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The rise of hardware startups: why croudsourced gear is the future

The rise of hardware startups
It's not just the big players having hardware fun any more
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A huge number of hardware startups are emerging all over the place at the moment, so where have they come from and what do they mean for us?

We hear about software startups no end, with the latest apps and social networks grabbing the headlines with hackneyed platitudes such as 'the next Facebook?' before disappearing into the ether. But bubbling under the software hyperbole, there's a volcanic rise of hardware startups that will change the face of consumer electronics forever.

The development of third-party software exploded with the advent of the internet. It was, and still is, easy for skilled individuals to make their own software and even start a software company. The initial costs will always be relatively low, needing only a computer, time, a particular skill set and some staff.

In comparison, the initial upfront costs of starting a hardware company are huge. COO of Miura Systems, Richard Goodlad, says that his initial costs were US$4.3m (around £2.8m / AU$4.7m), which includes manufacturing and sourcing of materials.

Ian Hogarth, CEO and co-founder of Songkick, explained to us that his startup costs were around £15k (around US$23k / AU$25k), which pales in comparison.

With the gulf in startup costs this extreme, starting up a hardware company is a serious financial risk, which is why hardware has been left, traditionally, to the big players such as Sony, Apple, Samsung and Google.

Competitive pricing

The rise of hardware startups

But three things have changed in recent years that have levelled the playing field. Firstly, the battle for supremacy between the big players has crashed the price of materials. The smartphone war and the never-ending conveyor belt of budget smartphones has driven down prices of components and made them affordable for a small or medium-sized business, which, ironically, has increased competition.

Companies such as Google have introduced disruptive pricing models, such as a £239 / US$299 / AU$349 Nexus 4, that has forced down the price of components and made other companies follow suit.

According to iSuppli Research, a Samsung Galaxy S3 cost US$204 to make in 2012, whereas the Samsung Galaxy S4, a phone with an upgraded quad-core 1.6GHz Cortex-A15 processor and a 1080 x 1920 pixel 4-inch screen, among other improvements, cost US$233.

So you can see a significant drop in the cost of materials. iSuppli estimates that the percentage share of DRAM - an important component of smartphones - on the overall cost of materials dropped from 14% in Q1 2011 to almost 6% in Q1 2012.


The rise of hardware startups

The second thing that has changed is access to finance, or, more specifically the rise of crowdfunding websites such as Kickstarter and Indiegogo. These websites have been a revelation for entrepreneurs in recent years, connecting them directly to other enthusiasts who understand the problem they're trying to solve and are willing to fund the entire process.

Projects that may have never got off of the ground through traditional finance streams are judged and voted for by the public, in a modern interpretation of Athenian democracy.

Products such as Fitbit, Pebble and Ouya have significantly benefitted from this funding model and produced products that might have seen the bottom of the waste paper basket in a central London boardroom.

But the traditional finance streams still play an important role. Accelerator programmes, where companies receive funding and work space, are springing up around the country. These accelerator programmes offer more than just money, they offer work space, which is often shared with other companies and can offer expert advice.

Paul Smith, director of the Ignite 100 accelerator programme in Newcastle, UK, told us: "It's difficult to put a number on [how many hardware startups there are in the North East of England]; there's probably a dozen or so, if by startups you mean small, early-stage teams. A few notable ones include Screenreach, Earsoft and Bubblepix.