Everyone Says Shenzhen Is the Place to Start a Hardware Company. So Why Are Most of the Billion-Dollar Ones American?

Once hardware got "smart," it took on a geeky, fashionable air, and startups making wearables, smartwatches and 3D printers drew intense attention. Yet only 11 hardware startups worldwide are valued above US$1 billion, and Xiaomi is the only Chinese company among them.

• Shenzhen may be called the "capital of hardware entrepreneurship," but most of the world's 11 highest-valued hardware startups are American. Xiaomi is the only Chinese one;
• Smart bands and watches get eager media attention, yet pure "wearables" account for only 3 of the 41 highest-valued smart hardware companies, and their valuations are low;
• Only 11 smart hardware startups are valued above US$1 billion, so there are few "giants";
• But smart hardware startups grow fast, and many are less than 5 years old: 5 of the 11 "giants," and 27 of the 41 highest-valued hardware startups.

These facts come from a smart hardware report that Cyril Ebersweiler published on the American news site TechCrunch, Cultivating Hardware "Unicorns." Ebersweiler is a Frenchman who has spent many years steeped in China. As early as 2001 he built an online sales system for Carrefour; he also ran a call center in Shenzhen and worked on customer relationship management (CRM) products in Japan. In 2009 he founded China Accelerator, the first incubator of its kind in China, and began investing in startups. As interest in smart hardware grew, he founded HAXLR8R (short for "Hardware Accelerator") in 2012, an incubator devoted to hardware startups. It sits in Shenzhen's Huaqiangbei, a district crowded with cheap "shanzhai" knock-offs, and has so far incubated more than 40 startup teams from China and abroad. Beyond the work itself, Ebersweiler likes to distill what he has learned from incubating hardware startups.

Since the end of last year he has been publishing Lean Hardware, a series of articles on TechCrunch about the state of the industry, teaching startup teams how to build prototypes and how to raise money. Cultivating Hardware "Unicorns" is the fifth piece. It sums up and analyzes the smart hardware industry by valuation, product category and other measures, and it contains plenty of insights.

QDaily recently interviewed Ebersweiler. Starting from his report, we talked about what the smart hardware companies in this "US$1 billion club" have in common, and what Chinese hardware entrepreneurs can learn from them.

In the report, Ebersweiler puts hardware startups valued above US$1 billion in a class of their own and calls them "unicorns"; those valued below that are "ponies." He estimates that roughly 6,000 hardware startups have appeared in the past decade, and that 11 of the 41 highest-valued are unicorns. Many are familiar names: the smartphone maker Xiaomi; the action camera GoPro; the mobile payments company Square; Jawbone, which made a range of fitness bands and Bluetooth headsets; the virtual reality headset Oculus Rift; the smart home product Nest; the headphone brand Beats; and others.

These hardware "giants" make very different products. What do they have in common?

"First of all, they all shipped."

Ebersweiler said this without hesitation. Unlike the many startups now raising money on crowdfunding platforms and then missing their delivery dates, these giants at least got their products made. A report cited by CNNMoney found that 84% of the 50 top-funded products on Kickstarter in 2012 did not ship on time.

The founder's fame matters too.

At least 4 of the 11 had famous founders from day one. Square is the creation of Jack Dorsey, co-founder of the social media giant Twitter. Nest's founder, Tony Fadell, is the father of Apple's iPod and was close to Steve Jobs. Xiaomi's founder, Lei Jun, was already well known from his years running Kingsoft. And the rapper Dr. Dre founded Beats by Dr. Dre. With famous names to talk about, these companies naturally attract attention.

They know how to market on social media.

Ebersweiler thinks GoPro is a good example. The camera itself may not be all that full-featured or powerful; what made GoPro was the first-person extreme sports videos on YouTube with millions of views. The videos look heavily edited, but they convinced viewers of one thing: with a GoPro, you can shoot cool sports videos. The same goes for Beats by Dr. Dre headphones, which set out to build an ecosystem for "young people"; the brand took off among young fans of rap. "Products may not sell well because their features and technology are so good. For consumers to tell products apart purely on features, you'd have to be ten times better or ten times faster. Marketing and community-building are two different things, but in the business of selling products they are closely linked."

The report also holds some surprises.

Smart bands and watches get eager media attention, yet pure "wearables" account for only 3 of the 41 highest-valued smart hardware companies, and their valuations are low.

And although Shenzhen is called the "capital of hardware entrepreneurship," most of the world's 11 highest-valued hardware startups are American; Xiaomi is the only Chinese one. For a city known as the "Silicon Valley of smart hardware," that is worth pondering.

"The window for Chinese smart hardware startups will be very short."

Ebersweiler has long been an enthusiastic evangelist of "Shenzhen speed." For years he has urged teams from China and abroad to come to Huaqiangbei to make their products. The district is packed with electronic component markets, and factories ring the city, so a team can move quickly from prototype to industrial design to mass production. A part or a factory that might take a 4-to-5-hour drive to find in the United States can take 10 minutes in Huaqiangbei. Shenzhen, and China as a whole, has a huge manufacturing advantage in smart hardware, yet this boom has not produced a single giant there. What is missing from China's hardware startup scene?

"When I started HAXLR8R 2 or 3 years ago, I urged Chinese startups to act right away, because I had a feeling the window for them would be very short," Ebersweiler said. In his view, the biggest problem for Chinese startups is that China has plenty of large manufacturers but very few people who know how to design a product, market it and sell it. Once foreign companies understand Shenzhen's advantages, break through the language and communication barriers, and do their prototyping and mass production in China, Chinese startups' edge will look much less obvious. "Technically, Chinese startups still have the opportunity, but they must act on it right now."

"China lacks a self-made hardware entrepreneur to look up to."

"What China's hardware startup scene most lacks is a real role model, someone who started from nothing and built his own hardware product. When Xiaomi started, its founder Lei Jun already had a lot of fame and money," Ebersweiler said. He sees this as a broader question of social values.

He gave an example. "It's the same everywhere. Talented people join big companies and get paid well, so they rarely leave. I once talked to an industrial designer at Huawei. He was very talented and showed me a prototype he had built himself, so I asked when he planned to bring it to market. He said, 'It's just for fun.' He was locked into the company; if he quit, his girlfriend and his family might kill him (laughs). So for him, starting a company was a joke. The same applies to Japan, South Korea and other places."

Ebersweiler also thinks one way forward for Chinese hardware startups is to go abroad first and then come home: "One option for Chinese startups is to focus on the American market first and then return to the Chinese market, because competition at home is simply too fierce."

"Crowdfunding, which has won so many companies users and money, doesn't work in China."

In the United States, the crowdfunding platforms Kickstarter and Indiegogo are the main engines behind smart hardware. Since 2012, products such as the Pebble smartwatch and the Oculus Rift virtual reality headset have moved, thanks to crowdfunding, from "geek" gadgets into the mass-market spotlight. Oculus Rift and Nest, the smart thermostat maker, were then bought by tech giants for billions of dollars.

In his report, Ebersweiler remains bullish on crowdfunding and on what crowdfunding sites give startup teams: an early fan community, a base of early users and some revenue. Of the startups HAXLR8R has incubated, 23 teams have put products on foreign crowdfunding sites such as Kickstarter, 5 of them Chinese. But when we raised the subject with him, he cut in the moment we finished the question:

"But it doesn't work in China."

QDaily heard much the same thing not long ago when it interviewed Zhang You, CEO of Demohour. In May this year Demohour, China's largest crowdfunding site, announced it was dropping crowdfunding to become a "pre-sale" platform for smart hardware. Zhang told the media that "crowdfunding is dead" and that he wanted to build the Jumei of Chinese smart hardware. Ebersweiler laughed: "He's right. The trend was clear from the start. In China, crowdfunding needs to find a new business model."

"Wearables may not be as great as they look; practical robots have more of a future."

In the report on hardware unicorns, wearables are a weak category. By valuation, only 3 make the list of the 41 highest-valued startups, and all of them sit near the bottom, whether it is Misfit Shine, which tracks health data, Fitbit, or the Pebble smartwatch.

Ebersweiler believes this is because wearables are too much alike: whether smartwatch or activity tracker, none can easily be "ten times better than the competition." He is not especially fond of wearables himself, and HAXLR8R has put more money into practical robots, such as cleaning robots and automatic painting robots for businesses.

"Whether it's wearables, robots or Internet of Things devices, what I dislike most right now is designing products around a 'solution,' that is, deciding on a product category in advance to solve a problem. What matters more is 'asking the right question,' because the answer may not be limited to one category of product. What excites me most is robots with real artificial intelligence. They may not have a robot's physical 'body.' They may be IoT devices, or products for pets, but they respond to people's needs entirely on their own."