Debunking the myth in the cost of a software startup versus a hardware one

Intuitively most people think that the cost of a hardware startup is both numerically and operationally higher than a software one.

The idea of having to buy physical parts, contract some EMS firms to put them together, ship physically somewhere via logistics services and putting them on to the shelves of retailers/distributers who charge a high margin, before there's a chance to collect a single dime from the buyers, looks scarily expensive.

Compared to that, a software startup can start paying for AWS or Google Cloud anytime, then scale up/down the cost based on the demands or just get out completely to cut cost (and stop operation). This seems to be a much "cheaper" business to run.

But is that true?

Any supply-chain or operation manager will tell you, the best supply-chain network is where you have multiple suppliers for each component/service, with none holding dominant positions. Then you could pit one against another, shift from one to another, for pricing and payment term flexibility.

On the other hand, if in one particular domain you have a dominant, even monopoly supplier. You are gonna be squeezed and paying high cost all the time.

In the hardware supply chain, only Intel, and recently Nvidia for AI applications, hold that kind of monopoly positions. But whereas in the early 2000's Intel CPUs were the only choice to build a powerful computing device, today one uses ARM-based CPUs which have lots of variations to choose from. Nvidia currently holds dominant position for AI applications but many chip startups are racing to compete in that field. There will come a day where AI programmers have a lot more choices for training efficiently.

As for EMS firms and suppliers of other components, there are basically infinite. There's no high-cost supply chain unless you have a lazy supply-chain/operation manager. The low gross margin you have is due to inability to price higher, either due to lack of product-market fit, too much competition or lack of effective marketing. It's not gonna be due to expensive supply chains.

A proof is that none of those EMS firms or suppliers of commodity components are making more money than you are. If they were to offer you to trade positions, you would definitely want to decline.

Now how about the seemingly software startups?

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Well, all depends on either Amazon AWS or Google Cloud. And as so many tried and failed and came to realization - you can't really negotiate pricing effectively against such a duopoly - or worse, some would say it's an AWS monopoly in practice. 

A proof of that negotiation deficiency: AWS and Google are making shit loads of money while you are not! That's the power of dominating a supply chain sector.

Bottom line: stop saying hardware is more costly than software. It's all in the negotiation power dynamics.

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