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Stay lean while money is easy
The hype cycle
Consumer hardware was hot after Nest sold to Google, and crowdfunding campaigns on Indiegogo and Kickstarter were everywhere. Eight Sleep raised $6 million in a single day after Y Combinator. A year later almost no investor would touch consumer hardware, because without a subscription the unit economics make it hard to keep selling.
Most of the big crowdfunding companies went under. They raised money during the hype, overspent, overhired, and had weak unit economics, and the cash disappeared when the market went cold.
Staying lean
Eight Sleep stayed lean through all of it. It has about 120 people, where some wearable companies at a similar stage have 700 or 800, and by its own count it earns more revenue per employee than Apple, retail stores included. Y Combinator called the team cockroaches, because they kept surviving. Roughly $250 to $300 million has been raised in total.
Surviving the stretch with the least cash bought the time for the company to become cashflow positive, with strong unit economics and room to keep growing.
Why do hardware startups struggle without subscriptions?
A hardware company earns its money once, at the sale, and that revenue has to cover manufacturing, shipping, returns, and warranty repairs. A subscription keeps paying after the sale, which makes revenue easier to predict and spreads the cost of winning each customer. Investors value recurring revenue more highly than one-time sales for that reason. A one-time sale also gives the customer little reason to come back.
How did crowdfunding fuel the hardware boom?
Kickstarter launched in 2009 and Indiegogo in 2008, and both let inventors collect money from backers before a product existed. In 2012, a smartwatch campaign on Kickstarter raised more than 10 million dollars, then a record for the site. Results like that drew in a wave of hardware founders and their investors. Making a prototype is far cheaper than manufacturing thousands of units, and many campaigns hit that gap.
Why did Google buy Nest?
Nest Labs made a learning thermostat and a smoke alarm, both connected to the internet. Google announced the purchase in January 2014 for 3.2 billion dollars in cash. The deal gave the company a foothold in the connected home. It also pushed investors toward other smart-home hardware makers.
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