The Exchanges

Q Is Fitbit, we could consider Fitbit, but software provided as well, isn't it? For a premium software.

A Yeah, it's a huge part of it. And I think a lot of people, when they filed their S-One were stunned in 2014 that this, this, you know, maker of these, you know, relatively cheap, uh, little accessories that you were on your wrist had ten million people paying Uh, you know, whatever it was, I think it's 60 dollars a year. Um, you know, it's for a premium subscription service. It's mind blowing to, to, to, to most folks. So, so really hardware is this really great Trojan horse to get software into places that it can't currently exist. And, um, I, there, there are so many more places where software can go that just can't right now because it's tied to these sort of legacy traditional devices. Uh, and that's really the, the really interesting part To, to me and my partners, the tentacles of software crawling into the greater, uh, world via hardware. And, you know, Brad, Brad Feld, my friend and mentor and one of our first investors was, uh, you know, has this great phrase that he coined a couple of years ago, which is, um, you know, he, he, he really likes, it's not hardware, it's software wrapped in plastic. And I think that's a really elegant way to think about many of these businesses. Now, to be fair, there are lots of other businesses, um, That are not necessarily software wrapped in plastic that are also interesting venture businesses. It, it still tends to be recurring in na…

AI assessment note: “Yeah, it's a huge part of it. And I think a lot of people”

Q And I want to deep dive then on the models themselves, and you cited three in the past. So what are the models, what are the fundamental models? And then I want to know which model you're most excited for personally.

A Um, yeah, there are, there are, uh, I mean, there really, there are many, but I, we, we tend to, to, Group them. And so I think the, the first is, is what we call hardware as a service. And these really are businesses where the hardware sale is really not that important. Um, and so if you look at a company like Meraki, uh, which I think is a company that, um, that not too many people know, but, uh, Cisco acquired for, I think it was about a hundred million dollars, uh, I think two or three years ago. Um, they sell really beautiful cloud managed, uh, sort of small business, uh, But enterprise grade, uh, you know, sort of network infrastructure. So things like routers and switches that are designed for, you know, mostly startups and sort of companies that are growing, um, all managed on the cloud. They're really fantastic products. You do pay upfront for the hardware, but that's not the reason that that business is doing so well. It's because you're paying, you know, a couple thousand dollars a year for each one of those boxes to function in their software license. Uh, and so this is really, you're, you're highly optimized for You know, making money on the software, even if you lose money on the initial hardware sale. So I think that that's one. Uh, and then, uh, there's a business category, which is a little bit what I talked about with curing, which is sort of around this idea …

AI assessment note: “the first is, is what we call hardware as a service.”

Q Is Fitbit, we could consider Fitbit, but software provided as well, isn't it? For a premium software.

A Yeah, it's a huge part of it. And I think a lot of people, when they filed their S-One were stunned in 2014 that this, this, you know, maker of these, you know, relatively cheap, uh, little accessories that you were on your wrist had ten million people paying Uh, you know, whatever it was, I think it's 60 dollars a year. Um, you know, it's for a premium subscription service. It's mind blowing to, to, to, to most folks. So, so really hardware is this really great Trojan horse to get software into places that it can't currently exist. And, um, I, there, there are so many more places where software can go that just can't right now because it's tied to these sort of legacy traditional devices. Uh, and that's really the, the really interesting part To, to me and my partners, the tentacles of software crawling into the greater, uh, world via hardware. And, you know, Brad, Brad Feld, my friend and mentor and one of our first investors was, uh, you know, has this great phrase that he coined a couple of years ago, which is, um, you know, he, he, he really likes, it's not hardware, it's software wrapped in plastic. And I think that's a really elegant way to think about many of these businesses. Now, to be fair, there are lots of other businesses, um, That are not necessarily software wrapped in plastic that are also interesting venture businesses. It, it still tends to be recurring in na…

AI assessment note: “Yeah, it's a huge part of it.”

Q Do you think that's brought about inherently Problems then in terms of supply chain. Obviously when you own the full stack supply chain, uh, you have the quality assurance is all you, uh, when, when you don't, and it's in Shenzhen or wherever it is, it's more difficult. Is it not?

A That's absolutely true. Um, but the cost benefit analysis of not having to deal with, you know, hiring and firing workers and people stealing stuff and, uh, you know, all the capex you need in order to build it and yada, yada, yada is totally worth it. Versus the supply chain management issues that you have to go through. And really what actually happens with most hardware companies now, their, their core focus as they grow is actually less about hardcore manufacturing and molding and quality control. And it's more about gaining expertise in your own supply chain. And that means cutting big deals with suppliers and learning how to forecast really well and trying to understand sort of demand and margins and how that all plays together with both manufacturers and with retailers. You know, you're, you're, you're one level removed, uh, from the low level work, but that gives you this great perspective on the big problems that your industry faces. Uh, and, and if you look at, you know, I mean, I'll point to Apple as an example of a company that really shifted from, you know, core product sort of manufacturing expertise. Uh, you know, Tim Cook is a supply chain guy. Uh, you know, he's brokering deals for, you know, billions of dollars worth of, you know, processing power and, and, and memory. Um, which changes the, the, the way in which, you know, a company can operate because they h…

AI assessment note: “That's absolutely true. Um, but the cost benefit analysis”

Q And we spoke there about consumer businesses, and we've spoken today about Fitbit and the kind of consumer hardware space. It seems that brand is making an ever greater presence in the, in the sector. Um, you know, GoPro, I think is, is a brilliant example. Um, so how important do you think brand is for hardware startups? And to what extent do you agree with me in the importance?

A Yeah, a hundred percent agree with you when it comes to consumer products, that brand is, it's actually the most important thing. And it's, it's a little bit of a red herring because brand encompasses so much of what a company is. You know, it's, it's really, I think people think of brand as like the font that you use on a logo or something. And that's really, That's branding. Uh, you know, it's, it's a little bit confusing, but the brand is really the promise that a company makes to a consumer. Uh, you know, living up to that promise includes things like, you know, making the product work well. It includes, uh, you know, how you advertise that product, actually setting the expectations for the promise in the first place. It includes customer service and support. Um, it includes, you know, returns and all that kind of stuff. So, so there, there's this, uh, very significant amount of work that, that goes into building a brand that, But it is hugely important, and really, in my opinion, the most challenging thing that a young consumer hardware company has to deal with as they grow. And if you look at, I love to compare and contrast Jawbone and Fitbit, because, you know, you take basically the same product that I think, you know, worked, you know, fairly similarly. You know, Jawbone really built a horizontal, you know, Bluetooth business, right? So all their products have Bluetoot…

AI assessment note: “a hundred percent agree with you when it comes to consumer products”

Q about when, when entrepreneurs come into VC's offices with their hardware, uh, they, they get the classic hardware's hard and, and get out of my office. But in the last five years, hardware investing has increased, uh, at According to stats. So I'd love to hear where you think this explosion of activity is coming from and why it's happening now. What are the kind of market drivers forcing this?

A Yeah, it's a great question and something that people don't talk about enough. Uh, the press loves to call attention to, I think these sort of sexy, cool trends, uh, things like crowdfunding and three printing and that kind of stuff, which I actually, I think is actually a very small part of the story. Um, Um, but it's a very, it's a very cool thing. And so people love to talk about it and write about it. The, the real reasons, uh, in my opinion, that hardware has become a much more interesting field, um, as a, and, and really it's, it's always been there just for paying attention to it in a slightly different way. Uh, you know, I think people forget that hardware really is everything. Um, uh, you know, it's really everything other than software. The, the trends are really driven in my opinion by things like contract manufacturing, uh, which as a field, you know, is fairly new. Um, you know, it used to be if you were, whatever, Apple, uh, you know, 20 years ago, and you were building a new iMac or something, you were buying, uh, you know, land, and building a building, and, you know, buying equipment, and hiring, you know, minimum wage employees to build things. It's pretty amazing, actually, to, to, to see now that you don't do that. No one does that. Even huge companies don't do that. They, they go, uh, you know, they go to Shenzhen, they go to some, you know, various places …

AI assessment note: “The trends are really driven in my opinion by things like contract manufacturing”

Q Do you think that's brought about inherently Problems then in terms of supply chain. Obviously when you own the full stack supply chain, uh, you have the quality assurance is all you, uh, when, when you don't, and it's in Shenzhen or wherever it is, it's more difficult. Is it not?

A That's absolutely true. Um, but the cost benefit analysis of not having to deal with, you know, hiring and firing workers and people stealing stuff and, uh, you know, all the capex you need in order to build it and yada, yada, yada is totally worth it. Versus the supply chain management issues that you have to go through. And really what actually happens with most hardware companies now, their, their core focus as they grow is actually less about hardcore manufacturing and molding and quality control. And it's more about gaining expertise in your own supply chain. And that means cutting big deals with suppliers and learning how to forecast really well and trying to understand sort of demand and margins and how that all plays together with both manufacturers and with retailers. You know, you're, you're, you're one level removed, uh, from the low level work, but that gives you this great perspective on the big problems that your industry faces. Uh, and, and if you look at, you know, I mean, I'll point to Apple as an example of a company that really shifted from, you know, core product sort of manufacturing expertise. Uh, you know, Tim Cook is a supply chain guy. Uh, you know, he's brokering deals for, you know, billions of dollars worth of, you know, processing power and, and, and memory. Um, which changes the, the, the way in which, you know, a company can operate because they h…

AI assessment note: “That's absolutely true. Um, but the cost benefit analysis of not having to deal with”

Q And we spoke there about consumer businesses, and we've spoken today about Fitbit and the kind of consumer hardware space. It seems that brand is making an ever greater presence in the, in the sector. Um, you know, GoPro, I think is, is a brilliant example. Um, so how important do you think brand is for hardware startups? And to what extent do you agree with me in the importance?

A Yeah, a hundred percent agree with you when it comes to consumer products, that brand is, it's actually the most important thing. And it's, it's a little bit of a red herring because brand encompasses so much of what a company is. You know, it's, it's really, I think people think of brand as like the font that you use on a logo or something. And that's really, That's branding. Uh, you know, it's, it's a little bit confusing, but the brand is really the promise that a company makes to a consumer. Uh, you know, living up to that promise includes things like, you know, making the product work well. It includes, uh, you know, how you advertise that product, actually setting the expectations for the promise in the first place. It includes customer service and support. Um, it includes, you know, returns and all that kind of stuff. So, so there, there's this, uh, very significant amount of work that, that goes into building a brand that, But it is hugely important, and really, in my opinion, the most challenging thing that a young consumer hardware company has to deal with as they grow. And if you look at, I love to compare and contrast Jawbone and Fitbit, because, you know, you take basically the same product that I think, you know, worked, you know, fairly similarly. You know, Jawbone really built a horizontal, you know, Bluetooth business, right? So all their products have Bluetoot…

AI assessment note: “a hundred percent agree with you when it comes to consumer products, that brand is, it's actually the most important thing”

Q And I want to deep dive then on the models themselves, and you cited three in the past. So what are the models, what are the fundamental models? And then I want to know which model you're most excited for personally.

A Um, yeah, there are, there are, uh, I mean, there really, there are many, but I, we, we tend to, to, Group them. And so I think the, the first is, is what we call hardware as a service. And these really are businesses where the hardware sale is really not that important. Um, and so if you look at a company like Meraki, uh, which I think is a company that, um, that not too many people know, but, uh, Cisco acquired for, I think it was about a hundred million dollars, uh, I think two or three years ago. Um, they sell really beautiful cloud managed, uh, sort of small business, uh, But enterprise grade, uh, you know, sort of network infrastructure. So things like routers and switches that are designed for, you know, mostly startups and sort of companies that are growing, um, all managed on the cloud. They're really fantastic products. You do pay upfront for the hardware, but that's not the reason that that business is doing so well. It's because you're paying, you know, a couple thousand dollars a year for each one of those boxes to function in their software license. Uh, and so this is really, you're, you're highly optimized for You know, making money on the software, even if you lose money on the initial hardware sale. So I think that that's one. Uh, and then, uh, there's a business category, which is a little bit what I talked about with curing, which is sort of around this idea …

AI assessment note: “the first is, is what we call hardware as a service”

Q about when, when entrepreneurs come into VC's offices with their hardware, uh, they, they get the classic hardware's hard and, and get out of my office. But in the last five years, hardware investing has increased, uh, at According to stats. So I'd love to hear where you think this explosion of activity is coming from and why it's happening now. What are the kind of market drivers forcing this?

A Yeah, it's a great question and something that people don't talk about enough. Uh, the press loves to call attention to, I think these sort of sexy, cool trends, uh, things like crowdfunding and three printing and that kind of stuff, which I actually, I think is actually a very small part of the story. Um, Um, but it's a very, it's a very cool thing. And so people love to talk about it and write about it. The, the real reasons, uh, in my opinion, that hardware has become a much more interesting field, um, as a, and, and really it's, it's always been there just for paying attention to it in a slightly different way. Uh, you know, I think people forget that hardware really is everything. Um, uh, you know, it's really everything other than software. The, the trends are really driven in my opinion by things like contract manufacturing, uh, which as a field, you know, is fairly new. Um, you know, it used to be if you were, whatever, Apple, uh, you know, 20 years ago, and you were building a new iMac or something, you were buying, uh, you know, land, and building a building, and, you know, buying equipment, and hiring, you know, minimum wage employees to build things. It's pretty amazing, actually, to, to, to see now that you don't do that. No one does that. Even huge companies don't do that. They, they go, uh, you know, they go to Shenzhen, they go to some, you know, various places …

AI assessment note: “The trends are really driven in my opinion by things like contract manufacturing”

Q I mean, we said there about Fitbit doing it well. Who else do you think is doing it well? And then who do you think are the incumbents that are falling away with this transition to the software play too?

A Yeah. So I think most of the big companies are really struggling with this, uh, and, you know, having to hire armies and armies of software people, uh, To, to sort of help augment their existing product line is, is usually a sort of death sentence for many of these big companies, at least in their, in sort of new, new products that they're trying to build. Um, I think when it comes to existing companies doing, or new, new companies doing it well, there are many, many, many companies that I think to me point to success. Um, the consumer ones are probably easiest to talk about because people know them the best, but companies like Dropcam, uh, or Ring, I think two examples of sort of connected home products that, uh, are really, uh, you know, pretty mind-bogglingly successful businesses sell initial device. They make, you know, a little bit of money, but it's not really the purpose. And then they, you know, I think Dropcam had about a 35% tax rate on a 10 dollar a month service. Uh, it's pretty astounding as a business. Uh, and, and the, the lifetime value of many of these customers far exceeds, um, you know, a traditional consumer software play, um, because advertising tends to be, you know, a little bit harder to monetize Uh, per, per user than someone paying you, you know, 10 dollars a month for Spotify or for Dropcam or for whatever the service that they're paying for might be…

AI assessment note: “companies like Dropcam, uh, or Ring, I think two examples of sort of connected home products”

Q I mean, we said there about Fitbit doing it well. Who else do you think is doing it well? And then who do you think are the incumbents that are falling away with this transition to the software play too?

A Yeah. So I think most of the big companies are really struggling with this, uh, and, you know, having to hire armies and armies of software people, uh, To, to sort of help augment their existing product line is, is usually a sort of death sentence for many of these big companies, at least in their, in sort of new, new products that they're trying to build. Um, I think when it comes to existing companies doing, or new, new companies doing it well, there are many, many, many companies that I think to me point to success. Um, the consumer ones are probably easiest to talk about because people know them the best, but companies like Dropcam, uh, or Ring, I think two examples of sort of connected home products that, uh, are really, uh, you know, pretty mind-bogglingly successful businesses sell initial device. They make, you know, a little bit of money, but it's not really the purpose. And then they, you know, I think Dropcam had about a 35% tax rate on a 10 dollar a month service. Uh, it's pretty astounding as a business. Uh, and, and the, the lifetime value of many of these customers far exceeds, um, you know, a traditional consumer software play, um, because advertising tends to be, you know, a little bit harder to monetize Uh, per, per user than someone paying you, you know, 10 dollars a month for Spotify or for Dropcam or for whatever the service that they're paying for might be…

AI assessment note: “companies like Dropcam, uh, or Ring, I think two examples”