Pictured: Tomy Han, Partner at Volition Capital
When investors hear the word hardware, many hesitate. Hardware investments have traditionally been viewed as riskier and capital-intensive, with lower margins and scalability compared to their software counterparts. As a result, the majority of venture dollars has historically focused on software, leaving hardware underfunded.
Over the past 10-15 years, however, hardware has quietly redefined itself, mimicking many of the advantages associated with building a software business. Advances in global supply chains, rapid prototyping, and the availability of cost-effective, high-powered components like cameras, sensors (e.g., GPS, motion, light) and networking modules (e.g., Bluetooth, Wi-Fi, 5G) have dramatically lowered the barrier to entry for hardware-enabled solutions. Building innovative hardware is no longer as daunting – or as costly – as it once was.
At Volition, we’ve become strong advocates of what we refer to as Hardware-Enabled SaaS models, defined as hardware + software solutions developed from the beginning to work as one, reimagining opportunities in the physical world that software-only startups have traditionally been hesitant to address. Our portfolio includes market leaders such as ButterflyMX, HALO, and HAAS Alert that are reshaping their respective industries and bringing long overdue modernization. Below are a few reasons highlighting why we are bullish on the potential of hardware-enabled SaaS.
Capturing an Untapped Market
Many industries in the physical world have been ripe for disruption but overlooked due to built-in limitations from outdated or inadequate hardware. For software to bring value in the physical world, it needs connected hardware that can 1) capture data, 2) either process it at the edge or transmit it to the cloud, and 3) take physical action (e.g. lock down a facility or deploy a drone).Â
Hardware-enabled SaaS has the potential to bring efficient solutions to an array of problems in the physical world that have not yet been addressed. By cost-effectively designing hardware to solve specific, real-world problems and seamlessly integrating it with software, this model creates value in ways that neither off-the-shelf hardware nor software alone can achieve.
Smart Scaling: Capital Efficiency in Hardware
In our experience, hardware-enabled SaaS businesses can scale efficiently, but doing so requires a strategic approach. A common thread amongst successful, capital efficient businesses is their ability to leverage manufacturing partners with deep expertise, enabling them to quickly design, prototype, and manufacturer hardware tailored to the unique needs of their customer base. By avoiding the pitfalls of building everything in-house, they leverage these partnerships to minimize upfront costs and accelerate timelines while maintaining agility. This approach enables teams to stay focused on solving the customer’s problem and delivering value.
Hand-in-Glove: Software Integration
The true power of Hardware-enabled SaaS lies in how seamlessly the software and hardware work together to unlock value. This is where the greatest product differentiation comes into play as a native hardware + software solution will always be superior to a patchwork of off-the-shelf hardware and third-party software. Products no longer need to compromise on functionality. Dedicated software solutions that fit like a hand in a glove with their hardware address pain points with a precision and efficacy that legacy solutions just can’t match. This native combination enables vendors to deliver a customer experience that is not only more efficient but also more cost-effective and easier to adopt.
Disruptive Pricing and Lowering Total Cost of Ownership
A final area where hardware-enabled SaaS excels is the type of pricing and business model it can facilitate. Specifically, the flexibility to sell hardware and software as a package or via subscription lowers the barrier to entry for many customers. No longer is it necessary to invest heavy dollars implementing, integrating, and maintaining hardware and software from different vendors.
A SaaS-enabled, connected hardware ecosystem from a single dedicated vendor eliminates this burden, mimicking the advantages of an “as-a-Service” model in software. By reducing upfront costs, lowering maintenance needs, and providing a subscription-based model, companies can expedite adoption and unlock a much larger revenue opportunity.
The Next Major Disruption
We view the shift toward hardware-enabled SaaS solutions as analogous to the transition from on-premise software to the cloud. Just as cloud computing revolutionized how companies think about infrastructure and scalability, hardware-enabled SaaS has the potential to reinvent the business model for hardware and open the floodgates for tailored solutions in the physical world.
