O’Reilly AlphaTech Ventures is a seed stage investment firm. The firm funds disruptors, innovators, and hackers of the status quo. Renee DiResta is a Principal at OATV and comes from a Wall Street background. We sat down with Renee to talk about the emerging hardware funding market, her upcoming book with Nick Pinkston and the mistakes hardware entrepreneurs make when pitching her.
I left Wall Street two and a half years ago to work as a venture capitalist at O’Reilly AlphaTech Ventures (OATV). I was interested in hardware right from the beginning. Not a lot of people were investing in hardware at the time, but the thing I really liked about it was that there were numbers underlying the production of a device. There was a cost of goods underlying a physical product, and people paid money for that physical product. I felt like it was a really interesting space, and an ecosystem that was largely neglected by the broader VC industry.
I started spending a lot of time looking at consumer products. I met Nick Pinkston within a month of being out in the valley, and he and I spent a lot of time talking about the nascent hardware community and what we could do to help that grow. We started a series of events. Nick started the hardware meetups, then we ran Hardware Unconference, and about six months after that we ran the Hardware Summer Camp.
These things were designed to bring people together and to foster a sense of a hardware founder community. Hardware founders have different needs and different challenges than the software founders — on the machining, tooling, prototyping and technology side, as well as the business side.
Nick and I started seeing a lot of the same questions being asked by different people, and thought this indicated that there was a lack of resources out there. The software community has Lean Startup, accelerator programs like Y combinator and a whole series of support structures that had been put in place to help software founders launch their company. Even with all of that, there wasn’t much out there in the hardware community.
Over the last two and a half years, the ecosystem and the support structures have fundamentally changed in hardware. Bigger companies are paying attention and people are starting accelerators that really address the needs of hardware founders. A lot of these support structures are a result of the community. Active community members are putting together great events for each other and sharing their expertise. This is also why Nick and I decided to work on a book.
There have been a number of high profile acquisitions in the spaces of robotics, internet of things, consumer devices, and gaming devices. When I started working on my Hardware, by the Numbers trend post last year, there hadn’t been many exits, but now we’ve seen several – robotics companies, Oculus Rift, Nest. It’s going to be interesting to see how those acquisitions continue to influence the fundraising market. It is actually possible for a VC to back a hardware company and get an exit.
The Internet of Things and Industrial Internet is becoming incredibly active. There’s a lot of startup activity on the consumer side, and I’m looking forward to seeing more activity on the enterprise side as well. I believe that there are a lot of enterprise applications that are only now starting to get off the ground.
Those conversations have completely changed. It’s common for VCs to sit down over coffee and share what they’re looking at. A couple years back, I would be excited about a hardware company and a common response would be, “we don’t invest in hardware.”
It’s very rare to hear that now. Instead, it’s more of a conversation about what subset of hardware fits a firm’s investment thesis— like health care devices or consumer products. It’s great to be able to share information with each other and once a number of investors have hardware startups in their profile, you can talk about what’s working for them and what isn’t working.
The number one thing that’s different with pitching hardware compared to software is understanding how you’re going to get it made. OATV is fairly early stage, and one of the common mistakes we see is a lack of understanding of what it’s actually going to cost to build something. A lot of teams will come in saying they can do it for $500,000, just do a Kickstarter campaign and be off to the races. It’s highly unlikely that they’re going to be able to fund a real company with a relatively small amount of money, not much reserved for salary, etc. There’s a difference between funding a product and building a company.
There is often a naiveté about the financials underlying the business side, particularly around sales, branding and marketing. There’s a sense that you’re going to prototype something, then put it up on Kickstarter, and then after that it’s going to sell itself. I’ve gone through many company financials and seen $500 a month as a marketing budget. That’s not going to go very far.
The third thing is a lack of understanding of how retail works, and just how much time and money goes into actually selling a product in Best Buy or the Apple Store. Some people don’t understand that if that’s your end goal, then you have to be budgeting—both in terms of time and margin—from day one for that.
“There’s a difference between funding a product and building a company.”
I personally wanted to see the factories for a couple of reasons. The first is that I periodically hack on a project myself and I’m always interested in where people get their parts and components. I always wanted to see Huaqiangbei to experience the scale of it. I wanted to feel the energy of Shenzhen and see what it’s like being in a place where cranes dot the landscape and things are constantly changing, and you have this phenomenal industry that we just don’t see here.
Secondly, I wanted to see the actual manufacturing beyond reading about it in a textbook or hearing about it secondhand. I wanted to actually see how an assembly line was set up, and how fulfillment and distribution happens. I’m really interested in logistics, so I wanted to see how pallets made it out the door. It was a really valuable experience in terms of gaining a better understanding of the guts of manufacturing.
I was really impressed at the broad base of skills of many of the engineers, particularly in some of the prototyping shops. I think I had a stereotype of factory work as everyone doing one small repetitive function on an assembly line. At the factories I visited there was also a lot of emphasis on worker happiness, which is unfortunately not the story you typically see in the press.
Also, in a lot of the prototyping shops there were many women engineers, which is not something that I was expecting. My own experience in computer science was that a vast majority of my fellow students were men. I was really impressed by the degree of diversity.
Working at O’Reilly has made me take two of our mantras to heart. The first is Tim’s phrase, “Work on stuff that matters” and the second is, “Spreading the knowledge of innovators.”
Those two things really come together in Solid conference. It’s an important space that has seen a phenomenal amount of innovation over the last couple of years. The maker movement underlies quite a great deal of this. I think that the companies that are starting today stand on the shoulders of the makers. You can look as far back as the Whole Earth Catalog in the 1960s and get a sense of this movement that has snowballed over time as it has gone from an early-adopter niche community, and now we’re seeing it cross the chasm and become much more mainstream.
You see General Electric, Intel and a number of major corporations—as well as startups—starting to think about what the connected future looks like and how they’re going to shape it. Solid provides a platform for people who have been doing really interesting work to share it with each other and to get it out there and have it made public. It’s bringing all of these people and this ecosystem together in one place to share their knowledge with each other and with a broader audience.
“I’ve gone through many company financials and seen $500 a month as a marketing budget. That’s not going to go very far.”
What we’re building is basically a roadmap. If you were interested in starting a hardware company, how would you go about doing that? When I first started looking into the startup ecosystem, I read canonical books that the software community had, like Lean Startup and Do More Faster. They are basically road maps for founders. There’s a lot of blog posts out there, but they are scattered and finding them requires following the right people.
We asked ourselves: if you were going to take a product to market, what would be the best practices around that? It starts with how to refine an idea, and gather and grow an early adopter community. It covers how to leverage that community for product development feedback and how to be as lean and iterative as you possibly can when you’re dealing with a physical device.
Nick is writing the technical side and I’m writing the business side. The business side that I’m writing talks about things like common hardware business models, how to price your product and even the types of certifications that your product will need. We’ve tried to write it as both prescriptive advice as well as case studies. Basically it’s about highlighting a pitfall and sharing the experience of an entrepreneur who’s faced that same thing…providing both actionable insights and words of wisdom from those who have gone before.
We structured the book by reaching out to people who we thought had done really impressive things in a given space. There were some companies that really stood out for me. I was phenomenally impressed by the way that Nest built a brand — they became a household name so quickly. I also liked OpenROV, and the way that David Lang had built this incredibly active community. We looked at Sonny Vu of Misfit Wearables, which is a portfolio company of OATV’s. He ran the most incredibly well orchestrated crowd funding campaign. He did it on Indiegogo and he timed everything down to the day. There was a beautiful timeline that he sent us around what updates were going to go out on each day. I was constantly impressed by the founders who generously agreed to share.
What is your greatest fear?
That I won't accomplish as much as I'd like to.
When and where were you happiest?
On my wedding day, in Manhattan. I'm always happiest in NYC.
What’s your current state of mind?
Excitedly harried! I'm really excited about what I'm working on and about my new baby, but I wish there were more hours in a day.
What is your greatest extravagance?
Travel - trips to faraway outdoorsy wonders.
Which words or phrases do you most overuse?
"Upside" (or more often, "no upside"). It's a holdover from my days in finance.
Which talent would you most like to have?
The ability to remember names easily.
What’s your favourite quote?
"Buy the ticket, take the ride" - Hunter S. Thompson
What book are you reading right now?
Shipping and Logistics Management by Yuen Ha Lun. It's a textbook, which will sound somewhat lame, but I'm really interested in container shipping.
What do you consider the most over-rated virtue?
What is your most treasured possession?
My wedding ring.
When I left finance and decided I was interested in getting into tech, I had no Twitter account or personal brand, because we weren’t allowed to on Wall Street. I started reading all these VC blogs and realizing how active both investors and founders were about putting themselves out there and realized I was going to have to start doing that.
I’m not good at keeping my blog updated, but I think you should try to write as much as you can to build your brand. People should also stay active on Twitter, have conversations with people and just put themselves out there. It’s scary at first, but it really pays dividends.
For myself, I wanted to put out content that was analytical and informative, and helped people understand a space or understand an industry. Most of the things that excite me and that I like to write about are very data driven.
Brand building for a personal brand is about understanding what your strengths are, what you bring to the table, and then putting yourself out there publicly by working to engage with the community that you care about and want to be known in.
What question would you pose to our next interviewee?
What are the best ways for hardware companies to make themselves visible?