Hardware is apparently the new software (at long last!)

The New York Times just ran an article discussing all manner of neat hardware startups, a fair few of which I already knew well (Nest, Lytro, Raspberry Pi), but quite a few I hadn’t heard of before (Pebble, Bilibot, Electric Imp, LittleBits, Ouya, etc). The conclusion, of course, is that Hardware Is The New Software, and that Venture Capitalists are getting superexcited about this trend.

Well… it’s a great theory, but unless you’ve got an unbelievably sci-fi pitch (like Pebble, whose core idea of a totally programmable watch I remember first proposing to a VC friend a whole decade ago), building your company up to the stage that you can sensible go looking for scale-up funding [which is what almost all VC investment has now become] is a particularly hard trawl, with very few angels wanting to take that road with you.

However… it struck me while reading the article that even though the hardware development cost curve would appear from the outside to be trending towards zero, this is almost entirely as a result of a systemic realignment within the development / design world away from traditional custom dev systems and towards low-cost tools. For example, I shudder to think how many USB dev tools lie scattered around my workspace – oscilloscopes, logic probes, Bus Pirates, RS485 interfaces, wireless adapters, phone interfaces, etc. Hence this is not a zero-trend, this is merely shifting from an older development paradigm to another newer one. Hardware development will remain resolutely non-zero for a loooong time (and let’s not get into the issue of CE & UL testing, ok?)

As for 3d printing, people have been using this for prototyping for well over a decade now, but the big difference these days lies in the scale of the usage and the wider range of materials that are available to print in (i.e. not just compromised low-end ABS). Yet even so, the real world of plastic manufacturing continues to move ever further away – a typical industrial device (such as my security camera) uses a whole symphony of different plastics to achieve both functionality and reliability, and new materials are introduced all the time.

The real hardware revolution will start when we can print injection moulds in our garages… but though I famously pitched that to the Tech City LaunchPad1 competition, nobody seems interested (as my ‘Zoe’ avatar says at the end, “no chance – next time stick to social media, ok?”) It’s only a trillion dollar industry, why should anyone want to invest in anything so pathetically small? 🙂 But once again, the chances would seem high that I’ve arrived at a great party seven years too soon, as per bl&^dy normal… oh well. 😦

Incidentally, one of the NYT article’s authors is the very affable John Markoff, who also writes about historical cryptography, one of my parallel passions (in case you don’t already know).

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Startups 3.0, The Lean Startup, and business angels…

OK, as with nearly all blog posts, the following is an outrageously reductionist simplification. But for all that, it remains a genuine and honestly held point of view that might just change the way you look at things…

Essentially, I believe that the modern financing history of “startups” divides into three overlapping generations or waves:-

• “Startups 1.0” were bank-funded, back in the days when banks had money to lend.
• “Startups 2.0” were angel-funded, back in the days when angels had both wealth and liquidity.
• “Startups 3.0” are self-funded, trying hard to move to customer-funded at high velocity.

Right now, I think that most startups are stuck in a limbo between 2.0 and 3.0 – we’re smart enough to see lots of practical problems with angel funding, but not self-confidently ambitious enough to honestly believe that we can bootstrap what we do from basically nothing all the way to a billion dollar company without angels’ alleged assistance. My advice? Have faith – you can do it, honestly you can. All you need to do is to devise a way of making it happen. Given that you solve every other problem you run into, why not try to solve that one too?

Interestingly, one common reaction to my popular post Lean Startups suck. Here are 10 reasons why… is that I must be some kind of Lean Hater. In fact, the single biggest thing I hate is seeing clever, ingenious and otherwise well-informed people suckered into following a course of action that will suck every last penny out of their pockets (and often out of their friends’ and families’ pockets too).

Unfortunately, I believe that this is what Lean will do to you if you trust it for financing. Angels don’t ‘get’ Lean, simply because Lean startups are encouraged not to make claims or promises that might have value, whereas angels are fundamentally looking for things of value to invest in. So the core issue I have with Lean is simply that we’re living in the decade before angels find a way – a ‘contract of mutual expectation’, if you like – of coping with Lean. In short, we don’t (and indeed we may never) have Lean Angels. That would be “Startups 4.0”, but we’re a long way from there just yet. 😦

Overlaying Lean onto the three startup financing generations described above, my argument would be that Lean conflates the two very different dynamics of Startups 2.0 and Startups 3.0, but ends up with the worst features of both. That is, Lean promotes the emerging incremental self-funded-to-customer-funded mindset (of Startups 3.0) but tied up with the need to expensively surrender control of most of your company to angels in order to scale (of Startups 2.0). It’s not a good mix at all.

But… “what’s so wrong with angels?“, you may ask. The awful truth is that here in 2012 we’re living at the tail end of the angel funding revolution: over the last decade, angels’ thinking has become so polluted by the “10x home-run” nonsense spouted by VCs (who have since moved en masse to far later-stage investments anyway) that angels’ overall level of ambition, expectation and – let’s face it – raw greed have all been inflated beyond the ability of any genuine startup to meet them, except purely on a vapourware or slideware level.

Lean does not fix this: in fact, Lean promotes angel funding at a time when the gap between startups and mainstream angels is widening year on year. I dramatized all that here back in 2010 as the Venn diagrams of death (and the world is still waiting for virtual angels), so it’s not exactly shocking news… but it seems to me that very few entrepreneurs get any of this at all. Don’t mind me, though, please feel free to carry on drinking that angel Koolaid all you like. As I said when I got cut up by a hearse the other day, “whatever, it’s your funeral“.

I know that bookshop shelves are filled with zippily-titled easy ways to start up your company (of which Eric’s book is merely one of many), but the reality is that these simply don’t work any more. In business terms, they’re all as outdated as 18th century encyclopaedias. They promote a gospel of financing harmony and collaborational positivity that simply doesn’t match the East End barrow-boy hustle that actually passes for angel investment.

Ultimately, I believe that the only genuine way that people can deliver the kind of low-risk-yet-hockey-stick-shaped returns angels demand is through armed robbery or Enron-scale fraud. So go ahead, pitch all you like, knock yourselves out: your so-called best case endgame scenario is that you’ll end up grinding out one ridiculous, abusively one-sided offer from a ragtag set of barely-liquid angels who will then be more interested in finding tricky ways of mitigating their downsides at your personal expense than in growing your splendid company together.

Alternatively, you can start small and find ways of getting to customers and growing fast. You know which option I recommend! 😉