The many twists and turns of hardware

Note: This is the final article in a three-part series on valuation thoughts for common sectors of venture-capital investment. The first article, which attempts to make sense of the SaaS revenue multiple, can be found here; the second, on public marketplaces can be found here.

Over the past year, the VC-backed hardware category got a big boost — Roku was the best-performing tech IPO of 2017 and Ring was acquired by Amazon for a price rumored to exceed $1 billion. In addition to selling into large, strategic markets, both companies have excellent business models. Ring sells a high-margin subscription across a high percentage of its customer base and Roku successfully monetizes its 19 million users through ads and licensing fees.

In the context of these splashy exits, it is interesting to consider the key factors that have made for valuable hardware companies against a backdrop of an investment sector that has often been maligned through the years, as I’m sure we’ve all heard the trope that “hardware is hard.” Despite this perception, hardware investment has grown much faster than the overall VC market since 2010, as shown below.

Source: TechCrunch

A large part of this investment growth has to do with the fact that we’ve seen larger exits in hardware over the past few years than ever before. Starting with Dropcam’s* $555 million acquisition in 2014, we’ve seen a number of impressive outcomes in the category, from large acquisitions like Oculus ($2 billion), Beats ($3 billion) and Nest ($3.2 billion) to IPOs like GoPro ($1.2 billion), Fitbit ($3 billion) and Roku* ($1.3 billion)**. Unfortunately for the sector, a few of these companies have underperformed since exit; notably, GoPro and Fitbit have both cratered in the public markets. 

As of April 3, 2018, both stocks traded at less than 1x trailing revenue, a far cry from the multiples of forward revenue given to other tech companies. Roku, on the other hand, continues to perform as a stock market darling, trading at approximately 6x trailing revenue and a market cap of $3.1 billion. What sets them so far apart?

The simple answer is their business model — Roku generates a significant amount of high gross margin platform revenue, while GoPro and Fitbit are reliant on continued hardware sales to drive future business, a revenue stream that has been stagnant to declining. However, Roku’s platform is one successful hardware business model; in this article I’ll explore four others — Attach, Replacement, Razor and Blades and Chunk.


“Attaching” a high gross margin annuity stream from a subscription to a hardware sale is a goal for many hardware startups. However, this is often easier said than done — as it’s critical to nail the alignment of the subscription service to the core value proposition of the hardware.

For example, Fitbit rolled out coaching, but people buy Fitbit to track activity and sleep — and this mismatch resulted in a low attach rate. On the other hand, Ring’s subscription allows users to view past doorbell activity, which aligns perfectly with customers looking to improve home security. Similarly, Dropcam sold a subscription for video storage, and at an approximate 40 percent attach rate created a strong economic model. Generally, we’ve found that the attach rate necessary to create a viable business should be at least in the 15-20 percent range.


Unlike the “Attach” business model that sells services directly related to improving the core functionality of the hardware device, “Platform” business models create ancillary revenue streams that materialize when users regularly engage with their hardware. I consider Roku or Apple to be in this category; by having us glued to our smartphones or TV screens, these companies earn the privilege of monetizing an app store or serving us targeted advertisements. Here, the revenue stream is not tied directly to the initial sale, and can conceivably scale well beyond the hardware margin that is generated.

In fact, AWS is one of the more successful recent examples of a hardware platform — by originally farming out the capacity from existing servers in use by the company, Amazon has generated an enormously profitable business, with more than $5 billion in quarterly revenue.


Despite the amazing economics of Apple’s App Store, as of the company’s latest quarterly earnings report, less than 10 percent of their nearly $80 billion in quarterly revenue came from the “Services” category, which includes their digital content and services such as the App Store.

What really drives value to Apple is the replacement rate of their core money-maker — the iPhone. With the average consumer upgrading their iPhone every two to three years, Apple creates a massive recurring revenue stream that continues to compound with growth in the install base. Contrast this with GoPro, where part of the reason for its poor market performance has been its inability to get customers to buy a new camera — once you have a camera that works “well enough” there is little incentive to come back for more.

Razor and Blades

The best example of this is Dollar Shave Club, which quite literally sold razors and blades on its way to a $1 billion acquisition by Unilever. This business model usually involves a low or zero gross margin sale on the initial “Razor” followed by a long-term recurring subscription of “Blades,” without which the original hardware product wouldn’t work. Recent venture examples include categories like 3D printers, but this model isn’t anything new — think of your coffee machine!


Is it still possible to build a large hardware business if you don’t have any of the recurring revenue models mentioned above? Yes — just try to make thousands of dollars in gross profit every time you sell something — like Tesla does. At 23 percent gross margin and an average selling price in the $100,000 range, you’d need more than a lifetime of iPhones to even approach one car’s worth of margin!

So, while I don’t think anyone would disagree that building a successful hardware business has quite literally many more moving parts than software, it’s interesting to consider the nuances of different hardware business models.

While it’s clear that in most cases, recurring revenue is king, it’s difficult to say that any of these models are intrinsically more superior, as large businesses have been built in each of the five categories covered above. However, if forced to choose, a “Platform” model seems to offer the most unbounded upside as it’s indicative of a higher engagement product and isn’t indexed to the original value of the product (some people certainly spend more on the App Store than on the iPhone purchase).

While it’s easy to take a narrow view of VC-hardware investing based on the outcome of a few splashy tech gadgets, broadening our aperture just a bit shows us that large hardware businesses have been built across a variety of industries and business models, and many more successes are yet to come.

*Indicates a Menlo Ventures investment

**Initial value at IPO

Android P leverages DeepMind for new Adaptive Battery feature

No surprise here, Android P was the highlight of today’s Google I/O keynote. The new version of the company’s mobile operating system still doesn’t have a name (at least not as of this writing), but the company’s already highlighted a number of key new features, including, notable, Adaptive Battery.

Aimed at taking on basically everyone’s biggest complaints about their handset, the new feature is designed to make more efficient use of on-board hard. Google’s own DeepMind is doing much of the heavy lifting here, relying on user habits to determine what apps they use, when, and delegating power accordingly.

According to the company, the new feature is capable of “anticipating actions,” resulting in 30-percent fewer CPU wakeups. Google has promised more information on the feature in the upcoming developer keynote. Combined with larger on-board batteries and faster charging in recent handsets, the new tech could go a long ways toward changing the way users interact with their devices, shift the all night charge model to quick charging bursts — meaning, for better or worse, you can sleep with your handset nearby without having to worry about keeping it plugged in. 

China closing in on massive new chip fund in bid to dominate US semiconductor industry

China’s government has made technological independence from the United States one of its highest priorities. And now, it appears to be putting its money where its messaging has been.

According to the Wall Street Journal, China is close to finalizing a $47 billion investment fund that would finance semiconductor research and chip startup development. The fund, formally the China Integrated Circuit Industry Investment Fund Co., appears to be underwritten predominantly by government capital sources.

Such a fund has been rumored for months, with the size of the fund ranging widely. Just two weeks ago, Reuters had reported that the fund would be $19 billion, while Bloomberg reported $31.5 billion two months ago. The exact number appears to be under intense negotiation among the Chinese leadership, and is also responsive to the increasingly tense trade negotiations with the United States.

If the $47 billion number pans out, it would be identical in size to a $47 billion fund that was financed by Tsinghua University, China’s leading engineering university, to spur the development of an indigenous semiconductor industry back in 2015.

China is highly dependent on foreign tech in its semiconductor industry, importing 90% of its chips in order to power its fast-growing economy. The Chinese government has always been wary of that dependency, but its fears were heightened in recent weeks after the United States banned American companies from selling components to ZTE, a prominent Chinese telecom equipment manufacturer.

Chinese President Xi Jinping has gone on something of an indigenous innovation tour in recent weeks, visiting factories across the country and encouraging further investment in the country’s technology industry. From the Communist Party of China’s official newspaper the People’s Daily two weeks ago, “National rejuvenation relies on the ‘hard work’ of the Chinese people, and the country’s innovation capacity must be raised through independent efforts, President Xi Jinping said on Tuesday.”

While the numbers discussed are eye-popping, so are the costs of developing leading-edge semiconductor technology. As semiconductors have grown more complex, costs have skyrocketed to maintain Moore’s Law. Intel spent more than $13 billion on R&D expenses alone in 2017, according to IC Insights, with Qualcomm, Broadcom, and Samsung each spending more than $3 billion.

While China may try to play catchup in the broad category of semiconductors, it is strategically placing its money on new areas like 5G wireless and artificial intelligence-focused chips where it might become a leading provider of technology. Concerns over 5G in particular have galvanized American attention on Qualcomm and its ability to compete in what is rare virgin territory in the telecom equipment space.

For American companies like Intel and Qualcomm, who are used to holding de facto monopolies on entire swaths of the semiconductor market, the renewed competition from China is going to pressure them to push their tech forward faster.

JBL’s new soundbar brings Android TV and Google Assistant to sets via HDMI

Given the downright deluge of news over the past couple of weeks, one has to wonder what, precisely, Google is keeping up its sleeve for I/O. The big event doesn’t kick off until tomorrow morning, but the company just dropped another interesting announcement: JBL Link Bar.

Created in partnership with Google, the living room entertainment device plugs into a set via HDMI, delivering Assistant and Android TV, in the process. It’s a interesting addition to Google’s smart home offerings, a bit like building a Chromecast directly into the soundbar. It’s a way to deliver the new version of Android TV introduced with Oreo, without having to upgrade the set.

The addition of Assistant, meanwhile, comes as Google is looking to compete with the living room footprint Amazon has built by way of the Fire TV. Saying “Hey Google” will fire up the usual array of video content, and when the set is off, the sound bar can double as a Google Home.

According to Google, this is “the first in a series of hybrid devices that delivers a full Assistant speaker and Android TV experience.” So we may be seeing more of those this week at I/O, along with the Link Bar, which will be on display at the event. The speaker’s set to hit stores at some point this fall, for a still TBD price.

The first 3D camera built on Google VR180 tech arrives

Timed with the release of the Mirage Solo headset, Lenovo is also releasing the first camera based on Google’s 180 tech. The Lenovo Mirage Camera, which seems to be geared heavily toward YouTube creators, packs a pair of fisheye 13MP lenses positioned about eyes-distance apart, allowing for high-quality 3D vision that’s perfect for VR viewing. At $299, the camera isn’t too expensive for creators looking to experiment, but it’s a worthy question of how big that niche really is. It starts shipping today.

The camera is based on YouTube’s VR180 platform, which is aiming to basically make capturing VR live-action content a little more palatable to creators. Indeed, 360-degree cameras have certainly gotten a lot of attention, but creators haven’t really figured out what to do with them for the most part. Google’s compromise here is to simplify the medium with a camera that shoots half as much but isn’t too expensive and delivers crisp 3D 4K video.

In terms of build, the camera is very nice. It doesn’t feel like it’s overtly high quality, but it’s solid enough and, most importantly, very pocketable. Like many 360 cameras, battery life isn’t awesome at two hours, but the battery can be swapped in and out and the camera comes with a spare, which is very nice. VR180 means 180 degrees, which you will understand in photos, especially if your finger creeps to the outer edge of the top of the camera — it will invade the 180 half-dome.

Users can utilize Google’s VR180 app to preview shots and live-stream footage from the camera.

It could all be a winning solution, but the question is really whether this product is popping up a little late. Tons of YouTube creators have undoubtedly experimented with VR-focused video and have gotten tied up in the frustrations. While the number of headsets is still growing, it’s still not enough that VR viewers can sustain a channel, and while VR180 videos are visible in “magic window” mode without a headset as well on mobile and desktop, it obviously loses the 3D capability as a result, which is kind of the biggest draw.

Review: Lenovo Mirage Solo headset with Google WorldSense tracking

Only a couple of days before Google I/O 2018, one of the biggest VR announcements from last year’s developer conference is finally coming to light. Lenovo’s Mirage headset is now on sale for $399. The standalone device is unique largely because of its inside-out tracking, a technology that has not been available on a VR headset widely sold stateside.

The Mirage Solo arrives just a couple of days after Facebook opened sales of the much cheaper $199 Oculus Go, so how does the Daydream headset that’s double the price stack up?

Well first off, Google’s WorldSense tracking is wildly impressive. The inside-out tracking tech is among the best I’ve ever demoed on a headset. While playing titles like Extreme Whiteout, I was able to use the headset’s tracking to move from side to side while skiing down a mountain; Merry Snowballs gave me the ability to dodge snowballs while firing my own at pesky kids using the standard Daydream controller.

The build of the headset is pretty solid. Bulkiness and a lack of sexiness are foregone conclusions for VR tech in general right now, and yes, this rig also has those issues. While the rigid PSVR-like visor head strap is certainly very comfortable, it also makes the headset a bit difficult to transport, which is arguably pretty essential to a standalone VR headset. I wish there was integrated audio, but the headset does include some little earbuds.

The headset charges via USB-C and has a microSD card slot that can expand its 64GB of onboard memory. A big advantage this headset has over others is its battery life, which spans two or three hours of gameplay on a charge, which seems good enough for sure.

The titles that make specific use of WorldSense certainly gain something new, but it still feels as though the tech is wasted on a platform that limits your movements so heavily to only a step or two in each direction. While the Mirage headset operates on Snapdragon’s 835 chipset, unlike Qualcomm’s own 835 VR platform, a Google employee tells me WorldSense on Mirage could be capable of full room-scale tracking.

This limitation is hardly Lenovo’s fault; Google should have waited another year and introduced a more defined high-end platform that integrated tracked controllers. Instead, what we’re left with is a piece of hardware that’s capable of so much but is limited by the content platform that has to optimize for the lowest common denominator. This may have worked better had HTC launched its Vive Focus on the Daydream platform as was originally planned, but it seems the struggling Taiwanese tech company realized that hardware margins would be tight and they had little to gain unless they owned the platform.

This all leaves Lenovo in a shitty, yet familiar, position where they are the first to buy into an “emerging” Google platform but are left as the only entrant. Just as Lenovo’s Phab 2 Pro was the first (of two) smartphones to build in Tango AR functionality, without other WorldSense headsets, developers are going to have a tough time justifying building apps that make extensive use of the WorldSense feature. If that happens, the headset-tracking will turn into a feature that is mainly one for comfort, rather than changing gameplay.

Compared to the standalone headsets that have come before it, the Lenovo Mirage is a steal at $399, but with the $199 Oculus Go launching this week as well, I have a tough time recommending the Mirage over the Go. Oculus has invested so much more time into its core apps than Google has, and while the WorldSense positional tracking is exceptionally impressive from a tech perspective, without tracked controllers the experience for the end consumer is only improved a bit.

China said to be discussing ZTE ban with U.S. officials

The Chinese government is reportedly going to bat for ZTE over a seven-year ban that would have broad ranging consequences for the phone maker. According to a new report from Reuters, the subject was broached during a meeting with between senior Chinese and U.S. officials in Beijing this week.

The ban imposed by the Department of Commerce is the result of a violation against U.S. Iranian sanctions. ZTE pled guilty, agreeing to pay a fine and penalize employees. After the DOC insisted it failed to do the latter, it barred US companies from selling software or components to the phone maker for seven years. Between chip makers like Qualcomm and software providers including, most notably, Google, the restrictions will prove next to impossible for ZTE to circumvent.

For many, the steep penalty appears to be part of a larger looming trade war between the two countries that’s also found ZTE and Huawei caught in the crosshairs over ties to the Chinese government. U.S. officials, however, have insisted that the ban isn’t related to trade issues between the two countries.

Earlier this week, the Pentagon banned the sale of both companies’ phones on military bases — just the latest in a long line tough breaks here in the States. ZTE has largely weathered the broader U.S. spying concerns better, due in part to a broader footprint in the States than Huawei, but the company admitted that this latest ban would be downright devestating. 

“The Denial Order will not only severely impact the survival and development of ZTE,” the company told TechCrunch, “but will also cause damages to all partners of ZTE including a large number of U.S. companies.”

ZTE has also reportedly been in talks with U.S. companies like Google and has suggested it will take judicial action, if necessary. 

Google Assistant now works with 5,000 smart home devices

With I/O just a matter of days away, Google’s gone on the offensive with Assistant. In a blog post this morning, the company is talking up its smart home play in a major way, noting an admitted pretty impressive bump in hardware compatibility. By its count, the number of compatible devices recently hit the 5,000 mark.

That number is up from 1,500 in January — an admittedly impressive jump in a short time frame. That, in itself, was a pretty decent jump since Google Home launched in late 2016 with little to no third-party device compatibility.

And, of course, that number’s set to grow quite a bit in the coming months. We’ll likely get more information on that at the big show next week, but a number of brands are just over the horizon, including Logitech’s Harmony hubs and Dish’s Hopper receivers, the latter of which will be getting Assistant functionality in the coming month. Google says it’s also working with more partners to bake Assistant directly into more smart TVs.

The company’s recently added a number of security devices to its list, including the Nest doorbell, which was the first product to add Assistant-based smart doorbell notifications. ADT, First Alert, Vivint Smart Home, August and Schlage will all be adding Assistant functionality down the road, as well.

The smart home is currently the key battlefield for smart assistants. Amazon made an important step in that direction with the addition of a hub to the Echo Plus, and Apple has been laying the groundwork for some time with its HomeKit offering and, more recently, the HomePod. In many ways, smart speakers are a means to end as companies push to make their assistant the centerpiece of the connected home experience.

Google also recently announced plans to follow in Amazon’s footsteps by making investments in early-stage startups that utilize Assistant.

Google’s pricey Clips ‘smart camera’ gets a $50 discount

There’s nothing altogether unusual about a holiday-related sale, but Google’s decision to drop its Clips camera by $50 through May 13 does leave one wondering if the company’s had some trouble moving the first-generation product.

Announced alongside the new Pixel phones back in October, Clips finally hit the market at the end of February. Google hasn’t discussed sales figures, but it seems likely the product didn’t catch the world on fire. The messaging around the device has been a bit confusing from the consumer perspective, and the $249 price point drew a fair bit of criticism, including our own review.

Google insisted that the price was a steal, given all of the advanced AI, ML and on-board processing that makes the magic happen. But that’s a pretty high barrier of entry for a new product category — especially since everyone basically carriers a phone around on their person at all times, these days.

As I put it in the review, “Clips certainly delivers as a GIF delivery service, but $249 is a steep price to pay for such novelty in an era when we’ve all got a camera within arm’s reach 24 hours a day.”

$199 isn’t exactly cheap, as far as Mother’s Day gifts go, but Google’s no doubt hoping to kickstart sales and interest in the product now that it’s finally nice outside in most of the country. As a “smart camera,” Clips’ own best advertisement are the images and videos that make it to social media — but word of mouth can only take the product so far.

Is the world ready for the return of the PDA?

I want to live in the Gemini’s universe. It’s one where the promise of on-demand hardware has been fulfilled. Where crowfunding, rapid prototyping, scalable manufacturing all of those good things have improved our lives by giving us the devices we both want and need. It’s the utopian dream of 2011, fully realized.

In the Gemini universe, the PDA never went away. It simply adapted. All of those irritated anti-touch typers had nothing to complain about. Sure, the iPhone still moved a billion units, because Apple, but the physical keyboard simply evolved alongside it, because tech should adapt to people and not the other way around.

Of course, the realities of technological Darwinism are much darker, and every half decade or so, there’s an extinction-level event, and Apple’s smartphone hit the earth like football field-sized asteroid covered in the bubonic plague. Over the past 10 years, many have and tried and all have failed to address the shrinking, but vocal niche of consumers bemoaning the death of the physical keyboard.

Many of us, myself included, fell in love with the Gemini at first sight when we spotted it across the room at CES. It wasn’t the hardware or the execution, so much as the idea. And, of course, we weren’t alone. When an astonishing 6,200 people came together to pledge $2.2 million on Indiegogo to help bring it to life, it was clear London-based Planet Computers had struck a chord.

And with both Nokia and BlackBerry having waged comebacks of sorts (albeit through licensing deals), it seems the iPhone’s 10th anniversary has been the perfect time to revel in a bit of mobile nostalgia. People have gone utterly gaga over the 3310 — clearly there must also be space in amongst this smartphone fatigue where a PDA can positively flourish.

In one sense, it almost didn’t matter what the final hardware looked like, this felt like a kind of bellwether. But in a larger and more important sense, of course it did. When it comes to consumer electronics, people don’t buy ideas, they by hardware. And in the cold, harsh light of day, the Gemini is a far more exciting concept that it is an actual product.

The product is a return of sorts for the Psion 5, with some of that clamshell’s designs back on board. And indeed, the device takes more than a few design cues from that 20-plus-year-old piece of hardware. The build itself is a bit of a mixed bag, here. It’s solid, but the clamshell ensures that it’s big and bulky, compared to standard smartphones with similarly sized screens (5.9-inch).

It’s not much to look at from the outside, with a plain metal casing, through there are some innovative touches here, including a break in the top that can be plied open to access the device’s innards, using compatible tools. The lid flips open, with a nice, satisfying motion, but screen’s hinge feels loose, moving each time you interact with the touchscreen. It would have also been nice to have the display open at different angles, but there are only two positions here: opened and closed.

As for typing, well, if you’re among the vast majority of mobile users have made the leap to touchscreen typing, you’re going to have to unlearn those skills. My own typing on the keyboard is nowhere close to what I’m able to achieve on a touchscreen these days. For a few fleeting moments, I entertained the idea of writing this review on the thing, but almost immediately backed down, when I found it difficult to type even a sentence right the first time.

The device’s size makes for an extremely cramped keyboard, in which many of the keys have to do double duty. But the width and girth of the device itself means there aren’t too many scenarios in which using the keyboard make a whole lot of sense. Attempting to type while holding it feels like an almost acrobatic feat. Really, a flat surface, like a desk, is your best bet, at which point you’re left wondering why you didn’t simply shell out the money for a real laptop. The ability to dual-boot Linux and the inclusion of a healthy 64GB of storage are interesting cases for the product as more of a small computer than a massive phone, that, of course, is ultimately hampered by the small display with smartphone dimensions.

That gets at what is perhaps a larger issue here. It’s unclear which problems the device is looking to solve in a world of ubiquitous slate phones and low-cost laptops and tablets. There aren’t ultimately all that many scenarios in which the throwback makes more sense than the hundreds of other available options, so it’s hard to recommend this as either a primary phone or laptop in 2018.

Perhaps many of its issues can be chalked up to first-generation hardware issues. There’s a lot to be said for the mere fact that the company was able to deliver a product in the first place. The Gemini certainly works as a compelling niche device, and it would be great to see Planet explore this idea further.

Anything that frees us from the oppression of nearly identical handsets is a victory in and of itself. As I said earlier, I want to live a world where devices like the Gemini can peacefully coexist with more mainstream devices. I just won’t be using it as my phone any time soon.