Venture Capitalist at Theory

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2 minute read / Jan 10, 2013 /

The startup hardware M&A market will be vibrant in 2013

Hardware competition is cut-throat. Walking through the halls of CES, every Android phone is identical. LG has copied each Samsung model. Because of the competition, tablet prices are plummeting - I saw a $49 7inch tablet (and some were giving Nexus 7s away for free with subscription. Not constrained to large competitors, startups like FitBit and Jawbone launched competing (and nearly identical) products within weeks of each other: the FitBit Flex and the Jawbone Up Even newer segments like gesture control of TVs or GoPro self-recording cameras are addressed by six competitors, many of them white-label.

Software has become the differentiator for all these devices because the hardware is indistinguishable to all but the geekiest. In other words, it’s all about the experience - a concept Apple has championed for almost three decades to great recent success.

Unfortunately, many equipment manufacturers lack the skill set to develop compelling software. For example Belkin’s wifi-enabled plugtop “actually makes your house worse” Even the software of the market leader, Apple, is be terrible: “iTunes should die”, “iOS6 Maps is Awful” and as Bijan wrote, every one of the core iOS apps has been replaced with third party software

As these OEMs face the challenge of building great software, they must choose among three options: 1. Accept - Co-opt open source software, like Android, and deploy a commodity 2. Ignore - Contract the development to an agency 3. Embrace - Build a software design competency in-house

Clearly, the market winners will pursue the last option. Some OEMs may be able to build teams on their own like Samsung. But the majority of manufacturers will look to acquire software design talent to differentiate their commodity hardware products.

The return of venture backed hardware startups has engendered a community of companies who have successfully unified talents in hardware and software design: Nest, FitBit, Electric Imp, Jawbone, Sonos, Basis, Leap Motion, Boxee and many more. Crowdfunding has also been a healthy supplier of capital to hybrid companies like Ouya and Pebble among others.

Hardware industrial design is no longer a sufficient differentiator for manufacturers. The winners in the next decade will fuse spectacular software design with better but commodity hardware. The fastest path to that end for incumbents is acquisition of startups like these.

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