
Sam Altman: Why Hardware Could Yield the Next $10B Startups - softdev12
http://blogs.wsj.com/digits/2015/03/25/sam-altman-why-hardware-could-yield-the-next-10-billion-startups/
======
leoedin
The reason that a larger number of hardware startups have recently appeared is
quite simple - these are mostly actually software companies. Modern hardware
that a startup might produce - IoT stuff, small computers etc - are
essentially bare-minimum hardware wrappers around black-box chips.

The complexity of developing hardware is driven by the number of discrete
components used. Every additional resistor is a resistor which can be fitted
wrong. Every additional analogue circuit built using discrete components is a
huge risk. To build cheap hardware, you avoid all that as much as possible by
building PCBs which just wire up highly functional ICs.

In essence your hardware company then becomes a software company.

~~~
rebootthesystem
> The complexity of developing hardware is driven by the number of discrete
> components used

Sorry, that's not even close to being true.

Interesting how on HN "hardware" seems to mean "a board with chips". You know,
like a Raspberri Pi. That is one type of hardware but not, I dare say, where
the $10B (and maybe even $10M) startups would exist.

We are developing two hardware products right now. One is an innovative fire
fighting system and the other a CNC machine. The complexity in these designs
has very little to do with what chips you place on a board. For example, we
expect to have to run three to six months of FEA simulations to validate
aspects of the fire fighting system and then have to iterate through several
design candidates over several months.

Beyond that there are regulatory issues that could up-end any design if you
don't know what you are doing.

Packaging. I almost forgot packaging. Man, that can consume months of testing.
You can design a beautiful product only to have it damaged during
transportation due to incorrect packaging.

Oh, yeah, you also have to have good software.

Nah, harware isn't just about chips on a board.

~~~
jkestner
Packaging is best thought of as another hardware product itself. Form and
function have to be design-gineered, and materials and parts and assembly have
to be corralled into a schedule and budget.

The idea that software is eating hardware, while true on some level for some
class of products, is also what leads to lots of startups with solid software
backgrounds offering a beautifully designed product that suffers from cost
overruns, delays, mechanical and firmware bugs (you think having to test an
app across a couple of phones is a pain, try field testing your smart lock).
"Move fast and break things" is very different from the mindset needed to
build hardware.

Be mindful of the perspective of the authors when reading these tragedies:
[https://medium.com/@stevekreyos/the-rise-and-fall-of-
kreyos-...](https://medium.com/@stevekreyos/the-rise-and-fall-of-kreyos-new-
ac4e2d847964) [https://medium.com/@Haje/how-a-half-million-dollar-
kickstart...](https://medium.com/@Haje/how-a-half-million-dollar-kickstarter-
project-can-crash-and-burn-5482d7d33ee1)

~~~
rebootthesystem
Right, I didn't mention such things as thermal and environmental testing. How
is your widget going to work in an Icelandic winter or at the peak of summer
in Death Valley? How about dirt, grime, dust, vibration and humidity, rapid
cycling, cycles per day, drop, impact?

The list is huge and highly dependent on the product being designed.

About ten years ago a company owned by a friend of mine shipped a machine
worth $800,000 to Japan. The packaging/crate was not designed correctly. The
machine suffered irreparable damage during transportation. No, there was no
penetration of the crate. It was purely inertial loads on components that were
not supported for transportation. They bent. It was probably a combination of
forklifts, trucking, port container handling, etc. The machine was a total
loss. The insurance company was not happy.

~~~
tjradcliffe
Also: EMC testing, RFI, etc. Certified by a test lab that will cover both
North America and Europe.

On shipping: these days it's pretty common to ship everything with mechanical
accelerometers in the packaging that trigger on high loads so you can tell
when the crate has been dropped. Crazy how often it happens.

------
striking
I am a broken record. So many brilliant people (RMS comes to mind) have fallen
into the trap of thinking that hardware dev for general computing (not
including rocketry and other such hardware) is so inexpensive that it's going
to be super easy. But that's not the case [1] because hardware is a totally
different beast than software. It won't be any more open, or any less
expensive; at least, not for a long time.

[1]:
[http://www.mauve.plus.com/opensourcehw.txt](http://www.mauve.plus.com/opensourcehw.txt)

~~~
rboyd
It is becoming more open and less expensive.

The point is that the tools for prototyping, simulating, assembly, and
manufacturing are becoming much cheaper. Along with the fact that people are
sharing more.

I agree that there is no substitute for RTFM. That will always be required.
Although, it's layers of abstraction in hardware too. Just like software
libraries and frameworks: if someone has published a circuit that includes
some subsystem I need, I can very likely ctl+v much of it into my own design
without having a full understanding of it. Which is the entire reason why an
industry around ICs can exist at all. It's just that more people are sharing
now than ever before.

Pick and place machines are now becoming accessible at low cost (see Fire Pick
Delta/LitePlacer). This addresses many of your assembly errors and mitigates
costs.

I can't construct a reasonable argument against your points E, F, and G, which
seem to all equate to "something unlucky and magical happened that broke your
prototype".

~~~
jkestner
Yes, manufacturing is getting cheap enough that the average person can get
themselves in a mess of trouble now. It's still got a ways to go before it's
cheap enough that they can get themselves out of that mess.

~~~
ethbro
I feel like "number of people able to get themselves into mess of trouble >
number of people able to get themselves out of mess of trouble" is a pretty
solid premise throughout time.

------
bsder
Not until software lottery tickets quit returning 10x+.

Who, in their right mind, would invest in hardware? NRE kills--especially in
_mechanical_ engineering which actually seems to be regressing. Machining
companies now charge a fortune for things which my grandfather used to do _by
hand_ in his garage in about an hour. Not to mention how _long_ it takes to
get an injection mold (14 weeks is not uncommon).

For the price of a couple injection molds, I can flog a gaggle of stupid
20-somethings living in squalor for about a year. No contest as to which has a
better probability of cashing out.

In addition, who is going to buy out a hardware startup? Hardware really
doesn't fit the Yahooglezoft strategy, so now your exits are very limited.
Even worse, hardware acquirers tend to be rational about things like costs and
profit.

Finally, everybody who does hardware tries to create the cloud back end and
then get _anybody else_ to do the hardware while they extract the rent.

So, longer timelines to cash out with higher risk. Yeah, don't think so.

Now, the _upside_ is that if you do manage to get a product out, you have an
actual _barrier to entry_. 2 guys and a dog in the Ukraine can't just clone
you.

While I love the manufacturing incubators, they don't solve the fundamental
problem of not knowing how to run machines. The existence of a CNC machine or
a TIG welder doesn't magically make you a machinist or a welder. Being able to
run a CNC machine doesn't mean you know how to make an injection mold.

Most people fail horribly simply at making a PCB board, and those are _totally
straightforward_.

Read Andrew "bunnie" Huang's blog for a taste of all the little sh*t that can
go wrong in manufacturing:
[http://www.bunniestudios.com/](http://www.bunniestudios.com/)

~~~
dba7dba
I agree. Software is easy to work with because you can reboot. With
manufacturing, you can not.

I heard a quote from someone discussing war.

When a war is about to break out 1) amateurs start talking about strategy. 2)
Professional start talking about logistics.

Google can be a milti billion firm because they can go from 1 to 10 (in
customer #, capacity) easily. With manufacturing, that's just physically
impossible.

And physics doesn't lie.

------
yarri
@sama actually addressed HW on his recent AMA here [0] but as with software
startups, you have to broaden your view of a hardware startup -- if you
include ventures focused on fundamental semiconductor technology, both analog
and digital; tools for design, prototyping and verification; semiconductor
intellectual property as well as end products, there are quite a few potential
$10B opportunities[1]. I believe @sama is considering the full range of
investment options. Not all investments in this segment are capital intensive.

[0]
[https://news.ycombinator.com/item?id=9238839](https://news.ycombinator.com/item?id=9238839)
[1] [http://blog.semiconductors.org/blog/what-end-use-
application...](http://blog.semiconductors.org/blog/what-end-use-applications-
drove-semiconductor-sales-in-2014)

------
philippnagel
Is calculated valuation (not market cap!) the only metric relevant to a VC
when talking about the size of a company?

What about MRR, YRR, profits, number of employees, revenue/profit per
employee?

The only ones profiting from high valuations are VCs' themselves. Therefor one
should be really skeptical when reading such articles.

~~~
tlb
Valuation is people's best estimate of discounted future profits. It's true
that the discount rate varies with macroeconomic changes, but rarely by as
much as a factor of 2 over the last 20 years.

When trying to express the long-term potential of a business, a factor of 2 is
noise. You're lucky if you can get the number of digits right.

MRR/YRR measures the business today, but the long-term prospects are more
interesting.

Number of employees or revenue/profit per employee don't measure business
potential. Some huge businesses (Wal*mart) have low revenue/employee. Some
small businesses (specialty consulting) have high revenue/employee.

------
onion2k
There are a few companies around that have the resources to copy the product
of any moderately successful hardware startup. Apple, Samsung, Xitomi,
Microsoft, and others can just straight up clone the clever parts of your
hardware and wrap it in a package that you could never afford to compete with.
That obviously doesn't mean you can't have any success - building a $hundreds-
of-millions company is definitely possible, but taking it to the $billions
will be a few orders of magnitude harder.

[1] Fitbit did movement tracking well, and now there's Microsoft Band, Nike
Fuelband, etc. Pebble popularised smartwatches and now there's Moto 360 and
Apple Watch. And so on. And Fitbit and Pebble weren't the first movers in
their markets, there'll be smaller companies who failed by being too early.

~~~
terravion
This maybe true of consumer product companies, but a lot of "hardware"
companies aren't either consumer or product companies, they are service
companies. For example, SpaceX builds neat hardware, but sells launch
services. They deliver a complete service with their own hardware + software +
services.

This is becoming more and more common model in many industries, and is a much
harder business to copy.

------
abiekatz
I like Sam's line: "I always tell my partners that our job is to fund all the
companies we can that can be worth $10 billion or more. That’s such a
difficult constraint we can’t have any other constraints."

~~~
claar
They should put that statement prominently in the YC application materials.

~~~
danieltillett
I think this might be a statement more honoured in the breech after looking at
the YC15 alumni.

------
ausjke
The softwarization of hardware is the key trend, agreed.

The software-defined radio/network/storage etc are happening quickly now.

For the low-end hardware, e.g. the IoT field, the wearable market etc, the
software is also key, for instance, they need the cloud platform to be
effective and useful these days.

We just need more workshop/factories to turn the (low quantity) hardware-
design into real products with high quality, which is still very challenging
and a bottleneck.

------
Spearchucker
Not trivializing the article, or it's point. Interesting though is that the
subject (hardware) reminded me of an app I wrote that lets me quickly model
system availability on my phone. My astonishment at the time was that such a
simple modeling tool isn't available in any app store (maybe today, couldn't
find anything a year or so ago).

There are sooo many tools, let alone basic productivity apps that just don't
exist yet. And here we are, breathless and panting, moving onto the next big
thing - hardware, biotech... Hey its all good stuff. Except for the part where
I can't create a simple DB-like table on my phone and have that sync
(securely!) with my other devices - _without_ making me create a Dropbox
account, or wanting to up-sell me in the app, or get all social on me. Basic,
simple and _honest_ apps. Like the Code Vault app I had on my Nokia
Communicator in 2001.

------
ilaksh
Im looking forward to tabletop micro-foundries that can create ICs. Its a ways
off and I'm sure people will say it is impossible, but it will happen
eventually and then it will be very obvious how similar software and hardware
are.

I think you have to anticipate a gradual movement towards total programabiltiy
of reality.

------
koops
$10B? That's awfully large, and closing the door on a lot of ideas. What if
you just want to solve an important problem by selling a product profitably
and don't want to grow to enormous size? I guess you look somewhere other than
Y Combinator to get started.

~~~
toong
If you're outlook is a $10M or even $100M valuation, VCs and even angels would
not interested.

~~~
jacquesm
Plenty of funds would be happy with exits in the $100M range. The billion
dollar exits or IPOs are the exception, not the rule and a $50M exit is a damn
sight better than a failure. Of course it all depends on when they joined that
particular party, the later in the game the higher the exit would have to be
to make those investors happy.

~~~
acgourley
Certainly they would pop a bottle for that 100m exit when it happens, but at
the funding stage there is a case to be made for chasing deals in markets
large enough that a 10B exit is at least possible. Because 10B _might_ happen
and that does a lot to the EV calculations. Even if it doesn't, some might
think that startup has a better chance for reaching the 100M mark sooner.

