, stating that there were approximately 140,000 globally. While there is no canonical “taxonomy” of the increasingly large startup ecosystem, at the topmost level it is reasonable to split into “Hardware” and “Software.” Many hardware startups are fond of saying that they’re really software companies, or that the hardware is merely a tool for gathering data, but the skill set and capital requirements required to successfully bring a physical product to market set these companies apart from those that are purely focused on building software, regardless of the business model that they select.

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There is no authoritative source for the number of hardware startups launched in any given year, but estimates using AngelList data seem to indicate that the number increased sharply in 2012 and 2013, and leveled off a bit in 2014. It’s difficult to track unfunded companies, so our graph below uses the proxy of first money raised to assign a birth year to the company.

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Figure 1-1. Year in which hardware companies raised first money

For many companies, the first money in comes alongside participation in an accelerator program. Again, identifying a comprehensive list is challenging, but as of May 2015 there are at least ten prominent accelerators around the world, focused solely on hardware. 

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Figure 1-2. Hardware accelerators worldwide

Perhaps one of the most interesting recent developments in the hardware accelerator ecosystem was the entrance of popular “predominantly software” accelerators such as TechStars and Y-Combinator into the hardware space. In the second half of 2013, TechStars partnered with digital powerhouse R/GA. Y-Combinator, perhaps the most prestigious accelerator, had dabbled with the occasional hardware company in past classes for quite some time—Pebble, a smartwatch company from the Winter 2011 class, is one notable example. In February 2015, YC heralded a more official focus on the sector by announcing a partnership with hardware seed investor Bo.lt (which was originally founded as a hardware accelerator) and CAD software powerhouse Autodesk, which now provides participant startups with access to prototyping facilities at its Pier 9 location. 

Hardware Startups Evenly Split between B2B and B2C Business Models

When looking at the companies participating in the hardware startup ecosystem, one trend of note is that we are now at a relatively even split between B2B and B2C business models for hardware startups participating in accelerators. 

  • HAXLR8R: reports that of the 65 companies it has worked with since it began in 2012, 17% overall have been exclusively B2B focused, with another 21% targeting customers in both B2B and B2C. Of the 12 companies it accelerated in 2014, 3 (25%) were B2B.
  • Lemnos: since its inception in 2012, Lemnos has invested in and accelerated 21 companies, of which 10 (52.4%) were B2B. In 2014, 50% of its class was B2B.
  • Highway1: one of the newest accelerators in this list, Highway1 has had 4 classes in total since Fall 2013. A total of 46 companies have completed the program. In 2014, there were 25 companies, of which 6 (25%) were B2B.
  • TechStars: in its official hardware startup accelerator in partnership with R/GA, 30% of class one was B2B, and 60% of class two was B2B.
  • Y-Combinator: before the official focus, YC had 153 companies in 2014, of which 9 (5.9%) were hardware. So far, in 2015 there have been 114 companies total, of which 11 (9.6%) were hardware companies; 45.5% of those hardware companies were B2B.
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Figure 1-3. B2B versus B2C business model split in hardware accelerator programs

The data set is very small. Currently, the majority of hardware companies are still B2C, but B2B percentage has increased. One explanation for the initial prevalence of B2C companies may be the influence that crowdfunding has had on taking a product to market. Many hardware companies publicly “launch” via crowdfunding—it’s effectively a presale campaign. 

Since the vast majority of backers are regular consumers who tend to see crowdfunding as a combination of sponsorship and pre-ordering, it would follow that B2C hardware projects would be more successful on these sites than B2B startups. Matt Witheiler of Flybridge Capital studies this market closely. He recently analyzed the types of projects that were most successful on crowdfunding sites in Q1 of 2015. The companies, which were selected from both Kickstarter and Indiegogo, had all raised over $100,000.

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Figure 1-4. Q1 2015: crowdfunding in the hardware sector. Courtesy of Matt Witheiler, Flybridge Capital.

The conventional wisdom that crowdfunding success predicts or drives future venture success no longer seems to be true. Prior to 2013, a crowdfunding raise typically happened before raising a venture round—many venture-backed hardware startups were “discovered” when their crowdfunding raises attracted press and contributions. It is now increasingly common to do a crowdfunding raise at the culmination of an accelerator, or after raising an angel or seed round. Using Matt Witheiler’s data set of companies that raised both $100,000 on a crowdfunding site and took venture funding, we see that an increasing percentage of companies pursue a campaign after the venture raise:

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Figure 1-5. Which came first: crowdfunding or VC funding?

We used Mattermark’s startup data platform to look at early-stage  “Hardware” and “Internet of Things” companies (we defined “early” to mean startups that had raised some capital, but pre-Series B). There were 486 companies that met these criteria. 189 were specifically classified as B2B IoT; 199 were classified as B2C IoT, though there was some overlap. The non-IoT B2B hardware included medical device platforms, semiconductors, and battery tech companies. Of the IoT B2B companies, many produced beacons or RFID technologies, often geared toward specific industries (e.g., indoor tracking systems for retailers). A fairly large number of companies were software layers for IoT security. Several produced functional-prototyping products offering “connectivity as a service.”

Dow Jones VentureSource states that the total amount of venture capital invested in electronics and computer hardware companies overall hit $2.56 billion in 2014, which exceeded the previous high of $2.24B in 2000. Drones continue to be extremely hot. While they are technically a subset of robotics companies, they are now treated separately on most popular “Bloomberg for Startups” ecosystem-tracking platforms.

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Figure 1-6. Drone investment activity by number of deals, dollars invested (data source: Crunchbase)

The startup community has a new term for describing companies valued at over $1 billion: unicorns. The past year has seen several new hardware entrants into the Unicorn Club: Jawbone ($3.3B), Magic Leap ($2B), Infinidat ($1.2B), and Razer ($1B). Two more—smartphone maker Xiaomi ($46B) and drone company DJI ($8B)—are based in China. 

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Figure 1-7. Hardware “Unicorn” valuations

And, of course, there are the acquisitions. There were several unicorn-caliber acquisitions in the hardware sector in 2014: Google bought connected-home startup Nest for $3.2B. Facebook picked up Oculus VR for $2B. Apple acquired Beats for $3B. And there were two IPOs: camera company GoPro (which currently has a market cap of $8B), and Mobileye (market cap $7.6B), which builds anti-collision hardware and software for self-driving cars.

Outside of the $1B+ market, there were several other high-profile acquisitions. While 2014 did not compare to the 2013 robotics acquisition blitz by Google, they did purchase Skybox, a satellite company, and Dropcam, a connected-home company. Intel bought Basis, the smartwatch maker, for around $100M. 3D Robotics, itself a startup, purchased Sifteo, a connected-toy company. Samsung bought connected home “connective tissue” startup SmartThings. 

Synthetic Biology

Moving away from Hardware proper…another area of the startup ecosystem that we’re following very closely is synthetic biology. Synthetic Biology refers to “the design and fabrication of components and systems that do not already exist in the natural world, or the re-design and fabrication of existing biological systems.” At O’Reilly, we’ve been following this space for a while; if you’re interested in in-depth quarterly reports, be sure to sign up for the BioCoder newsletter.

As of 2014, there are two new accelerators specific to Synthetic Biology. Y-Combinator also expressed interest in biotech in general, welcoming ten bio startups into its Winter 2014 class. 2014 saw YC accelerate two synthetic biology companies: Gingko Bioworks and Glowing Plant. SynBio Beta, a community site dedicated to tracking and facilitating the growth of the synthetic biology ecosystem, noticed the admissions, writing, “Biotech is no longer married to costly pharmaceutical and agricultural applications—or their heavy regulatory burdens—and is free to pursue non-traditional applications with consumer-facing businesses. By leveraging continuously improving infrastructure and technologies, biotech startups such as Glowing Plant are becoming increasingly lean, highly scalable, and getting products to market more quickly.”

Looking at AngelList data for Synthetic Biology, we see 44 companies in total. The first 12 joined AngelList in 2012; there has been no clearly accelerating trend yet. We saw 7 in 2013, 16 in 2014, and 9 so far in the first half of 2015. Fourteen of the companies have raised venture dollars: $179.8 million in total. Ten are based in San Francisco; the rest are scattered across the country.

The sectors that these companies focus on run the gamut. The largest subclassifications are bioinformatics, nanotechnology, and biofuels, but the sample size is small. We look forward to covering how this space continues to develop in future Hardware by the Numbers reports.

We hope you’ve enjoyed this brief overview of some of the trends that we’ve observed in the hardware ecosystem, and will join us at Solid to hear from the expert innovators who are driving these industries.

Post topics: Business