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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Presenting to the 3Cs Community this evening…

This is what I’m aiming to avoid 😉

Unsurprisingly, the reason I’ve been rejigging my pitch deck of late is that this evening (17th January 2012) sees my first business presentation for a fair few months. It’ll be at the 3Cs community, by all accounts a nicely eclectic London-based group of entrepreneurs, techies and investors – it encourages its members to “Pay It Forward” by helping other people out, rather than merely being snarky and pouncing on opportunities etc.

Just so you know, I’m reliably informed that the “Connections – Commitment – Capital” tagline that appears on its website is actually a [much later] backronym – the name “3Cs” originally came about because it was set up by three guys called Colin. 🙂

I was very kindly introduced to the 3Cs by Mike Scase (who I met via Rosco Paterson, Redhill’s one-man network hub) and Alan Ferdman (who I met through KRTI): I’m therefore honour-bound to fill them with copious amounts of beer in the pub afterwards. If you find yourself near the Rack and Tenter from about 8.30pm (it’s super-close to Moorgate BR & Underground stations), feel free to say hi. 🙂

“The Secret History of Commodities”…

Next week will see my first proper Nanodome pitch following a fair old period developing stuff, so I’ve spent a bit of time this week revising my pitch deck, and even had a chance to run it past KRTI’s Bob Lindsey (who often attends 3Cs meetings) over coffee at the Surbiton Brasserie (very good hot chocolate there, by the way). After far too many iterations, my first slide ended up a really ‘left-field’ thing – titled “The Secret History of Commodities“, I thought it was interesting enough to deserve a blog post as well. So, here goes…

One of the biggest challenges when pitching startups-that-actually-make-physical-things (as opposed to pretty much any of the social media / digital services startups Old Street is currently awash in) is that perilously few angels have any experience of making money out of making things. To be precise, the large majority of the Home Counties angel investors you’ll ever get to meet will have made (and, in fact, will usually still be making) their money from relatively ‘pure’ financial service plays: by and large, most seem to treat angel investing as an extension of that financial services mindset. Hence most are basically on the prowl for scalable service model startups with relatively lightweight capital funding requirements.

Another issue is that there is a widespread perception of manufacturing as a stagnating, overoptimized segment – as if by merely saying the M-word you are necessarily invoking the slothful ghost of British Leyland and its awful ilk. In reality, few people (even those in government who like to espouse manufacturing as the way that UK plc will turn its fortunes around) realize that the nature and practices of manufacturing have dramatically changed over the last ten years: and one of the key reasons for this lies in what I call the secret history of commodities.

My secret weapon to help me make this visible is a 20-year graph of commodity indices from May 1992 to May 2011 collated by the International Monetary Fund’s economists, corrected to notional 2005 dollar values (hence all the curves cross at index=100 in 2005).

For me, this tells the secret recent history of both commodities and manufacturing. For a start, it’s notable that the dotcom bubble leaves not a butterfly-flutter of a trace on the graph circa 2000: there was essentially no overlap between the physical and Internet business worlds back then. I’ve also divided the chart into three sections to make it absolutely clear how I read it:-

1. 1992-2001 – the “steady-state optimizing” phase. Supply (and improvements in supply) generally outstripped demand for most commodities. Margins were tight. Some supply chains were tightening up thanks to an influx of MBAs, whose fat consultancy fees were paid for by savings from the JIT (just in time) regimes they designed and put in place.
2. 2001-2005 – the “uh-oh” phase. Something not really seen during the 2oth century happened: demand for a whole set of commodities started to accelerate faster than supply. Manufacturers responded by outsourcing (particularly to the Far East), extending their JIT arrangements, and integrating yet further with distribution and customers. Fragility of the system started to ramp up.
3. 2006-present – the “OMG” phase. Just look at the relative volatility! Demand continued to accelerate faster than supply, but – far more importantly – almost all commodities started to be actively traded by speculators looking for the next gold bubble. What’s more, widespread trading in commodities derivatives and futures magnified and amplified any micro-trend until it became a macro-trend. This has led to a succession of short-term price booms and busts as waves of fashion interest moved into steel, nickel, tin, aluminium, lead, ABS plastic, wheat, corn, whatever (apart from onions, but that’s another story).

I think that without extensive and wide-scale government intervention into the futures / derivatives market (and you may be surprised to hear that many governments are actively considering this!), (3) is what manufacturers are now stuck with… forever. Hence this level of price volatility affects the raw cost of every physical thing you buy.

From the point of view of a manufacturer, this price volatility of physical stuff is like a dark, dark shadow hanging heavily over how you design things. Nobody wants to design defensively for price volatility; nobody in the twentieth century has really had that as a dominant factor guiding their design strategy; typical manufacturing design strategies revolve around engineering an appropriate balance between scale and demand. All the same, I suspect this mad (and maddening!) price volatility will rapidly turn out to multiply the strength of the many pro-green arguments by a major factor. Engineering devices as platforms for long product life, reduced resource consumption, etc are now the starting point for Manufacturing 2.0 – whether or not you want to call them “Green” doesn’t matter.

But what hardly anybody seems to have noticed is that really long life products are actually more of a service than a product. Which (I think) means that the next wave of mega-manufacturers will surely go completely vertical and sell long-life services directly to end-users, destroying every shred of value chain between them and end-users. Ultimately, it seems that the upshot of a “Green” manufacturing economy is vertically integrated service providers masquerading as manufacturers.

When I put this point of view to my ex-Reuters friend Martin, his response was: “so, you’re basically saying the mobile phone contract model will take over industry?” And in many ways, I think he’s right: manufacturers may aspire to be Lean and Toyota-like, but their real future is Orange. Who’d have thought it, eh?

Is it time for a “Small Manufacturing Tsar”?

Few people have heard of the Tech City Investment Organization, and even fewer realize that one of the main reasons it was set up was to encourage overseas companies to park themselves in Shoreditch, to “create more employment more quickly”. Hence the eyecatching entrance of Google and Cisco into the whole Tech City parade: of course, what we’ll do once all the web programmers in town suddenly disappear into their corporate maws is another matter… so yes, that was a great idea, Dave. ‘Great‘, as in… ‘utterly awful‘.

Of course, it’s true that TCIO would also like to encourage angel investors to invest in Tech City startups, but… have you seen any doing this yet? [No, neither have I]. And much as I enjoy chatting with Silicon Valley Bank’s smart & engaging Oscar Jazdowski, trying to apply SVB’s heavyweight expansion capital funding model to Tech City’s frothily lightweight, early stage social media startups is not unlike trying to crack a nut with a pneumatic Hammer-O-Tronic 9000. Well, you could… but, frankly, you’d probably lose your nuts in the process.

As normal, you don’t have to scratch very far beneath the surface hype to see the real problem. For even if you don’t remotely believe TCIO’s apples-for-mangos statistics for the allegedly dramatic expansion of tech startups in Tech City (and I for one don’t), it’s surely terrifically unfair that those [quite literally] poor darling hotdeskers have such an extraordinary burden of government rhetoric dumped on their collective shoulders. Much as I love them as individuals, how exactly are these self-funded software engineers supposed to change the fortune of UK plc? Or is it rather more likely that 95% of their startups will pivot, pivot, stutter and fall, leaving their principals to drop their principles & grab jobs with the webbed-up corporates now conveniently situated next door?

It’s a little bit galling that almost all the attention goes to Tech City, when there has (according to other recent [and probably more reliable] statistics) been a huge surge in startup activity right across the London area. I’m not blaming TCIO’s Tech City tsar Eric van der Kleij for this, but I can’t help but notice that as soon as Tech City gets mentioned in the media, it’s as if everyone’s suddenly trying to behave like an idiot venture capitalist circa 1995, but crossed with all the idiot parts of the Lean Startup circa 2011: people trying to fund VC wetly disintermediated dreams with pin money. Does that notion make any sense to you? Nope, I didn’t think so. 😦

If we can somehow manage to resist the temptation to inhale too deeply from the Tech City bong, the big question is this: what would actually make a difference? What positive thing could the Government actually do? Well…

What about a ‘Small Manufacturing Tsar’?

Being realistic, to make a macroeconomic difference you’d need at least a hundred startups to go totally platinum – to become billion dollar export-heavy industries all in themselves. And that’s a big ask, seeing as barely any UK companies have managed this trick of late.

Yet I think one sector that stands a finite chance of achieving this is modern lean manufacturing, and – not for the first time in the last few years, it has to be said – the world viewed from my seat appears to be radically different from what Whitehall seems to be seeing.

For me, modern manufacturing is totally rock & roll, and offers a real chance of making a macroeconomic difference to exports, tax revenues, and to UK plc in general. Electronics development (and even mechatronics development) has gone garage, while hardware startups are just starting to go properly guerilla too.

Yet many people – even otherwise well-informed and erudite commentators – still struggle to see the differences between, say, British Leyland circa 1975 and a miniaturized mechatronic startup circa 2011, when (apart from the “both making things” bit) you’d have a lot of trouble finding any similarities. I hate to say it, but a lot of this is just academic snobbery, self-appointed faux-elitist nonsense from people who excel at engaging with theoretical knowledge, but disdain getting involved with anything remotely practical. Score one (own goal) for academe, sadly.

The central communication problem here is that small manufacturing has no obvious champion, no clear focus, no accepted role models – the closest Vince Cable gets is when he talks up Brompton Bikes (what about Grahame Herbert and his Airframe folding bike, then? 😉 ).

Hence what I think the UK needs right now is a ‘Small Manufacturing Tsar‘ – someone who can champion, focus and promote small UK manufacturing, to help the country’s small manufacturers get the mindshare and attention they need. They’re not British Steel and British Aerospace, they’re small (yet hugely scalable) companies who don’t happen to fit the kind of startup pigeonholes and templates that funding bodies like the Technology Strategy Board would like them to conform to. They are, as per the title of a recent survey, “Born Global” – because proper manufacturing may now start small and ‘Lean’ (in the correct sense of the word), but it starts with a foot in every country. And that’s… quite a lot of feet.

And so here’s my open question to the Business Secretary: Mr Cable, do you have any current plans to champion, focus and promote the small manufacturing sector? Might I suggest that a Small Manufacturing Tsar might help to do this?

100th post: the mystery of manufacturing…

Journalists & editors love centenaries and plausible-sounding round number anniversaries: it’s an easy way of making press out of something that happened ages ago, and with the logistical advantage of being a date in the (near-ish) future you can prepare for in advance.

And so it goes with blog posts: only there, the longstanding tradition is to celebrate the 1000th post / 1,000,000th visitor / whatever by posting something really great. In practice, however, this is typically no more than a long list of links to various non-sucky articles you’ve posted, presumably hoping that by so doing they’ll get some kind of celebratory PageRank boost from Google. 🙂

Anyway, the (otherwise totally meaningless) milestone here is that this is the 100th Funding Startups post: and following a thoroughly nice lunch at the Griffin in Claygate with Mike Scase (who incidentally helped design the Amstrad CPC464 for Alan Sugar), I thought I’d post on something he seemed to find interesting… the mystery of manufacturing.

1. Asleep at the wheel?

First, the economic context as viewed from my contrarian swivel chair. When the recent long period of (apparent) financial stability fell to pieces in the Credit Crunch, commercial banks realized that they’d been caught napping. Their balance sheets were awful because for decades they’d been lending large amounts of money at relatively low interest rates – acquisitions, management buy-outs, and all kinds of spurious stuff. Leveraging had vastly changed high-level business funding models: presumption of access to stratospheric levels of debt had even become part of the syllabus at business school.

But now things had changed, and the banks wanted their ball back. One group hit badly by this were the distributors…

2. Piggy in the middle, carefully sliced…

The distribution sector was unhappy about this change in the landscape: numerous large empires had been founded and built up on the model of holding large inventories while giving 60 days’ credit to trade customers. If the banks now won’t let you hold stock or sell much on credit to small trade buyers, what are you supposed to do? Looking at that big liquidity hole in your accounts where all that soft money used to be, it would surely be hard not to conclude that your business bubble had just been popped.

Moreover, now that distributors don’t hold a lot of stock, it’s often the case that bigger customers go directly to manufacturers, forming a direct-from-the-source relationship, shrinking the market in the middle. At the same time, there’s a lot of sideways pressure on distributors from Internet wiseguys also looking to disintermediate them, by replacing their service with a teeny-weeny webbed-up warehouse in Wareham. So if the banks won’t fund your inventory or let you give much credit to trade customers, bigger customers want to cut you out, and web-based micro-disties are trying to eat your lunch, what’s the future of distribution? Really, when everyone wants to take a slice out of what you’ve got, it’s not easy being piggy in the middle.

3. Just In Time(berlake)…

From the point of view of manufacturers, distributors are very often the primary sales channel, their basic “route to market”. But if banks won’t let distributors hold much of anything in stock, it falls to the manufacturers either (a) to finance the stock themselves; or (b) to find clever fast ways of creating stock on demand (the whole “Just In Time” phenomenon). Yet because the whole idea of working capital has become little more than a vague, distant memory, banks have placed manufacturers under arguably even worse pressure than the distributors: hence option (a) [financing the stock themselves] is very rarely practical.

However, even if you are able to devise clever, lean manufacturing models based around small, fast batch sizes – option (b) is the starting point for manufacturing right now – the process of manufacturing continues to be just as capital intensive as ever. You still need to design & prototype (even though 3d printing has made shape functionality testing much easier), build injection moulds (expensive, clunky, and slow), verify functionality, check for standards conformance, adapt for manufacture, assemble, test, pack, ship, and – last but not least – pray like crazy that people do now buy whatever it is you’ve spent so much time making, i.e. that the market for your product hasn’t silently evaporated while you’ve been away with the (development) fairies building it.

4. Finally, we get to “The Mystery of Manufacturing”…

Though I blog about “Funding Startups”, when it comes to funding manufacturing startups I’m entirely mystified. How on earth does anyone do it? There’s no money in distributors, there’s no access to working capital or overdrafts, and there’s only regional development support if you happen to be opening up a decent-sized factory in a region with high structural unemployment… which, frankly, ignores the reality of how most pragmatic modern manufacturers would structure their operations (typically around Far East subassembly and local late assembly for customer flexibility). As far as I can see, the main reason that James Dyson moved production to Malaysia was that his company would be stuffed otherwise: having outsourced much of the Midlands to Shenzhen, what’s our local alternative? It’s like that, that’s the way it is.

As a result, for UK manufacturing startups the only feasible source of funding is typically angels and VCs: but almost all of these have little or no interest in actually building things, preferring to channel their money into mobile apps and social media pixie-dust. It’s no secret that manufacturing doesn’t have anything like that ‘iGlamour’, for how can it compete with neon-look 3d demo buttons on a sleek black handset? Hence, “the mystery of manufacturing” is simply… circa 2011, how on earth is it possible?

So… a hundred posts down the line, it should be clear that I’m starting to flag somewhat. I continue to look at companies such as AlertMe and Nest.com to try to figure out what the secret of their funding success was. However, apart from Pilgrim Beart’s reasonably generic advice to founders to delay inward investment as long as possible, I don’t really see what there is to learn about the realpolitik of funding manufacturing, what microeconomic levers there are out there left to pull.

Ultimately, slicing through the tangled Gordian knot, there’s a high chance that there is in fact no mystery here: that is, the UK has no “mystery of manufacturing” simply because it has no manufacturing. Should people like me abandon the UK and start afresh in Taiwan or Shenzhen, planting the IP seed of their business into a richly loamy cultural soil that not only understands manufacturing but actually values it?

Could it be that I’ve been so caught up with solving super-hard tech development puzzles that I’ve sidelined the properly big question – is this the right place to run a manufacturing company from? That is, might the real mystery of manufacturing be “why do I persist in banging my head against this particular wall?” Or, rephrased as a Zen koan for philosophical heavy metal fans, “what is the sound of one head banging?“

Aiming (much) higher than Hackspaces and FabLabs…

In response to my last post on manufacturer hackspaces, Phil Jones (founder of the Future Manufacturing meetup group) left a comment mentioning “James Hardiman’s project to build 50 fablabs“. That project was inspired both by MIT and by the various FabLabs springing up in Holland: James notes that the first UK Fab Lab has arrived in Manchester, called (somewhat unsurprisingly) Fab Lab Manchester, with two more (one in Cambridge, one in Brighton) threatening to get started any minute.

Perhaps I should be pleased by all this, but just as with London Hackspace, this all seems to me to fall well short of the mark. Only people who haven’t actually worked in manufacturing would think that buying a 3d printer and a vinyl cutter would be sufficient investment to push an entire community into a making frame of mind. Prototyping for looks falls well short of prototyping for function or for mass production: additive mass manufacturing is still so far from a reality that I usually find it embarrassing when I see it in someone else’s business plan or pitch. A serious attempt at seeding manufacturing would have proper kit for startups who are driven to change the world, one good idea at a time: an EOS direct metal laser-sintering system, a 3-axis computer controlled mill, a decent laser cutter, and so forth.

But then again, almost nobody in the UK seems to have any sense of how this would work, or why it would be even remotely necessary For many manufacturing hopefuls (particularly those on or just out of design degrees that seem to be Sociology accessorized with a bit of Rhino3d product design module, though you’re not supposed to say that), the grimy side of physically making things is frequently perceived to be nothing more than a ‘design plus’ activity. For once you’ve designed yourself a sleek-looking Jonny Ives-style 3d model of your hypergadget, you lob it over the partition and the rest is easy… errrr, isn’t it?

Actually no, not even close: the gulf between the (mostly Western) turtleneck Mac-design-house mindset and the (mostly Far Eastern) mass production world has arguably never been wider. There are now a billion spectator seats at the manufacturing table for wannabe makers who can sense the global hunger for tools and gadgets: but making one of those into a success is, if anything, harder than ever right now. I don’t even want to speculate on how dwindlingly few people in the UK have a sufficiently good grasp of conceptual design, mechanical design, electronic design, interface design and software design to doggedly push a real project right through from start to finish, and who also ‘get’ customer development enough to build something that people will buy.

Of course, I appreciate that someday we may possibly all have desktop 3d replicators able to summon the world’s digital designs to our hands, one petulant (and probably virtual) mouseclick at a time: I’ve met plenty of people who give the impression of living off the whole sci-fi high of that notion. But for now, I’m sorry to have to say that it’s just nonsense.

This is because the practical limitations of 3d printing are many and varied, all the while the whole process of proper injection moulded parts is rapidly improving. Yes, that’s right: hardly anybody realizes that even though 3d printing is getting better all the time, injection moulding is also continuously improving and reinventing itself too. Going all ‘Wired’ by focusing on the eventual promise of 3d printing will likely cause you to miss out on the real manufacturing revolutions that are happening right here, right now.

So… who should back the UK’s manufacturer hackspaces? I previously proposed the Technology Strategy Board, but OpenCoffee-er Brian Milnes also suggested the Engineering and Physical Sciences Research Council (in fact, they both operate from the same building in Swindon). All the same, I think there’s a strong (and perhaps slightly surprising) case to be made that the best source of all would be NESTA, the National Endowment for Science, Technology and the Arts.

I’ll try to explain. Possibly the biggest argument against any kind of investment in manufacturing is simply that for most people – and I’d certainly include the majority of business angels in this category – building things is just too prosaic a thing to get particularly interested about. But for me, I see manufactured objects as a kind of beautiful miniaturized IP symphony: the customer development, the idea, the form factor, the design, the mouldings, the machines, the electronics, the sensors, the interface, the technology, the packaging, the assembly, the testing, the conformance, the software, the hacking, the platform, the recycling… all of it.

Where you see gadget, I see process. Moreover, where you see prose, I see poetry: for the UK will continue to have no manufacturing all the while it has lost its collective sense of the poetry of production. The ignominious application of production line metaphors to (the actually very creative) industrial life has helped alienate people from the process of making: whereas Lean Manufacturing instead helps to reconnect workers with the project as a whole, by seeing waste as a thing that erodes value, and that corrodes the relationship between customer and producer by making it unnecessarily fragile and contingent.

And this is where I think NESTA comes in. There is a crazy, valuable, wonderful space opening up here for a manufacturing hackspace with a direct remit not just to connect with (and empower) startups with a drive to build, but also to try to piece together and tell the story of manufacturing as it lives in the minds of modern makers. Yet this goes way beyond the whole tokenistic artist-in-residence type of conceit: for if we cannot as a society engage with the manufacturing dreamworld – for what are products but our collective dreams made solid? – then we will end up designing our FabLabs merely to satiate superficial toytown needs, to scratch parochial mercantilistic itches better ignored.

Ultimately, the future history of manufacturing that people such as I are trying to write is a far more nuanced thing than anyone seems to realize: it’s a matter neither of high-value goods vs low-value goods, nor of on-shore vs off-shore vs late assembly, nor even of in-house vs out-house, but one of doing vs not doing. That is, the world does not need more software houses: software is far too often a way of avoiding doing useful work, of sidelining bright people. Rather, the world needs more people doing things, building physical things, and merging hardware and software in useful and unexpected ways. Isn’t it true that apps are arguably the least interesting type of Sampo, that legendary Finnish “magical artefact… that brought good fortune to its holder“?

To my mind, the most subversive act of all is designing and building something new, for that serves to shift the balance of that-which-is-immediately-physical-possible: as useful day-to-day technology moves from spectacles to medicines to lifts to robots to exoskeletons, the sum of our parts becomes more than mere bodies. Yet we have become so accustomed to seeing novelty in apps as our collective metric for ‘interestingness’ that we often overlook this beautifully simple world of useful, empowering objects. Who, now, is looking to curate these machines of modern production, to bring out the subversive story of modern man as maker?