I was having an interesting conversation with my friend Fictive Cameron recently and it got me thinking a bit. We were talking about entrepreneurship and what it would take to create a successful hardware incubator and I thought it was worth throwing out there to start a conversation.
Not That Kind of Incubator
The incubator is an approach to encouraging (and investing in) startups that has gotten hot over the past few years. Led by Y Combinator and several other groups (in addition to a number of clones), the idea is to identify budding entrepreneurs and put them in a position to succeed. This typically entails getting a group of nascent companies together to work in the same place and providing a small amount of funding and, more importantly, the expertise and rolodex of more seasoned entrepreneurs and investors to get things rolling with each venture. In return, the incubator takes a stake in each company.
The approach has been fairly successful, to the point that earlier this year Yuri Milner and SV Angel started offering a $150k convertible note, no questions asked, to any Y Combinator company (for those who are less familiar with the traditional way of business in Silicon Valley, that is an extremely favorable investment basis for the entrepreneur(s) and all the more noteworthy given the complete lack of due diligence beyond “member of Y Combinator” on the part of the investors). Historically, however, incubators have strongly favored software and web ideas over hardware plays. This is understandable, as relative to hardware companies those types of ventures can scale much more quickly and generally operate on compressed timescales across the board, including elapsed time between inception and liquidity event (sale, IPO, etc.). In addition, hardware companies can be more difficult, risky and capital intensive.
Where Is The Opportunity?
Despite all that, I think that there is still a golden opportunity for a successful hardware company incubator. Hardware can be easier to monetize than software and has the potential to be extremely lucrative (see: Apple). The same issues that can be headaches for hardware companies (e.g. manufacturing or logistics) can in turn act as barriers to entry for competitors once a company has implemented effective solutions.
There is another factor that makes now an opportune time for hardware idea incubation: the rise of crowd sourced investment platforms such as Kickstarter. Kickstarter is a website that lets people post projects that can be micro-funded by the general public. As an example, consider someone who has an idea for, say, an SLR camera mounting clip (full disclosure: Peter is one of the other folks in Pocobor’s shared office space, which puts me in excellent position to vouch firsthand for how good his product is). Kickstarter or its equivalent can be used to (1) gauge customer interest in the idea, (2) get feedback on product features and (3) come up with cash for manufacturing at low risk to the entrepreneur or investors. This can drastically reduce the capital required from other sources to get a hardware venture off the ground and correspondingly the risk to the investors (read: incubator).
Obviously there are a number of issues that need to be addressed to design an effective hardware incubator. Some of the ones that jump to mind (certainly not a comprehensive list) are:
Facilities: A wide variety of testing and fabrication tools could be useful and a full machine shop is likely a minimum requirement. There are also safety and expertise concerns to address.
Seed investment size: The initial investment would have to cover design and prototyping expenses in addition to living expenses for the participants and so the investment size would likely have to be larger than those used with software incubators. In addition, there would be classes of hardware ideas that aren’t feasible with this model (e.g. some kinds of medical device or biotech plays).
Expertise: manufacturability is a vital area for hardware startups but also one that young entrepreneurs frequently don’t have much experience with. Providing this type of guidance will be invaluable to creative but callow founders.
Timetable: the pace of iteration is typically slower for hardware than software; the incubator program length should reflect this.
Call To Arms
Speaking as an engineer and entrepreneur who is particularly interested in hardware and how technology interfaces with physical products in our lives, I would love to see a hardware incubator get off the ground. Despite the wrinkles that go along with these types of companies, I think there is a great opportunity for a well-designed program to thrive. So I challenge all entrepreneurs and investors – who will be the first to make it happen? To the victor(s) go the spoils.