2014 is shaping up to become the year of the hardware narrative, as tangible technologies are increasingly viewed as lucrative propositions. Three of the four largest tech acquisitions in 2014 have been hardware deals. Furthermore, GoPro is readying for an IPO while Jawbone is rumoured to be doing the same, with both set to breach the billion-dollar milestones on the markets. Although much of the activity of business transfer agents has been steeped in software services, hardware is making a comeback.
Nest, Oculus Rift and Beats have led the hardware assault on the markets this year. In the first quarter of 2014, Nest’s sale to Google for $3.2 billion was only one out of 79 acquisitions, but accounted for 43% of the combined disclosed value of all deals that quarter.
While this state of affairs offers strong support for the hardware segment, it remains a niche that is still met with apprehension by investors. Hardware entrepreneurs are used to rejections from venture capitalists reluctant to do hardware deals, usually due to failed past projects. Even during the present hardware boom there are few VCs making large hardware deals. The fact that all of the top three, and five of the top 10, largest Kickstarter campaigns are hardware related suggests start-ups in the segment are not seeing much luck from traditional sources of financing.
So why the success of Nest, Beats and Oculus? In large part, their sizeable exits were enabled by the fact they were hardware products with a major software element. The purchasing firms – Apple, Facebook, Google – were paying just as much for the platforms they represented than the technological innovation they brought in with them. Google talked up the potential of Nest as a future Internet of Things connectivity catalyst, Facebook viewed Oculus as the next-generation communication platform, and Apple was attracted by Beats’ online music service potentially more so than the actual headphones.
The lesson here ultimately is that investors and digital majors alike only value hardware in the billions of dollars if it comes with a ready or potential software package. This is a natural evolution of development and with the Internet of Things suggesting all devices will require data-connectivity, hardware without software will be the equivalent of a smartphone unconnected to the web. Partnering with a suitable software provider is therefore the smart play before looking for an exit.
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