Hot hardware: The smart money's taking notice

After years of private tech investors favoring software startups, new hardware companies are attracting keen attention. Witness Wednesday's $30 million investment in Webcam startup DropCam. Software still gets more buzz -- and yes, more money -- but in the last couple of years, more than $711 million was poured into hardware startups, according to a recent blog post by Renee Di DiResta


It's an uptick that correlates with the rise in smartphones, according to investors who say recent hits like Dropcam, Nest and Fitbit are just the tip of the iceberg.
"You have more and more people with computing and engineered devices in their pockets and on the go," said Menlo Ventures Principal Sunil Raman, who sees the start of a tipping point for hardware. "It's become a lot more interesting for hardware."

Hardware startups were, and still are, a tougher sell. They have higher failure rates and cost more to get up and running. But despite their caution, investors are nonetheless voting with their wallets because of new opportunities created by the growth of mobile and cloud-based computing.

Historically, hardware has meant chips and silicon, switches and routers -- the bits and pieces behind the machines that delivered the software. The new wave of hardware tech is more focused on consumer products, not just the things that power them -- in particular, an entirely new category of software-driven hardware which have accompanied the rise of cloud computing.

It's a slow-motion trend that has been in the works for about five years. In the last 24 months, though, interest in hardware startups have gone into hyperdrive. Consider what DiResta found: in 2012, venture capitalists poured $209.5 million into hardware companies, spread over 52 early-stage investments. By comparison, VCs have already invested $222.9 million in 47 startups during the first half of this year alone. DiResta's data crunching is based off of CrunchBase's figures for early funding rounds of both enterprise and consumer hardware products, and she created an interactive graphic where that lets you see which companies were funded.
Hardware startups in 2013 are also tapping into new sales and marketing opportunities that did not exist, say, in 2003. In particular, the availability of social media marketing campaigns and crowdsourcing sites like Kickstarter now lets companies go directly to consumers and generate buzz among the early adopters, instead of first needing to convince skeptical retailers to carry a little-known product. It's still in the early stages but in the last two years, the amount of money Kickstarter users poured into hardware products multiplied more than tenfold to $22.7 million from $2.6 million. Some of this originates with the maker movement, but even that mentality has changed, according to DiResta.
, a principal at O'Reilly AlphaTech Ventures.