Renee DiResta invests in connected hardware.
She's a venture capitalist with O’Reilly AlphaTech Ventures, which has helped fund companies including LittleBits and Misfit Wearables. She is also organizing a conference called "Solid" which is all about the future of manufacturing, with a focus on the industrial Internet of things. During a recent event at Smart Design, we asked DiResta to talk about what it takes to "win" in the connected device space. Here's what she said.
"One of the things I see frequently is Arduino-style projects that grow organically out of the maker ethos being pushed into the mainstream market before a lot of thought has gone into what the market segmentation’s going to look like, what the user is really going to need, and to what extent you can make the product intuitive out of the box," says DiResta. "I myself have received Kickstarter projects where I’ve taken it out, plugged it in and said ‘I can’t make this connect to the Internet. I have a computer science degree, and I have no idea what I’m doing wrong.’" Keep in mind that companies like Apple have set the bar incredibly high. Consumers are now accustomed to taking a gadget out of its box, pushing one button, and having everything just work.
"I was asked to do some advising at two of the hardware accelerators around here. One of the things we see very commonly is people will believe that they have an idea and then the Kickstarter will take off and they’ll find themselves unable to handle fulfillment or come up with an accurate timeline," says DiResta. "A lot of the mistakes I see as a seed stage investor are the mistakes of just naivety. Not making a thing that can be made. Here’s this beautiful design, but where the rubber meets the road it’s simply not possible to have a bill of materials come in at a price you need to see."
The easiest way to overcome that problem: Find a mentor, and invest the time in doing real research on the manufacturing process. "I came from quant finance and from software before that," she says. "I found that literally just emailing people saying ‘Hey, I saw you were a buyer at Walmart in the home electronic department. Would you sit down with me and walk me through what it actually takes to wind up on your shelves?’ Not this theoretical, ‘Oh, we’ll have this massively successful Kickstarter raise, then they’ll reach out to me.’ Oftentimes it’s quite the opposite," she says. "Just emailing people and saying ‘Hey, I’d like to buy you coffee and sit down for an hour and tell me about what it is you do.’"
"At the seed stage, one of the things we specify is that we like to see several different types of prototypes," says DiResta. "That you have your model side of it: This is what it’s going to look like, this is an approximation of what we envision shipping to the end audience. Versus what often comes in, which is the Arduino hooked up to the laptop. So we can kind of see the functionality and maybe see how it interacts with the software on one side of it, and also on the flipside see that you at least have a sense of what the design is going to look like. If there’s no designer on the team, which is quite common, we want to see that they have a relationship in place with an industrial designer who is helping them and that it’s an industrial designer who’s produced a product that’s come to market before and has an understanding of where their costs have to be."
"Misfit Wearables is one of our portfolio companies. They did the Shine. They actually raised money prior to launching on Indiegogo. The Indiegogo launch was partially for marketing purposes. Indiegogo was selected in part because they offer flexible perks. And the really interesting thing about flexible perks is that you can adjust your customer offerings in real time," says DiResta. "So you can put out like ‘Hey, we’re going to offer 50 black Shines and see how quickly those turn over. Or people started writing in to them and saying ‘Hey, I’d really like my Shine to connect as a necklace.’ What Misfit was able to do is say we’re going to use this as a channel to reach our early adopter customers and really get a sense of what they want. They had already designed it. It was already made. There was already the core design of the Shine which was made in Korea, Vietnam, and the U.S.—it was a fairly complex process that went into manufacturing that device—they were able to take that and then say, ‘What do we need for our go to market strategy?’" Misfit was able to do that in part because they had already raised funding.
"I see some interesting things come in with financials. Everyone will tell you seed stage VCs discount financial models, that we don’t pay attention to them. In software that is more true than it is in hardware. In hardware there’s nothing that terrifies me more than seeing ‘Oh, we’re raising $3 million of which $1.5 million is for hiring these four people and $1.5 million is how we’re going to get it made,’" says DiResta. "We do look to see: Have you secured a contract manufacturer? Are you making it here in Asia or Mexico? What does your bill of materials look like? What’s the margin you’re building in? Are you going to retail or direct to consumer? What’s your distribution channel? Have you given a substantial amount of thought to the business side? How are you taking this to market? What’s your market segmentation? Where’s your demand? Does your price tie into that demand? We do want to see evidence of a business plan and the fundraising ask tied to a plausible plan for execution."
One area that startups constantly get wrong is marketing and branding, says DiResta. "I think this comes partly out of the maker ethos, maybe the software startup ethos which is ‘if you build it they will come’—and that’s not really the case. Unless you have phenomenal SEO and this is the first one of its kind to ever be made…typing ‘baby monitor’ in is not going to pull up your brand new widget baby monitor, it’s going to pull up something made by Belkin. If you’re selling a thing to somebody, it’s understanding that your fundraising ask should be tied to a marketing strategy and understanding what that’s going to cost as well."
The connected device space is full of potential, but it's often at odds with entrenched consumer behaviors. That's got to change. "One of the things that we tend to see is that humans are still very much the routers of the Internet of things," says DiResta. "Like your Nest tells you that something is wrong, but it doesn’t necessarily automatically address the problem by itself by talking to another control system. So one of the things we’re interested in seeing is that point at which instead of it alerting you to the problem, it fixes the thing and then sends you a push notification ‘Hey, I changed your temperature’ or ‘Hey, I talked to your vent.’"
"I think Lowes is trying to go this route with their Iris system. I think Smart Things is doing some really interesting stuff," says DiResta. "We’ve also been watching it as what’s coming from the top down—the big company approach versus what comes up out of startups. Some of the things Kevin Lee from Samsung spoke to about lack of standards, lack of interoperability is a concern. So it’s an area that we’re watching and saying ‘what is going to continue to develop here?’"
"In software it's the idea of a minimum viable product. We encourage companies to articulate: What is your differentiating feature? What makes someone switch away from another product and use you?" says DiResta. "We see it the same way in hardware which is: Why would I use a Nest when I have a functional thermostat—what is the one killer feature that’s going to offer me?" It’s better to roll out a version 1.0 that’s simple and let the product evolve over time. "You don’t have to have every feature," she says. "It’s like, your cell phone used to be an actual phone. I don’t remember the last time I used it to make phone calls."
So how do you know when your connected device is ready for market, or at least an investor pitch? "It’s done when you’ve identified that one killer differentiator that someone is willing to pay money for that solves a meaningful problem that’s big enough to make them switch away from their old method of behavior—whether that’s flipping a light switch or adjusting the thermostat with a dial," says DiResta. "And then rolling out that product, building it so that it’s modular enough that you can release some additional features through software rather than requiring a new hardware component is a fantastic way to build some modularity into that and save yourself the cost of having to produce a new run each time."