This essay is part of a 3-part series:
Hardware startups are sexy. Building flying cars, nuclear reactors, or electric cars is more tangible and in many ways more interesting than writing software. It’s also possible to tackle a wider range of important problems with hardware than with software alone, from global warming to food security.
For these reasons, many founders and would-be founders dream of starting hardware companies, and some of them actually do. Occasionally, that decision works out reasonably well, but most of the time, it ends in tears, especially for founders without previous successful outcomes. This is due to factors inherent to hardware companies, which the startup community is somewhat aware of but perhaps not enough. In this essay, I’m hoping to make those factors clear, with the hopes of saving other founders future pain.
This warning comes out of my own story.
I’m from a software background — I started programming as a teenager, studied computer science and AI in college and in grad school, and have worked in different parts of the software industry since high school. But in grad school, while studying AI, I became enamored with the idea of automating food service.
I realized that automating fast-casual food service (think Chipotle, Sweetgreen, etc.) could bring down the costs of building and operating restaurants by so much that high-quality meals could be sold at half the price they’re sold for today. To realize this vision, I co-founded Mezli with two friends from Stanford, and a year and a half later, we successfully launched a fully-robotic restaurant. However, despite selling thousands of meals at near-100% uptime and significantly better unit economics than human-powered restaurants, we were unable to raise more money and were forced to shut down.
Some of this was due to the downturn in the funding market — it was much harder to raise money in 2022 than it had been even a year or two earlier. But in hindsight, just being a hardware company made us much more fragile than an equivalent software startup would have been.
One crucial factor that I underestimated at the beginning of Mezli was the mandatory requirement for raising escalating amounts of capital to keep making progress with a hardware startup. People sometimes talk about hardware startups being “capital intensive”, but this is only part of the picture — plenty of software companies also invest hundreds of millions of dollars into engineering, sales, and marketing before they become profitable. The difference is that most software companies can adjust the amount of capital they invest in product development and growth as conditions change. If investor money becomes unavailable, a software company can usually lay people off and coast on revenues until the economy improves — or never fundraise again.
This is simply not possible for most early-stage hardware companies. Hardware products typically require substantial scale to reach profitability, which means huge up-front investments are necessary before turning a profit becomes possible. This means needing to raise numerous rounds of external funding, with each being do-or-die. The immediate implications of this dynamic are bad enough, but there are second-order impacts as well — even if an investor likes a hardware company’s prospects based on its technology and economics, well-founded concern that a single missed fundraise at any point in the future would be enough to kill the company can easily be a significant-enough factor to torpedo the current fundraise as well — a sort of “Keynesian beauty contest” dynamic that sounds academic but is very real.
Even a hardware success story like Tesla suffered from this dynamic and would have folded if not for repeated bailouts by Elon Musk. And for every Tesla, there have been countless hardware companies with equally-promising products but without the deep-pocketed backers needed to see them through lean times.
A second crucial drawback of hardware startups, which I think is often underappreciated, is the glacial speed of iteration compared to software. A software company can launch and update its product(s) and go-to-market motion near-instantaneously, allowing for very fast iteration. This is a huge advantage to a startup, allowing for fast contact with the market and evolution of its product(s) in the direction of customer pull — essentially the essence of the “Lean Startup” philosophy. Many software companies have found product-market fit and grown large on the back of this approach.
But the value of the ability to iterate quickly is not only to the benefit of the startup itself; it’s also to the benefit of its founders personally. When it’s possible to experiment on a daily cadence, to see efforts succeed or fail, and then to try again the next morning, the rate at which it’s possible to become a more-skillful entrepreneur is very high.
Hardware companies present a completely different picture than this when it comes to the speed of iteration. Hardware products typically take months or even years to design, manufacture, and ship, so that much more has to be guessed up-front that is only proven right or wrong by the market a long time later. And with only one or several iterations possible before the company proves a success or failure, the founders have limited opportunities to learn from the experience of bringing a product into contact with the real world. This slower learning curve is especially bad for first-time founders, who need to spend years learning lessons they would have learned in weeks with a software product.
And one final disadvantage of hardware is that even if a hardware product proves a huge success, the slow cycle times of hardware mean that scaling up that success and enjoying its fruits takes far longer than it would for a typical software company.
Of course, there are some exceptions to these rules — hardware companies where mandatory requirements for capital and long cycle times are less of a factor. A common example are companies that use off-the-shelf hardware to deliver a product differentiated by software. This includes companies that use off-the-shelf drones accompanied by computer vision models to inspect bridges and pipelines, companies that use AI models to get robot arms to pack boxes or weld metal, and many such others. By not having to design and build their own hardware, these companies are subject to fewer — but still many — of the issues that dog hardware startups.
Notably, both of the factors that make hardware startups a risky move for first-time entrepreneurs — capital requirements and slow learning curve — are less of a problem for repeat entrepreneurs or industry veterans. People who have amassed capital and experience by starting successful software companies or playing significant roles in existing hardware companies are often the best-positioned to tackle a hardware problem with a new startup.
And one-in-a-billion technical experts whose niche knowledge presents a necessary edge in a “hard tech” category may also find that it makes sense for them to start a hardware company. Such cases are especially common in biotech, but can also be seen in fields like nuclear energy and aerospace. For someone who’s spent twenty years becoming the world’s leading expert in a space like gene therapy or nuclear fusion, starting a company in that space can make sense — though that company will still be subject to the risks of high capital requirements and slow cycle times.
But for first-time generalist entrepreneurs without experience and capital, it’s hard to beat the advantages of software startups. There’s a reason why Silicon Valley startup culture came into being with the rise of the software industry, and why the vast majority of founders who go from nobodies to big successes make it big initially with software companies. (Dalton and Michael from YC made a great video about this.)
The software industry, and the startup ecosystem that’s part of it, are going to undergo big changes in the coming decades under the influence of AI, and may soon present fewer and fewer opportunities for entrepreneurs to make a mark. But until that happens, my advice to aspiring entrepreneurs who are looking for the most promising problems to work on is to strongly prefer founding a software company over a hardware company.
Alex Kolchinski 