A Realist’s Outlook Of The Hardware Game: Courtesy Soaib Grewal, Venture Partner At 500 Startups

With the advent and virality of 3D printing and IoT, healthcare being re-envisioned with product innovations, fashion getting a makeover with Snapchat’s Spectacles and drones being used to catch Pokemon (ha!), the hardware sector has been gaining massive traction worldwide.

Big manufacturing comes from big money, which may paint a rosy landscape for hardware startups. Unfortunately, that’s not always the case. There are many complications in the hardware game and few can grasp its ins and outs. With the enviable credentials of being a Venture Partner at 500 Startups and Design Mentor at Microsoft Accelerator, Soaib Grewal pretty much qualifies as an individual who does.

From the sector’s landscape, investor perception, and funding, to the China versus Make in India debate, prototyping woes and a lot more; Soaib helps paint an honest picture of the Next Big Thing in our Indian startup ecosystem.

This interview has been edited for clarity and brevity.

Inc42: What are some of the opportunities for the bubbling Indian hardware ecosystem?

Soaib: Personally, I think companies need to understand how hardware plays a role in a country’s overall market. Making a consumer-centric product for India doesn’t work well in hardware. Instead, I think the real opportunity locally will be in enterprise, SMEs and agritech solutions that have a hardware component core to the service delivery. Many of these solutions will require some degree of hardware and software localisation. Nothing is just hardware anymore, the device is an enabler or a platform for the software. Brad Feld calls this ‘software wrapped in plastic’ and I think that’s the best way to define it. Look at the two major hardware enabled success stories in India – Grey Orange and Ezetap, both of them are integrated solutions.

Inc42: Are you excited by the sector’s potential in India?

Soaib: I truly believe that Indian startups can lead in hardware enabled-solutions (people call this IoT but I hate that term), in particular in the spaces I mentioned earlier. In my opinion hardware ecosystems of the future will require three things to succeed: excellent software engineering, a knowledge of enterprise sales and customer support, and hardware design and manufacturing expertise and infrastructure.

I think we are pretty good at the first two and if we can figure out the third component we’re golden. On a personal level, I’m a hardware geek, I studied Industrial Design at the Rhode Island School of Design and did some product design work before I started my first company. So as an investor I really want to support exciting hardware companies and get my hands dirty.

Inc42: What’s different in the various funding parameters at different funding stages for hardware startups in comparison to other startups?

Soaib: There is very little funding for pre-prototype companies. You will have to rely on angel and grant money. At this time you need to concentrate on: early validation, getting that working prototype ready, having your financials in order – cost per unit, gross margins, and maybe some pre-orders. You are raising Seed money for inventory, fulfilment, early sales. Most venture investors in India aren’t ready to invest until you’ve had some pre-small batch production and sales. Don’t even think about additional SKU’s (stock keeping units) until you’ve gotten to Series A.

Inc42: How differently do investors perceive hardware startups?

Soaib: Hardware is definitely at a disadvantage in India, I don’t want to sugar coat things. Investors perceive hardware to be more cost intensive – especially upfront pre-launch costs. R&D, prototyping, design for manufacturing, small batch and initial distribution channel development costs add up substantially. This means that in a one to one comparison with software product startups it’s a far riskier bet.

Inc42: What is the best financial planning advice you can give to hardware startups?

Soaib: It’s imperative to understand and break down your pre-production costs. This means understanding the typical failure points in the product development process. Firstly, go get customer feedback and test your product out multiple times at the prototype stage. This isn’t software you can’t expect to get customer validation after you’ve spent money on a custom injection mold die.

Second, invest in a good functioning prototype, don’t discount this at all – it helps in communication with manufacturers, customer feedback and getting investors excited. Third, spend time in optimising your BOM (Bill of Material), which means spending enough time assessing correct materials, manufacturing processes and suppliers. Lastly, if it’s the first product and you haven’t yet optimised distribution you need to limit your inventory risk – less is definitely more even if it means taking a hit on your gross margins early on.

Inc42: Hardware funding is at its current peak worldwide, is India a little late to jump on to the bandwagon?

Soaib: Not at all. I don’t think it’s fair to compare Indian sectoral funding to global sectoral funding. Companies that are creating unique solutions will attract funding, we’ve seen it in India as well. I think made-in-India for India consumer solutions will always be at a disadvantage from a fundraising point of view.

Inc42: How important is it for hardware startups to ‘Make in India’?

Soaib: I think in the long run it is definitely important. In the short term I really don’t think Indian startups should worry about this, instead, they should focus on optimising their Bill of Materials, supply chain and unit economics. If that means manufacturing the entire thing in China, that’s perfectly fine. We can’t wait for industry and the government to catch up. Governments are a lagging indicator of innovation.

I’m still not convinced that we can compete with other countries in mass consumer manufacturing any time soon, but I think we have a chance at being very competitive at hi-tech manufacturing especially as ancillary industries develop around defence and electronics manufacturing centres.

Inc42: How feasible is it to collaborate with other startups/corporates to make and sell a better hardware product?

Soaib: Globally, very much so. Foxconn operates a ‘Manufacturing Hotel’ in China where hardware startups can access prototyping and manufacturing facilities by the hour or the month depending on their need. PCH runs a very successful hardware accelerator in San Francisco called Highway 1. Their end goal is simple they want to work with these companies early on so they can take care of their manufacturing needs as they grow. We aren’t seeing enough of this in India.

I seriously believe manufacturing corporates in India need to step up or they will get left behind and to be honest I won’t be shedding any tears for them.

Inc42: Prototyping seems to be a major challenge in India, what’s your say on the matter?

Soaib: I think the challenge is threefold: knowledge, expertise, and infrastructure. There is a severe knowledge gap. Hardware entrepreneurs are enthusiastic and hungry but need more opportunities to learn the nuances of the prototyping and design process. Secondly, India needs more designers, embedded software engineers, model makers, and design for manufacturing experts. This is a systemic problem, in the short-term, we need to figure out ways to facilitate interaction between existing experts and startups. The last bit – infrastructure is slowly being solved thanks to hardware incubators and maker spaces.

Inc42: Is there a need for specialised hardware startup enablers – including hardware-specific funds, accelerators, peer groups, development marketplaces etc.?

Soaib: Most definitely, hardware needs an ecosystem to flourish. If you look at any flourishing hardware ecosystem, there is an abundance of prototyping spaces, accelerators, incubators and communities. I think we are working towards all of this in India. We definitely need to figure out component sourcing and small batch manufacturing in India. Most manufacturers won’t entertain orders below 1000 pieces, which puts a massive strain on startups.

Inc42: Hardware startups usually require a more diverse core team (front-end, back-end, biz-dev, embedded systems, mechanical, electrical, industrial design, etc.), which cities in India have the potential to supply a good amalgamation of such talent?

Soaib: I think cities with existing manufacturing ecosystems and proximity to the large startup cities will have a serious advantage. In my opinion Bengaluru, Coimbatore, and Pune will have a major advantage. Delhi/NCR has the talent but needs some of the other ecosystem components, that the cities I mentioned before already have.

500 Startups is organising Blueprint – A Hardware Workshop for founders and hardware enthusiasts in collaboration with Autodesk, in Bengaluru on November 19, 2016. Soaib will be leading a session on fundraising and conducting design reviews. For more information and tickets go to bit.ly/BPblr500