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Tandem Capital

How Bluetooth LE And Crowdfunding Are Accelerating The Connected Hardware Boom

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What Games Are: The Marketing Squeeze

It’s one trend that’s been hard to miss, being mostly clipped and/or strapped in plain sight. To spell it out, hardware startups — and the devices they’re making — are having a moment, thanks in major part to crowdfunding websites providing the funding bridge between a promising prototype and the cost of manufacturing a shipping product.

Fuelled by crowdfunding, hardware startups are hard at work extending the capabilities of mobile devices – the phones and tablets that have otherwise become boringly alike – and building out the long anticipated Internet of Things in the process. In case you haven’t noticed, this network of connected objects is beginning to materialise around us, piece by Bluetooth-connected piece.

Startup accelerators are also increasingly getting in on the connected hardware action, with a number of dedicated hardware hothouses cropping up, such as recent entrant High Tech XL in the Netherlands (in the midst of accepting applications for its first cohort).

High-profile accelerators such as Y Combinator have also been taking more of an interest in the hard stuff – with the likes of Lockitron coming out of their program in recent years. Blogging about the rise of hardware last October YC’s Paul Graham suggested a confluence of factors are combining to make it easier to kick-start a hardware business:

There is no one single force driving this trend. Hardware does well on crowdfunding sites. The spread of tablets makes it possible to build new things controlled by and even incorporating them.Electric motors have improved. Wireless connectivity of various types can now be taken for granted. It’s getting more straightforward to get things manufactured. Arduinos, 3D printing, laser cutters, and more accessible CNC milling are making hardware easier to prototype. Retailers are less of a bottleneck as customers increasingly buy online.

One question I can answer is why hardware is suddenly cool. It always was cool. Physical things are great. They just haven’t been as great a way to start a rapidly growing business as software. But that rule may not be permanent. It’s not even that old; it only dates from about 1990. Maybe the advantage of software will turn out to have been temporary. Hackers love to build hardware, and customers love to buy it. So if the ease of shipping hardware even approached the ease of shipping software, we’d see a lot more hardware startups.

I would add that hardware can be much easier to conceptualise than software. Add in the tangibility of actually getting a physical thing in your hand in exchange for your hard-earned and convincing buyers to part with money isn’t such a hard sell as software can be (being still somewhat dogged by the notion that bits & bytes should be free).

The latest Silicon Valley accelerator to be bitten by the hardware bug is Tandem Capital.  One out of every three to four of its intake over the next 12 to 18 months will be a hardware startup, Tandem’s Doug Renert tells TechCrunch – injecting an additional strand of physicality to its ‘muscle capital’ approach. The latter involves six to 12 months of in-house mentoring before graduates head off to raise outside capital — and hopefully keep on growing.

“Our plan is, at least for the next year, we’ll basically do one out of three to four companies in the hardware space now. That are tackling what we feel is disruptive – or have a disruptive business in a very large market,” he says.

Tandem’s new dedicated hardware arm will sit alongside its software program, although it is bringing in some additional expertise to staff out the hardware side.  “We’ve brought in folks who can help on everything from the marketing, from the video to the [crowdfunding] campaign. All the way to the product design and the development, when it comes to the embedded software and the [connected] devices and so forth,” says Renert. “Six months ago we didn’t really have the capabilities.”

Tandem typically invests $200,000 apiece in six mobile startups at a time — and will soon be ramping up to six companies per quarter. Previously that effectively boiled down to app makers – graduates of past programs include PlayhavenBitRhymes, attassa and ZumoDrive — but up to a third of each intake going forward will be making some kind of device, in addition to building an app.

Bluetooth LE is allowing a new wave of physically minded startups to build devices that can fly for long enough to become disruptors.

Why is hardware hot right now? The hype around wearables and the quantified self/health tracking movement is certainly encouraging more device makers to get busy. But on an underlying technology level, it’s the next-gen low-power flavour of Bluetooth – Bluetooth Low Energy (or BLE) – that gets the credit as the enabler of this connected device boom.

BLE is allowing a new wave of physically minded startups to build devices that can fly for long enough to become disruptors. Older generations of Bluetooth were just too thirsty on the battery for that. BLE is a very different beast – one that allows makers to build interesting devices that can keep communicating for up to a year on a single charge (in some cases). And that’s a game changer. Add in ubiquitous smartphone ownership and it’s a perfect storm.

Tandem got interested in hardware after noticing what was happening around this new flavour of Bluetooth and getting excited about its potential, according to Renert. “The Bluetooth LE communication protocol that allows these devices to be built for the first time, opens up all sorts of opportunities that weren’t there before,” he says. Renert doesn’t limit the category to wearable devices; recognising that’s just a small portion of the stuff that falls under the IoT umbrella – whether it’s environmental monitors and weather stations or door locks and kitchen scales.

“A lot of the market has been referring to wearables as a hot trend but we view that as too narrow honestly. Because with these tiny devices that you don’t have to charge you can really attach it to anything you own,” he says. “Whether it’s a consumer product or something in the enterprise for that matter which should be connected to the Internet, and communicate with the web and open up all sorts of other possibilities.”

Tandem’s first ‘experimental’ hardware startup was Tile — which is making a Bluetooth tag to help consumers keep track of their valuables. Tandem worked with Tile to prepare its crowdfunding campaign – which then went on to raise $2.6 million via Selfstarter – in addition to the $200,000 injected by the accelerator.Tile

“It was an amazing success – they raised over $2.6 million from 50,000 early customers, and have continued pre-selling the product since that day and have actually reached much higher numbers since then,” says Renert. (Tile has in fact doubled its backers to more than 100,000 people placing pre-orders since the campaign closed on July 24.)

Despite all the hype and heat around hardware right now, Renert reckons there are still plenty of investors who haven’t yet got comfortable with backing hardware. Indeed, Tandem was tentative at first — hence it viewed Tile as an experimental foray into a strange new world.

“We haven’t seen too much dedication to the space. People are still trying to figure it out, and get comfortable with it. And even we were doing that if you rewind six months ago. We weren’t sure about it; we started slowly with some experiments…. But we felt it could be mapped to disruption and fortunately the Tile experiment proved out,” says Renert, adding: “Now we’re stepping on the gas.”

The approach Tandem used with Tile will be the same one it applies to all its hardware startups going forward. The accelerator model combines its initial standard funding injection of $200,000 (plus the six to  12 months of in-house mentoring) with a crowdfunding campaign aimed at raising enough capital to carry device manufacturing costs. It’s calling this crowdfund-leveraging model ‘lean hardware’.

“There’s a lot of difference in terms of how you execute on [hardware vs software]… but not a lot of difference in terms of how much money or time you need in order to prove product market fit, which is a huge, huge development,” he says. “It used to be that a hardware startup was much more expensive to startup and launch but with Tile…  we did our typical $200,000 in the company and brought them in for six months and they were able to accomplish everything they have so far only on that initial investment.

“Now they’ll probably soon raise more but it wasn’t necessary to have more capital or time to get to playing for that.” So, in other words: the crowdfunding opportunity has effectively dissolved that hardware vs software startup difference as far as this accelerator is concerned – at least for now.

Notably Tile used the open source Selfstarter option for its crowdfunding campaign – rather than opting for the two main crowdfunding platforms: Kickstarter and Indiegogo. “We haven’t had to rely on just one of the existing crowdfunding communities and platforms and be completely dependent on them,” notes Renert. “Tile was able to manage its campaign on its own. Remain completely independent, leverage Facebook, YouTube and Twitter to get the word out and that turned out to be very effective. So that’s another key tool we’re building at Tandem — the know-how to build and run those campaigns.”

There’s going to be a huge wave of this for the next 12 to 18 months and at some point there’s going to be saturation

Although Tandem is betting on hardware right now, it’s not convinced the current conducive winds helping to accelerate hardware startups are going to be sustained forever — or even for all that long. Renert is under no illusions that crowdfunding fatigue will set in at some point, for instance. And also recognises that Tandem’s lean hardware formula will require tweaking to keep it fresh.

“The market will continue to evolve quickly there, so we’ll have to be cognizant that what works today won’t work potentially a month or two from now so you’re always going to have to be adjusting to stay ahead of the curve. It’s not something that we can learn quickly and not be able to get better at,” he says.

“I don’t think this is going to be a five-year trend – I don’t think there’s going to be a window for five years. There’s going to be a huge wave of this for the next 12 to 18 months and at some point there’s going to be saturation – the consumer is going to get a little fatigued about all this stuff getting promoted to them. So we want to really strike now – and we think this next 12 to 18 months is the time to build those next brands in this category.”

As more and more startups crowd in to the hardware space, and crowdfunding loses its sheen – after enough consumers get burnt with bad product, shipping delays and failed and/or scam campaigns – the end result will be that hardware gets harder to startup again. Or at least that hardware startups have to try a lot harder to win consumers’ trust, says Renert.

“You’ll have to show the credibility of your team and the viability of delivering your product and I think the bar will get higher and higher to do that before consumers will invest in you,” he says. “There still will be room for a product that excites consumers, and that they’re willing to bet on, but their bar’s going to be higher – and building the confidence that that team can deliver on it [will be essential].”

In the near term, Tandem has two more hardware startups in its immediate pipeline, following in Tile’s footsteps – one targeting entertainment, and another in the personal safety space. The aim is to launch crowdfunding campaigns for each this fall, before Thanksgiving. “We’ve now turned out attention to a couple of other lean hardware startups who are entering the program and we’re building out a lean hardware arm within Tandem to support these businesses,” he says.

It took Tandem “a little over three months” to work with Tile to launch their crowdfunding campaign, honing the story and creating the video to tell it, as well as getting the prototype to a position where they were comfortable they could build it, according to Renert. “That was probably about three and half months out of 10 of the program,” he says.

So, while there’s no getting away from the fact that it takes (on average) longer to ship a hardware product than a piece of software, the ability to both “prove product market fit” — via a crowdfunding campaign — and buy time to build the product by booking pre-orders, means the difference between starting a hardware vs a software business is not as great as once it was.

“From day one to actual shipping of the product, yes it takes longer, but from day one to proving the product’s market fit does not have to take any longer which is the beauty of the model now,” Renert adds.

“To get to the point where you’ve designed it and promoted it and if you have market demand you can take another six months to actually build and ship the produce. And that’s what Tile did. They shared that they wouldn’t have their product until the first quarter of 2014 so that the backers – the customers who came in – were excited about the product, pre-ordered one but gave the team time to deliver on their commitment.”

How long this window of opportunity for hardware will stay open remains to be seen. But right now, it’s never been easier to build that connected thing you’ve always dreamt about making.