Private Equity



6 minutes


Where are all the early-stage hardware technology investors?

The world's key challenges - smarter cities, more responsible manufacturing and cleaner energy to name a few - can't be solved by software alone. Hardware innovation, and therefore hardware early-stage investment, is critical but, managing the risks puts off many VC investors.

The world's key challenges - smarter cities, more responsible manufacturing and cleaner energy to name a few - can't be solved by software alone. Hardware innovation, and therefore hardware early-stage investment, is critical but, managing the risks puts off many VC investors.


Does the infamous Marc Andressen quote, "Hardware is hard" and related beliefs, still hold true?


“Hardware requires more capital”

  • Whilst this might be true to build, sell and ship the first unit compared to a software startup, hardware companies can require less equity investment later on. For many VC-backed software companies or digital platforms, chasing growth in "users" does not always translate to "revenue". Reaching profitability in a winner-take-all market can require a lot of funding as a result. Hardware users are much more likely to pay for the privilege and hardware companies can access non-dilutive financing options as they grow.
  • Furthermore, 3D printing and outsourced batch manufacturing allow early products to be produced and shipped more cheaply than ever.


“Hardware takes longer”

  • Hardware usually does take longer in the beginning but it’s getting easier and quicker all the time. Many components such as optics, electronics, power systems etc. are available off the shelf. Moreover, design iterations no longer need physical prototypes at every stage. They can be iterated much more quickly now using software simulations, digital twins or even virtual reality.
  • the smarter hardware becomes, the more its competitive advantage is less about patents and more about science, software (that includes A.I. and Machine Learning) or user experience, which can continue to improve over time based on increased use and data.
  • Taking longer means it’s more difficult for competitors to imitate and catch up.


“Hardware is less profitable”

  • This was true when hardware products were dumb pieces of metal and plastic. But increasingly hardware is a trojan horse to sell software and gather data. The result can be a powerful combination - recurring revenues and high margins of software with higher barriers to entry of hardware.
  • Indeed, the dominant players in software and web services, Google, Amazon, Microsoft and Facebook all now choose to play in the hardware world. Hardware increases accessibility to their software ecosystems and controls (and gathers data from) more touchpoints with customers. The hardware and software "full stack" solution captures more value from the customer.


So, hardware can be more profitable and scalable later on than software but more difficult to get going. Moreover, whilst there have been some very successful hardware IPOs and large M&A deals, such as Luminar (Lidar sensors $3.4bn SPAC IPO), Habana Labs (AI training processors bought by Intel for $2bn), 6 River Systems (warehouse robotics startup acquired by Shopify for $450m) and Oculus Rift (VR headsets bought by Facebook for $2.3bn), there's also a trail of postmortems. For any startup, the path to success is brutal. According to CB Insights, only 46% of startups, in hardware or software, will succeed in raising even just one additional round of funding. Furthermore, 70% of them will die or become Zombies, earning revenues but not growing enough to push for IPO or to attract a large M&A exit.


CB Insights note the top reasons for start-ups failing are building something that nobody wants or running out of cash. Hardware start-ups have added complexity in technical development, scaling up production and sales, both physically and in terms of managing working capital, and in gathering and iterating on customer feedback. There are few investors with enough experience and technical expertise to understand or want to manage the risks. However, for the reasons mentioned above, there are significant investor returns to be generated with the right opportunities and execution. Moreover, as M&A markets hit record highs, there are more opportunities than ever for investors to realise value.


We've cherry picked some examples of successful exits and pointed to the biggest tech companies in the world moving into hardware. We've suggested that for a variety of reasons, building hardware could be easier than ever, but, so what? Is this enough to embrace early-stage hardware investment?


It is said by some that we are entering a new industrial revolution, Industry 4.0. The first industrial revolution beginning in the 1760s was about mechanisation, steam and water power, the second beginning in the 1870s was about mass production and electricity and the third in the beginning in the 1950s was about electronics, IT systems, computers and software. The fourth industrialisation, now upon us, is an era of cyber-physical - hardware + software. The need for smarter cities, responsible production, affordable and clean energy can't be solved by software alone.


The world is striving for sustainability and the responsibility for efficient production and supply chains is felt from the largest corporates to the smallest SMEs. More often than not, serious improvement requires data on inefficiencies, why and how they arise, then a feedback loop to keep improving. It is hardware technology like new sensors, 3D printing, robotics, quantum computing that will drive this change. And early-stage investors are needed to find the best ideas, accelerate their commercialisation and share in their success.


Foresight Williams was formed with this purpose in mind. We recognised that early-stage hardware investment is critical but, managing the risks and seizing the opportunities with early-stage hardware technology companies requires the right experience and technical expertise.


Foresight Williams is a joint venture between leading infrastructure and private equity investment manager Foresight Group and world-leading technology and engineering business Williams Advanced Engineering (WAE). Foresight has a 36-year track record of fundraising and investing, growing and exiting UK SMEs. WAE, which was born out of Williams F1 in 2010, specialises in technical innovation, engineering, testing and manufacturing services, with a speed to market derived from four decades competing in Formula 1. The partnership is a unique collaboration in early-stage investing. It was formed with the purpose of accelerating the commercialisation of transformative technologies that positively impact the word and sharing in their success. Foresight Williams is perfectly placed to identify and support the most exciting early-stage hardware companies.


We look forward to more hard tech investors joining us on the journey soon. The world needs more early-stage hardware innovation and there are exciting times ahead.


Foresight Group LLP is authorised and regulated by the Financial Conduct Authority (FRN 198020). Tax reliefs are dependent upon an investor’s individual circumstances and are subject to change. VCTs and EIS’ should be considered longer-term investments and may be higher risk and more difficult to realise than other listed securities. Capital at risk.


Andy Bloxam, Director

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