Team, Tech, Market and a bazooka for Defensibility

Four-Points Checklist to Invest in Hardware Startups

Every investor has its own pet peeves, or mission. At HAX we narrowed it down to a few points. It helps us discuss and compare startups with more clarity than “I like it”, “not bad” or “I don’t believe in it”.

The world is divided into two kinds of hardware startups…We evaluate 4 things: Team, Prototype, Market, and Defensibility.

As we are based in China, we know a thing or two about copycats and time-to-market. We bought an Apple-watch looking gizmo 1 month before it came out. It wasn’t the same device (the version we bought has a camera, a SIM card slot, and no Apple app), but it gives you some idea of the speed.

Also, China is the land of Xiaomi, which is currently dominating/destroying a number of connected device categories. Their smart band is $13, they have a smart scale, a GoPro-like camera, etc. all for a fraction of the price. It does not sound safe to compete with them.

1. Team

Teams fall into three main categories:

  • Fresh grads. They are probably strong at software and hardware prototyping but know nothing about… almost everything else. They are often more excited by technology than business. PhDs tend to be the most remote from market considerations.
  • Industry veterans. Many years of experience, know their thing inside out. Generally spotted a solid opportunity and go for it. They know the tech, the people, the channels.
  • Indie inventors. Sometimes from the “Maker Movement”. They are often wilder cards than fresh grads, but closer to their customers.

2. Prototype

Ok you have a great team (or “formidable founders”, would say Paul Graham), but can they build? Prototype is proof.

3D renders, passive 3D prints and basic breadboard electronics won’t cut it. Show us something that works. Work-like-look-like is best, if you can. Then explain why it’s 10 times better than what is out there in some way, otherwise customers are unlikely to care.

Also, how are competitors doing? It’s very rare to be alone! (and it might not be a good sign as it can mean “no market” or “many roadkills”).

3. Market

Ok you got something working. But how many people might want it? Do you have any proof? Have you talked to enough prospective customers? Do you really understand their problem(s) and why the current solutions are not enough?

Occasionally, we revisit the market and find a better one to target. This happens more with science-focused teams who are often looking for a problem for their solution.

Key questions are also:

  • Is it a new market or a new segment? Building a new market is VERY HARD WORK. Creating a new segment is standing on the shoulders of giants (and stealing their hat).
  • Is it the right time? Sometimes it’s much too early.
  • Is it the right price? A quick estimate of your Bill of Material can tell us tons.

If you clear those up. Let’s talk more.

4. Defensibility

  • Patents are NOT the most common way, though they are quite frequent with medical devices.
  • These days it’s a lot about software, algorithms and AI.
  • Sometimes it can be a community of users or developers.
  • Increasingly there is a “hard science” element like medical / physics / materials or else. Even the conspicuously inconspicuous Voltera PCB printer has a nanotech scientist on staff (she also does hardcore crossfit).

Note also that not everything should be patented, the pharmaceutical industry (and Coca-Cola) knows well about trade secrets!

Some less glorious aspects of defensibility are:

  • Your supply chain. With an equivalent product, you can beat a competitor based on a better supply chain. Legal issues aside, this is likely what happened to Segway (acquired by its Chinese competitor Ninebots).
  • Speed. Get to market first with a good enough product. People are unlikely to switch unless your competitors have significant advantages (or, sadly, much more marketing money).

Check our 12 “Wares” list

Some time last year, we wrote down in our Techcrunch “Lean Hardware” column a list of 12 “wares” to avoid. It’s still a pretty good guide. Check it out!

Partner @ SOSV — $700m VC fund for Deep Tech (biology, robotics, etc.) | Digital Naturalist | Keynote Speaker | Angel Investor

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