Hardware products (and therefore startups) that are NOT

In venture investments we talk about "outliers".

Outlier startups are basically outside of the mainstream of startups. They carry various weird characteristics such as weird ideas, weird perspectives about the markets, weird go-to-market strategies and above all, weird founders.

 

Why weirdness matters?

The weirdness is very much appreciated in our world for the obvious reasons: if you're too normal, you either already have 100 competitors in the same sector or WILL have 100 competitors in the same sector. This is similar to the famous economist joke about a $10 bill on the road. If it's something that makes perfect sense, chances are many people would have already  thought about it and some would have already started doing it.

In the VC world, a home-run (and therefore disruptions) usually start with something that does not make 100% sense and therefore could be qualified as an outlier. Examples include:

  • Facebook was the first social network that tried to enforce some sort of real identity, in a time when internet was all about anonymity. It's only when Facebook grew like hell in later years that people realized insistence on real identity improved the trust among users and enabled more interaction and therefore incredible stickiness.
  • Google's PageRank scheme famously veered away from the bidder model for advertisement, which came from the old guards of traditional media such as TVs and magazines, but instead ranked search results based on the relevance of the pages. By giving users what they wanted, i.e. relevance, it generated much higher conversion rates than competitors who tried to stuff the highest-paying customer down the throats of unhappy users. The rest is history.
  • Airbnb started with such a weird and dangerous idea (especially in the lawsuit-happy US) of having strangers sleep on your couch. They eventually proved that statistically humanity and the desire for serendipity outlast the horror imagination inspired by Hollywood and therefore unlocked a whole swathe of opportunity at a marginal cost of zero.
  • Xiaomi entered a market that was already highly competitive and seemingly dominated by a duopoly (Apple & Samsung). They chose to sell premium phones at cost, which is not really competing on price but rather viewing phones as a trojan horse. They focused instead on user experiences, community and data, thereby creating marvelous growth in the humongous Chinese market and are starting to monetize through none-phone part of the operation.

The story can go on. Almost all major startup successes, especially in the past 10 years when lean startups took hold, started with something that was not really normal before the consumers proved the founders right.

This is why Marc Andreessen said famously:

The venture capital business is a 100% game of outliers- it’s extreme exceptions.

Only outliers could stay under the radar from the competitors — stealth doesn't really help on that course today — and have the chance to scale to dominance before people realized that their markets are not outlier markets.

 

Hardware startups that are NOT

Applying the same spirit to hardware startups, what should we look at? One of the things I personally look for is hardware startups that are NOT.

What I meant is on the surface the product seems to offer a certain function, but when looked deeper, it actually is in a totally different business, and therefore the part "that are NOT".

A good example would be our portfolio company, Prynt. I wrote about the emotional aspect of their products as well as defensibility in another article here. But essentially we can say that Prynt is a polaroid smartphone case that is NOT.

For Prynt it is not really about printing physical photos and sharing them with friends and memories. What made it hugely successful on Kickstarter was the AR-style video playback part. Like the campaign said, "your memory comes alive". In other words, Prynt is actually in the business of keeper of the memory. By storing precious living moments for users while triggering the playback via physical photos, Prynt avoids all the awkward and oft-tried models of tagging, categorizing, face-recognition, etc on other big and small video platforms. If they can manage the memories of people properly while enabling a range of memory-related services on their crowd platform, they will be satisfying their users much more than just providing a printer or a video platform or the combination of the two. They will become the keeper of the memory and see a lot of smileys on their users' faces.

Another example would be the omni-powerful Keecker. Here instead of an obvious function that is actually not the core, Keecker simply is capable of doing so many things that it's hard for anyone to pinpoint what Keecker is. It can be simultaneously in the business of entertainment, home security, children education, gaming, communication or even pet business – imagine a Keecker keeping your dog or cat occupied while you're away!

As such, Keecker is NONE of those, but rather one can say Keecker is in a business of its own, i.e. in a Keecker business. If the company can execute well and gain substantial traction, it has the potential to define a brand new sector and become the synonym of it, much like that GoPro is not in the video camera business but in a GoPro business.

 

Conclusion

In conclusion, if you are a hardware startup aiming to become extremely successful – not just a mediocre M&A exit – you might want to do an exercise and try to understand what it is that you are NOT.

If you fail to find such an answer even after considerable deliberation, maybe you're in a highly competitive business already.

On the other hand, if you succeed, it might help you reshape your strategy and branding, leading to a GoPro-size exit in a few years!

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