The 3 Essentials for Rapid Growth of Hardware Startups
Comparison between Jibo and Nest in IoT smart home devices
Monozukuri Ventures provides financial and technical support for hardware startups and shares insights and information gained through researching and analyzing various kinds of cases. In this article, our intern, Inada Takahiro, who is studying at the Graduate School of Economics at Kyoto University, shares insights gained through his research.
Among startups, a company that has achieved remarkably rapid growth is called a “unicorn.” Unicorns have been attracting a lot of media attention recently. Most unicorns are in the software field, and there are only a handful in the hardware field.
So, “how do you become a hardware unicorn startup?”
I assume many hardware startup entrepreneurs are striving to find the answer every day.
In the software industry, they use a rapid cycle of trial and error to fill the gaps between the value of their services and the market’s needs. However, each trial takes a long time in hardware startups because they deal with a physical object. Therefore, how they refine the product and get it to the market is different and requires different management than the software business. This is why they say, “Hardware is hard.”
So, in this “hard” business, what is needed for a hardware startup to grow?
Let’s look at the case studies of two companies: Jibo, a pioneer in social robotics, and Nest, a successful IoT home device company acquired as a unicorn after Jibo shut down six years after its founding. We will compare the two companies, which took contrasting paths despite operating in the same field of home IoT devices.
3 essential factors may have contributed to their success and failure:
1. Product Development
2. Human Resources
3. Funding
Stories of the two contrasting companies. Jibo, social robot pioneer. Nest, successful IoT home device company.
Jibo
Jibo was founded in 2012, led by Cynthia Breazeal, an associate professor at MIT. She is a student of Prof. Rodney Brooks, co-founder of iRobot, and one of the first proponents of social robots. In January 2013, the company raised $2.2M from Charles River Ventures and others but struggled with business development. In April 2014, the company decided to raise $5M in a bridge round. In July 2014, the company raised $2.3M from over 7,000 people through crowdfunding, demonstrating demand in the social robot market, which helped the negotiation with VCs later. The company raised $25.3M in Jan 2015, $11M(including Dentsu Ventures and KDDI) in July, and 16M in October. However, after repeatedly postponing the shipment that was initially planned for 2015. The company managed to ship them in September 2017 for $900 per unit. Eventually, a year later, in November 2018, the company sold all of its assets to SQN Venture Partners. Six years of business came to an end.
Nest
Nest was founded in 2010 by former Apple employees Tony Fadell and Matt Rogers. They played key roles in the iPod and iPhone projects, respectively. Soon after its founding, the company raised Series A funding from famous investors like Kleiner Perkins and Google Ventures.
In 2011, the company launched the Nest Learning Thermostat, which optimizes room air conditioning and saves energy, for $249. In January 2013, the company raised $80M from Google Ventures and others. In October of the same year, it launched its second product, Nest Protect, a smoke detector. In October of the same year, the company launched its second product, Nest Protect, a smoke detector. Then, they were acquired by Google in January 2014 for $3.2B. That was just four years after the company was founded.
After that, the new products kept on coming. The Nest Cam series of home cameras and the Nest Secure home security system. After the acquisition, Nest continued to operate independently from Google, but in February 2018, it was integrated into Google’s hardware division, and from May 2019, it was announced that the previous Google Home would be sold under the Google Nest brand.
Factors that made the difference between the two companies
1. Product development
Nest’s success: Steady sales growth through significant improvements to existing products
Nest launched the Nest Learning Thermostat in 2011, the Nest Protect (smoke and carbon monoxide alarms) in 2013, the Nest Cam series (indoor and outdoor surveillance cameras) in 2015, and the Nest Secure series (home security cameras) in 2017. Nest Secure”
(home security systems) in 2017. Although these are niche products, they have made significant improvements in design and UI/UX compared to previous products. They changed the concept of thermostats and alarms by connecting them to the Internet.
In an interview, co-founder Rogers mentioned that “Dyson made vacuum cleaners sexy” and “we are aiming for the same thing.” Nest has been growing by introducing products the people want and steadily increasing sales. VCs liked the fact that applications and markets of their products were always straightforward.
Jibo’s failure (1): The concept was vague and took too much time to release.
Jibo is a university spinout venture led by an associate professor at MIT who developed the concept of social robots. She is also a protégé of the founder of iRobot. However, it took more than two years to build its first demo unit.
Also, Jibo was officially released in 2017 for about $900. Although Jibo initially launched a new concept of a social robot, the final product did not fully reflect that concept and couldn’t differentiate from competitors’ products. At the time, many competitors were already offering affordable smart speakers like Amazon Echo for around $50 to $100. Jibo failed to provide users with any value for about 10 times the price.
Their concept of a social robot was vague. They spent a lot of time defining the requirements for the robot’s functions and desired interactions with humans, making it impossible to develop a product that fits the real market environment. While novelty and attractive concept may be enough for university research, in business, the product needs to be wanted by users and adopted in the market. Jibo could not nurture the exciting concept of a social robot through feedback from the market.
Jibo’s Failure(2): Not enough resources to implement core functions.
Jibo was released in 2017, but it was supposed to ship in 2015. The launch has been postponed many times. There were many reasons, but one of the major issues was the voice recognition accuracy. The robot was controlled by voice, but because the voice recognition function, which is the core of the robot, was not good enough. No matter how good the content was, it could not meet the expectations of customers.
Similar to the previous example, Jibo’s management team needed to think about the customer’s perspective, understand the core technology for their product, and prioritize and allocate resources better.
Jibo’s failure (3): Building the platform was too costly
Jibo’s value depends on the content that sits on top of the hardware. They call the content “skills.” Jibo’s strategy was to build a marketplace called the “Skill Store,” which would provide these skills through partnerships with major companies and third-party developers, rather than developing all of them in-house. This entailed many tasks such as developing SDKs and APIs, marketing to developers, and negotiating partnerships. On the other hand, the development of hardware and pre-installed skills resulted in the decentralization of resources.
Building such a platform is too enormous a task to tackle with the limited resources of a start-up company. As a result, it was overtaken by competitors such as Amazon Echo.
2. Human resources
Nest’s success: Building a team with experienced developers in both hardware and software
Nest was co-founded in 2010 by Mr. Fadell, former VP of iPod at Apple, and Mr. Rogers, who led the conceptual design of the iPhone. Since its early days, Nest started with about 10 experienced people from Twitter and Microsoft in web development and machine learning. Since then, Jibo had successfully expanded its workforce quickly: more than 130 people at the end of 2012, 200 people in 2013, 280 people in 2014, and 1,100 people in 2015 when Google acquired Jibo.
Jibo’s failure: not having enough talented developers at the beginning
Jibo was co-founded by Breazeal, an associate professor at MIT, and Asher, a serial entrepreneur. However, Asher is not an accomplished entrepreneur (he later negotiated partnerships with content providers, so he is considered on the business side). Chambers, who was previously president of a company called Nuance Communications, joined the company as an advisor in mid-2013 and became CEO in January 2015. In the previous company, he led sales and marketing and business development. Both of them have experience in the business side.
On the other hand, they brought in an acquaintance who worked on a project as the lead designer in the early stage. In July 2014, the company strengthened its development team by appointing Atkins, a former Netflix board member, as vice president of engineering, and Pack, a former iRobot employee, as chief of robotics development. However, it had already been two and a half years since its founding, suggesting that Jibo may have lacked capable development team members in its early stage. While sales and business development are undoubtedly essential for growth, product development is more critical in the early stages of a hardware startup, and a pioneer like Jibo probably needed skilled engineers and designers sooner.
3. Funding
Nest’s Success: Steady Funding from Leading VCs
Nest has raised funds from leading VCs such as Kleiner Perkins and Google Ventures at the Series A stage. Google Ventures has continued to invest in subsequent rounds, leading an $80M investment at an $800M valuation in 2013 indicating that Nest is steadily raising funds from VCs. They steadily achieved milestones and increased their corporate value. In 2014, just four years after its founding, Nest was acquired by Google for $3.2B. In 2014, just four years after its founding, Google acquired it for $3.2B, quadrupling its value in one year from the previous year’s round.
Jibo’s Failure: Poor VC Funding and Stagnant Valuations
After an unsuccessful Series A funding round, Jibo turned to crowdfunding in 2014 as a last-ditch effort. The crowdfunding was successful, and the company raised $2.3M, but this money included product sales. Not all of the money could be invested in development. While this crowdfunding proved demand for the product and allowed the company to negotiate a better deal from VCs in 2015, the valuation was considered around $130M, and the growth was modest. Although the crowdfunding shows that the product was undoubtedly attractive to users, the company was unable to smoothly raise sufficient funds to enable faster growth because it could not sufficiently develop a business model and growth scenario that would attract investors.
Here we compared two companies that took contrasting paths despite operating in the same home IoT devices field and identified the three essentials for a hardware startup to achieve rapid growth. Nest has steadily increased its sales and smoothly increased its corporate value by improving existing products with clear applications. On the other hand, Jibo, despite having an attractive concept, struggled with product development, human resource strategy, and financing. That’s why they could not achieve the desired growth.
I hope that this article will be helpful to hardware entrepreneurs who are now taking on the challenge of hard business. I hope this article helps hardware entrepreneurs who are now taking on “hard” business.
This article was written based on CrunchBase, Wikipedia, Harvard Business School Case, and the following articles.
- Anderson, Derek, “From The Garage To 200 Employees In 3 Years: How Nest Thermostats Were Born,” TechCrunch, May 11, 2013.
- Carman, Ashley, “They welcomed a robot into their family, now they’re mourning its death,” The Verge, Jun 19, 2019.
- Kessler, Sarah, “Nest: The Story Behind the World’s Most Beautiful Thermostat,” Mashable, Dec. 15, 2011.
- Kodama, Jin, “Global Sales Canceled! Social Robot Jibo’s uncertain future,” Roboteer, Aug 17, 2016.
- Levy, Steven, “Nest Gives the Lowly Smoke Detector a Brain — And a Voice,” Wired, Oct 2013.
- Van Camp, Jeffrey, “My Jibo Is Dying, and It’s Breaking My Heart,” Wired, Mar. 8, 2019.
- Wollerton, Megan, “Seven years in, Nest is hitting its smart home stride,” CNET, Mar 14, 2018.
Written by: Takahiro INADA
Ph.D. student in Kyoto University, Graduate School of Economics, researching on founding processes of startups
He is researching and developing in Monozukuri Ventures as an intern taking advantage of his academic background.Translated by: Kenji YANAGAWA
A graduate of Kyoto Institute of Technology in 2020 after studying mechanical engineering and product design
He is an English-Japanese translator and a fab staff for Kyoto Makers Garage, run by Monozukuri Ventures, to host workshops and events on 3D printing, Laser cutting, Arduino coding, etc.Published by: Monozukuri Ventures Inc.
Venture Capital based in Kyoto and New York to help the world’s entrepreneurs rapidly deliver high-quality products to the market, regardless of production volume. As a global ecosystem contributor, the company provides founders with essential resources such as investment, mentorship, prototyping know-how, manufacturing expertise, and community support.
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