A Hardware Renaissance while “Software Eats the World”?

In early August 2011, Marc Andreessen published an unusually long and detailed essay in the Wall Street Journal titled “Why Software is Eating the World”.  Mr. Andreessen argued persuasively that:

“…we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy [emphasis added]”

Sitting at at the head of the Valley’s hottest VC fund, Andreessen Horowitz, and having co-founded Netscape and Opsware, Mr. Andreessen is in as good a position as anyone to observe and comment on such trends.

The point of this blog post is not to argue against Mr. Andreessen’s thesis – especially since, its undoubtedly true – but rather, to take a look at a smaller trend that falls within his broader argument: in the coming years a number of successful startups will appear to be hardware companies (particularly in the eyes of consumers).

This is a non-consensus view.  Think about it, nearly all of the hottest startups in the recent cycle have been software only: Facebook, Twitter, Zynga, LinkedIn, Groupon and Pandora. Investors have been ringing the “software only” bell for 10 years and for good reasons: no inventory costs, faster cycle times and above all, low capital intensity.

Given all this, why are we on the verge of a Hardware Renaissance?  I think the broad trends are well understood and include: the rise of low cost Asian manufacturing, the movement towards universal smartphone penetration (as smartphones will often be the “brain”) and the ability to quickly and easily update hardware over-the-air.

Below are four examples that demonstrate the point.  The first is a clear success story, the second is an emerging success story, while the third & fourth are looking really promising.  Each demonstrates a creative pairing of low cost hardware with smart software.

SquareJack Dorsey’s follow up to Twitter is a small, square shaped dongle that plugs into an iPhone and allows anyone – yes, anyone – to accept credit card payments for 2.75%.   The company is giving away the dongle and as of October 2011 had signed on 800,000 merchants (which is approximately 10% of the Visa & Mastercard accepting world!) and was on track to do $2 billion in gross payments.  Square is combining a simple low-cost hardware package with an insanely smart software backend and the result has been mass adoption faster than anyone thought posible.

JawboneMost people know this company simply as the maker of a stylish Bluetooth headset.  After Mr. Andreessen’s fund invested $49 million in March of 2011 observers began to take notice of Jawbone’s larger ambition, namely, wearable computing.  The firm’s second wearable device, the “Up”, has stumbled due to quality issues but otherwise has generated serious buzz online.  At $179, the device is comparable to Fitbit but with a high-end, jewelry inspired design.  The device ties into a lifestyle management software platform online and intelligently helps consumers live healthier lives.

Twine – In recent weeks an obscure Kickstarter project which looks to be a plastic bar of soap has captured the imagination of early adopters.  Twine raised just shy of $500,000 from 3,500 backers (avg. cost of $142) to produce the Swiss Army knife of programmable sensors.  The device is adept at detecting movement, temperature, IR, moisture, and has a number of switches and inputs. Consumers will be able to let their imaginations run wild and program their Twine’s to do thousands of tasks.  The hardware is a plastic rectangle with off the shelf components inside of it, which is to say, its low cost and simple to build.  The real brains are in the cloud (a DIY platform for consumers to program their sensors).

SurfEasy (MantellaVP portfolio company) – Everyone knows that Internet “privacy” is a big issue but nobody knows what to do about it (and no, quitting Facebook is not an option).   At next week’s CES show in Las Vegas, Chris Houston and his team will unveil their radically simple solution: the SurfEasy USB key.  Pop the USB key into any computer and SurfEasy provides you with fully encrypted access to the Internet – and not just any kind of encryption, this is Bank grade tech. SurfEasy ensures that no data is left on the computer your surfing on and that nobody (hackers, your spouse etc…) can identify who you are!  The stick retails for $59.99 and sits in a credit card sized holder so that it can live inside your wallet and be with you wherever you are: a friend’s house, the office, or the local Starbucks.  SurfEasy quickly pre-sold about $70,000 worth of product on Kickstarter earlier this year and is now taking pre-orders from the general public (first batch ships on February 20).  SurfEasy has done a great job combining an insanely complex backend system with a simple and low cost hardware package.

In conclusion, software is eating the world but often that software is going to come packaged in beautiful, low cost and/or simple hardware.

Feel free to post comments & questions below or message me on twitter (@RussSamuels)

Thanks,

Russell (@RussSamuels)

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