Starting a new early stage VC fund at the intersection of AI and the physical world. Stay tuned for more. Former General Partner at Lux Capital. $5B+ AUM. Former Principal at General Catalyst Partners.
There are two interesting and relatively new/emerging revenue models in hardware space. (1) Software Enabled Hardware Hardware is sold at lower but slowly improving gross margins (eg 20-40%), and software recurring revenues layered on top. Software sells at higher margins, enabling blended margins to appear in 50%+ category. These are applied in situations where hardware is not expected to be replaced or greatly improved upon in deployment for a significant number of years to come. Consider your car, or military equipment, or even infrastructure equipment. As always, there are often multiple business/revenue models utilized by different players in the same industry. (2) Hardware As A Service Hardware and software are bundled and sold with annually recurring revenues. Often multi-year contracts are signed to be able to amortize hardware over time, and enable blended gross margins over the length of the contract to be high (approaching 60-75%). This is more common in situations where vendor takes responsibility to upgrade hardware as needed along the way to provide maximum and highest functionality to the customer. Hardware inventory costs are, over time, passed on to suppliers or third party financing parties in lieu of few gross margin points. Consider robots as a service in factories (ala Formic), or AI-enabled equipment (eg Evolv, Lumafield etc). Hardware innovation will require deeper investigation, experimentation, and understanding of business/revenue models to fit customer needs as well as to maximize value for the innovating company. Strong and experienced management teams work hard to minimize sales friction, inventory costs etc, but also maximize gross margins, customer stickiness, and ability to upsell during the life of a contract.
Adam de Delva
8mo
Personally, my company is dabbling with open hardware chip design & hybrid cloud architecture use cases. The future is open - as we’ve seen with the success of OSS. The next frontier is enabling emerging markets with similar capabilities to what we’re seeing with NVIDIA H100/H200s. Radical thought processes but, it’s going to be critical as we think about further commoditizing and democratizing access to specialized hardware for training & inference of models.
Saurabh Palan
8mo
Bilal Zuberi both of these are time tested strategies. 1. Google has been subsidizing cost of hardware for more adoption of its Android and associated services. More people I know than ever before are tied into Google ecosystem with photos and mail and are buying the subscription plan to upgrade memory. Not to mention the ads based revenue when people use their products. 2. Cable TV operators have been doing HAAS by leasing their settop boxes. With new types of products it is about adopting these time tested models. #1 is definitely long terms thinking but need heavy upfront investment and conviction to be able to recover the cost.
Chris Smith
8mo
The economics of hardware makes more sense for founders and VCs than ever as the cost of producing the hardware falls, labour costs and shortages rise, and the white space for technology that does 'real things' is multiples larger than the remaining space for software only solutions
Bilal Zuberi Your take certainly characterizes paths for defense "deep tech" -- aligns with new flexibilities in software acquisition pathways and tracks closely with robots-as-a-service strategies actually underway. I wonder how you think attritable hardware systems, think ADA2 for Replicator, would impact the margins in either of these emerging revenue models; if at all?
Nick B.
8mo
A deployed hardware infrastructure is also inherently defensible - once a customer has infrastructure solving a problem or need, they're unlikely to install a similar system from another brand. Hence the route to market needs to be a fast and well funded physical rollout, perfect VC territory. Remotely upgradeable hardware with excess resources reduces risk of hardware islanding.
Kevin Toderel
8mo
We are starting to see oops for -#2 in the drone space. Skydio tried the “high” recurring software cost and the customers, especially Public Safety hated it. Much more appetite for a capital cost model and ultimately better for OEM’s and resellers. Interesting opportunities for traditional resellers to create proprietary software that increases capabilities. As for #2 as deployments get more complex - say Drone as First Responder - the costs get larger ( people costs as well as hardware) making this model much more interesting. We are certainly seeing people entertaining it which they would not do in the past.
Harrison Knoll 🤘
8mo
We have been using the software enabled hardware business model. I think both the business and the customer get a better experience. It encourages the hardware to be designed with a forward thinking mindset in quality and functionality and it provides a platform to release new software to expand functionality over time
Zachary Kimball
8mo
Great post! These are two of the more common of many different names being given to recurring hardware models. Small collection in this image here. I see the name "hardware-enabled software" much more than "software-enabled hardware." Especially common for businesses that use commodity hardware (such as sensors) but provide value-add reporting and analytics using the data.
John Jamie
8mo
In the IT hardware space, HPE has 3.8M hardware devices sold on an ARR basis in their GreenLake service. Dell has an equivalent called Apex.
Founder @ Rockhopper Ice Collective. Founder Atop Bascom LLC. Previous: Accenture Managing Director.
8moHardware as a service makes too much sense for all parties, though the upfront capital need is a real challenge many have a hard time with. Though I don’t love the category name as the business model is just “as a service” and happens to combine hardware, software, and services.