Hardware Start-Ups Can't Survive Without a Niche
Investors love nothing more than discussing a company's market size. It's the part in a presentation where their ears perk up and they run the numbers on what it will take to have a billion dollar business. In response, entrepreneurs often waste too much time trying to find numbers to justify their idea.
Unfortunately, that's not how it works.
Most of the best hardware brands start by solving a single problem. Over time they evolve into billion dollar opportunities, like Skullcandy. That company started because the founder wanted to listen to music while snowboarding and was sick of taking his gloves off every time he had to answer his phone. Likewise, Jawbone started out as technology to help soldiers communicate in noisy environments.
One thing that makes hardware start-ups so expensive is the cost of acquiring new customers. The use of online and offline marketing tactics means you'll spend a lot of money trying a variety of ideas that are difficult to measure, all in the hopes they'll bring positive sales. In the end, you'll only realize that the more niche and passionate your initial market is, the easier it is to grow your customer base.
If you can profitably gain more customers, you can build a really successful hardware company. If you can't, you'll never get farther than your backers on Kickstarter.
In finding the right niche, you first want to identify the right market trends. Then you want to find a set of consumers who are passionate about the problem you are solving. Here's a look at how to do both.
Identify a positive market narrative
I'm a big believer in the notion that finding the right market is about understanding its narrative. Numbers are helpful in estimating a market's size, but trends within and around it are more important.
Take the elderly population in the U.S. By running a few Google searches you'll see it's expected to nearly double in size over the next 15 years. It's a staggering number, which means this market segment will be looking for products to make its life easier.
Lively is one such start-up hoping to ride the tide of market momentum. Its use of sensors and a mobile app makes families feel confident their parents are safe. Smart locks, on the other hand, don't have the same market momentum. Sure, people buy products that are tied to their phones, but there isn't a strong narrative for buying more locks.
And the reason for that is simple: The housing market just isn't growing. But these new companies hope the growth in rental sites like AirBnB will be enough to drive demand for keyless locks. However, until the market picks up, these new start-ups will have to compete on features as they try to convince shoppers a smart lock beats a dumb lock.
Keep in mind the size of your market doesn't have to be growing to indicate a positive narrative. Digital cameras have been outsourced to mobile phones, but that doesn't mean people are taking fewer pictures. In fact, just the opposite is happening. There's more demand for photography than ever--the only difference is the products have changed.
Find passionate customers
Within a positive market narrative, you also want to identify customers who are excited about what problem you're solving. Not only will this drive word of mouth, it will result in a customer base willing to spend money on your product.
To identify passionate customers, I use a simple matrix (see below). One axis shows how frequently consumers they use your product--the more frequent, the better. The second axis shows the reason for their purchase. Products that bring joy (i.e., make your life better) are a marketing sell, while products used to solve pain (i.e., a chronic problem) are an information sell.
What made Contour initially so successful was that outdoor enthusiasts frequently participated in their sport and received an incredible amount of satisfaction from recording adventures. The competitive nature of sports combined with the desire to make memories were powerful drivers for buying an action camera, even after the economy tanked.
The maker movement is another great example. It's a niche segment of do-it-yourself (DIY) builders who spend their weekends hacking exciting new products. Makerbot quickly realized spotted this trend and focused intently on building 3D printers that were convenient, well-made, and affordable.
SoundFocus, on the other hand, is a start-up focused on hearing loss whose mobile app improves the sound of music on phones. Soon they'll introduce hardware that challenges existing hearing aids. The founder's experience with hearing loss is a problem he deeply understands, and that gives him a major advantage in solving a problem both high in frequency and in pain.
Going back to smart locks, it's hard to see where they fit on this matrix. Losing your keys is a headache, but does the problem occur often enough to warrant replacing your locks? I don't know. Some people rent their homes on a regular basis and frequently need to provide access. But are there enough home renters to justify a market with three start-up competitors and a handful of established lock makers? Only time will tell.
Identifying markets with the right narrative and finding a passionate consumer within it, are critical to your hardware start-up's success. Knowing both will provide incredible momentum to turn your start-up into the next billion dollar opportunity.
Marc Barros is the co-founder and former CEO of Contour, a hands-free camera company. Shortly after graduating from the University of Washington, Marc co-founded Contour in 2004 and led the organization from a garage to a multi-million dollar company. Contour products were sold in over 40 countries through action sports retailers and national chains, including Best Buy and Apple.