Our Thesis on Sensors

At 2048 Ventures, we are excited to back hardware based companies that are creating the future.

Historically, however, hardware based companies also face unique challenges that impact their ability to achieve venture scale outcomes, especially when compared to their software peers. In this post, we share more about the specific types of hardware companies we want to back.

Spoiler: we want to fund businesses that use low cost hardware & sensors that capture proprietary and valuable data.

Why hardware is hard

Hardware solutions are non-trivial to build due to the obvious physical requirements and dependencies. The time associated with hardware procurement slows down iteration cycles, and means that companies need to spend larger amounts of capital on their prototype or MVP before they can get it in the hands of their first customer and collect field data.

Secondly, hardware sales also require significant upfront capital investment. Early stage companies need sufficient capital to build the system and deliver it to a customer before ever seeing a dollar in return. All of this significantly slows the time to market.

Lastly, pure capex heavy hardware leads to linear growth. The ability of a hardware company to grow revenue is effectively a function of how many units can be sold. The linear dependency on capital makes it more difficult to achieve a venture scale outcome.

Sensors + SaaS offer cost-efficient and scalable approach

Our belief is that certain types of hardware plays are much more likely to achieve that exponential growth curve.

The critical components of these hardware companies is that they:

• Use low cost hardware
• Use that hardware as a sensor, sometimes literally and sometimes figuratively, to capture proprietary and valuable data
• Sell SaaS that uses this data to perform and control mission critical workflows

This approach is attractive because the companies leveraging low cost hardware have lower capital costs and quicker time to market. This helps them stay lean and iterate faster in product design and with early customers. It also helps them scale faster with existing customers and meet demand quickly.

The second and third components are the most critical, because they promote both stickiness and opportunities for nonlinear growth. Hardware that does not collect proprietary data is at risk of not being sticky with customers due to a lack of strong moats.

For example, when a company comes out with a robot that is 2x as efficient at moving boxes as the existing leader in the space, customers will switch. There is no moat or lock-in mechanism that compels customers to stay, as they will always pick the cheapest way to complete a given task. When you are collecting data, you can then use it to own and orchestrate entire workflows rather than individual tasks. This leads to a much stickier business model and much stronger moats.

We have written about why systems of record are so powerful - they are the gatekeepers for mission critical data that users depend on everyday. Hardware should be thought of as the Trojan Horse, the means to the end, to collect this data in ways that were previously not possible and fuel a brand new system of record, workflow, and orchestration layer for customers.

Once data is within a system of record, it opens up the potential to build an entire platform around it through software. You can add more features and downstream workflows that leverage this data to provide even more value for customers. Rather than completing one task, the hardware and SaaS combo enables your customers to reimagine entire roles and workflows within their organization - from data collection, to insight, to execution. It becomes the new standard for getting things done and is very hard to rip-and-replace.

On top of the stickiness benefits, this models also allows you to expand ACV without increasing units of hardware in the wild. Rather than a one time hardware sale, each customer becomes an opportunity for non-linear growth as more features and workflows can be orchestrated through software.

Examples in action from the 2048 portfolio

At 2048, we’ve been lucky to invest in many companies using hardware in this way to collect proprietary data and leverage it to transform how their customers solve problems every day.

H2OK allows manufacturers and data centers to track the composition, quality and consistency of their operations in real time using low-cost IoT sensors. Prior to this, their customers needed to manually test batches and systems at regular intervals. More real time data means they can can adapt the second something goes wrong. On top of collecting and storing this data, H2OK is also the engine that uses this live data to optimize all of the water and industrial processes in real time based on sensor feedback. In data centers, this enables critical temperature regulation. In factories, it reduces the need for over-treating water with expensive chemicals.

Pathspot is a comprehensive health and safety operating system for hospitality and restaurants. They install low cost hardware in customer facilities, such as hand scanners to make sure employees have properly washed hands, and temperature and humidity scanners that make sure food stays safely stored. These devices act as sensors to collect all of the necessary data about the safety and cleanliness of customer facilities. Their software then leverages all of this data to help kitchen managers instantly generate the detailed operational reports and safety/compliance reporting to management and regulators.

Lastly, Impilo helps doctors and healthcare providers procure and provision low cost medical devices, such as glucometers and heart monitors, to their patients. These devices are very common already, but a big challenge for doctors is getting patients to accurately report the data from these devices. Impilo solves this by providing APIs which collect device data for each patient, allowing healthcare providers to have a more complete and real-time picture of patient health data. By providing common medical devices conveniently and at a low cost, Impilo is able to unlock even more valuable insights through proprietary patient data - not just at the individual level, but at the population level as well.

Looking into the future

We are obsessed with companies that leverage low cost hardware to collect proprietary data and own critical workflows for customers. These companies enjoy capital efficiency and have strong potential for venture scale outcomes.

As the world around us produces more and more data, we see the inevitability of sensors measuring everything - from human beings, to the environment, to company processes, and everything else.

If you are building SaaS that is enabled through hardware-based data capture, we would love to talk to you!

Reach out to us and tell us more!