Why Hardware Businesses Are Hard

And Why Some Hardware Startups Still Succeed

You’ve got a hardware business idea? In “a world that is eaten by software”, tinkering with hardware looks different, fancy and advanced, for two reasons: (1) hardware requires a whole different set of skills, (2) the United States has a massive shortage of skilled electrical engineers due to manufacturing moving to offshore.

Once Roxy was in an incubator, an advisor warned us to stay away from hardware but did not specifically explain why. Now, I get why he said what he said and understand the reasons.

When you are turning a hardware idea into a business, the cost structure is more complicated than software, which makes a business model harder to work out. In this article, I will talk about those reasons that make hardware businesses so hard to survive.

High Cost. Low Margin.

In a SaaS (Software as a Service) business, the margin is up to 70% or 80%. The cost comes from (1) product development, (2) sales effort, (3) customer service, and (4) software hosting. #1 and #2 are non-recuring. #3 can be optimized by software improvement. The only recurring cost is software hosting. When the business has more clients, the cost of software hosting will be amortized over all the customers.

Running a hardware business is a completely different story. Besides the NRE (non-recurring engineering) cost you would spend on R&D for the hardware product…