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Hardware startups scare many investors. Hardware adds additional risk dimensions, including suppliers, manufacturers, and distributors. Hardware also tends to require more equity capital because early-stage startups are too risky to work with traditional lenders to help fund initial production.

A good amount of hardware risk comes from failing to understand how business models can change when hardware is connected to the internet. Connected hardware unlocks new customer relationships and proprietary data, as well as actuators, consumables, and services. Put another way, it presents opportunities to increase the lifetime value of customers.

Tesla redefined the relationship between car owners and manufacturers. Before Telsa, you had to drive into a dealership so they could learn about your car. For Tesla, connecting their cars over the internet means they can update software to improve performance and add features. It also means they can provide better levels of support because they can see problems before customers can. And it means they can learn from all of their customers by collecting proprietary data to train algorithms.

Proprietary data is at the heart of many successful AI applications. Some of this data comes from humans, but a growing portion of it comes from sensors embedded in things ranging from cars to irrigation systems. Hardware, specifically sensors, can play an essential role in unlocking the data to drive new algorithms.

Hardware can also enable mini retail outlets. Much like ink for printers or water filters for refrigerators, connected hardware doesn’t just allow direct interaction with customers; it also facilitates ongoing revenue from consumables — the things that are used up in delivering the service provided by hardware.

Finally, as noted, hardware can unlock new types of services. Rather than waiting for something to go wrong, professionals can be notified to inspect or replace parts and avoid service interruptions and potential for additional costs.


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