Breeding Hardware Unicorns

About a year ago, Aileen Lee from Cowboy Ventures wrote her seminal piece on billion-dollar startups, now widely called “unicorns.” At the time, she found 39 U.S.-based software companies fewer than 10 years old in that category.

Since then, other articles expanded this list to a global research by various people like Fred Wilson from Union Square Ventures, which lead to further analysis. South Korea alone had 10 of them, though a few were older than 10 years. The news about an actual unicorn lair found in North Korea proved to be a misunderstanding.

As early-stage investors and hopeful hardware unicorn breeders, we looked into the situation of hardware unicorns and up-and-coming “ponies.” As it takes an average 7 to 10 years to unicorns to reach $1B, many of the newer companies will need more time to reach a high valuation, so our list includes 41 hardware companies that raised the most VC funding or exited recently. The source is accessible here and you are welcome to expand it.

Below is a list of things we have learned about the “hardware unicorn club”:

  1. We found 11 companies with a valuation above $1 billion. Their combined valuation was above $40 billion.
  1. Only one unicorn did IPO (GoPro) and three others were acquired (NestBeats and Oculus). Exits are more likely to be acquisitions than M&A: Another eight companies were acquired in deals ranging from $100 million to $1 billion.
  1. Most companies are B2C. Robotics dominate B2B.
  1. Despite the media attention, wearables and smartwatches are a relatively small percentage among unicorns and ponies. AR/VR, Robotics, Smart Home and lifestyle products also fared well.
  1. Most companies were from the U.S., while China and Europe had a few outliers. We did not research age and ethnicity of founders and it is possible some foreign companies “rebranded” as US companies. It is likely China, Japan and Korea are punching below their weight, as their expertise in consumer electronics is undeniable.
  1. Crowdfunding is still nascent but seven startups on this list, including one unicorn, raised funding on Kickstarter, Indiegogo or on their own. It is likely this trend will grow.
  1. There is (almost) no hardware without software. Standalone hardware was an exception.
  1. Hardware unicorns are growing faster. Five out of the 11 unicorns and a total of 27 startups out of the 41 in our list were less than fewer years old.
  1. Unicorns ship products.

Welcome to the Hardware Unicorn Club

We could not estimate precisely the percentage of unicorns among hardware startups due to lack of data. Yet, it is likely they represent less than 1/10th of tech startups — maybe even 1/20th or less. Aileen Lee estimated the number of software and Internet companies at 60,000 over the past decade, so a generous estimate would be 6,000 companies for hardware. Eleven out of 6,000 would be 0.18  percent or one out of 545.

The number of hardware unicorns is probably still too low to be statistically significant, but a sloppy analyst could say your chances of reaching unicorn status are more than twice as high as in software (for which chances are 0.07 percent, according to Lee).

Prototyping has become much easier, whether it is for giving a new connected life to existing “dumb” product categories or building entirely new ones. Electronics can be done initially with platforms like Raspberry Pi, Arduino and Spark Core. Connectivity is done via smartphones, Bluetooth, Wi-Fi and cloud infrastructure. Even prototyping circuit boards is becoming easier with a growing number of PCB printers, reducing the time needed for iterations. And coming up with form factors is now a fairly simple job with 3D printing.

Finally, going to market and manufacturing is also getting easier thanks to the “Lean Hardware” approach and the opening up of Shenzhen’s supply chain to startups.

All those reasons might explain why the investment in IoT is soaring.