January 2013


Very recently, one of our portfolio company CEOs experienced a horrible tragedy; one in which there is no reaction or response that can substantiate what has happened.  This tragedy has hit very close to home personally – and has rocked our organization all the way up to our LPs – Karen Pritzker and Michael Vlock – as we try to see if there is anything as a collective that we can do to support them during this time.

To this person and his family, please know that the entire LaunchCapital team – and entrepreneurial ecosystem is here to support them when they are ready.

To everyone else out there (entrepreneurs, VCs, angels, mom’s, dad’s, brothers, sisters, etc), go home tonight, turn all of your devices off, have dinner with your family and spend a few minutes reconnecting with them.  Talk about something silly.  Laugh about something stupid.  Don’t take yourself too seriously.  These are the moments in life that matter most.

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The physical and digital worlds are colliding. The most exciting recent mobile innovation has been the product of the growing inclusion of the physical world.  Accelerometers, GPS and NFC tags have enabled mobile devices to expand beyond being merely one-way portals to the digital world. From activity trackers to location-based deals, mobile devices have demonstrated the numerous opportunities that arise from the interplay of the physical and digital world. While once the domain of only large corporations, technology has enabled businesses of any scale to participate in the awesome opportunity that is building connected hardware.

Design/Prototyping

Previously CAD software required prohibitively expensive specialty computers and an engineering degree to operate. Now through Google Sketchup and Autodesk, the process of designing a product is significantly easier and accessible. The current open sourced environment of CAD designs, also allows for the leveraging of existing designs. The process of turning digital designs into physical prototype is now seamless as well, through 3D printers and other personal fabrication tools.

Another major hurdle that previously encumbered small hardware producers was the inability to produce and acquire critical hardware tech.

Now that a lot of hardware technology has been commoditized, individuals can acquire prefabricated kits and chipsets cheaply, not to mention custom chips can now be manufactured inexpensively as well.

Production

The go to market strategy has radically changed for hardware startups.  Kickstarter and Etsy have democratized the means of reaching consumers, and Kickstarter in particular has been an excellent channel for market validation and early customer acquisition.

Added to the ease for startups, Foreign manufacturing is becoming increasingly accessible to smaller firms. Small Firms can also pursue domestic contract manufacturing, an opportunity previously not available. 3D printing and other fabricating tools are also laying the foundation for truly scale free manufacturing.

Community

The DIY hardware community, called the Maker subculture, is a major driver of the larger hardware movement.  The increased availability of common platforms, easy-to-use tools, Web-based collaboration, and low cost technology has facilitated participation in the maker movement. Many contend that the current state of maker movement is reminiscent of the early personal computing movement that consisted mainly of hobbyists and tech enthusiasts. Whether one agrees with that comparison or not, the potential hardware innovation that can occur in garages all across the world is an incredibly exciting prospect.

Paul Graham, in his blog post on the Hardware Renaissance, perfectly explains the appeal of hardware from a consumer standpoint: “physical things are great”. Tangible tech is just plain cool. Hardware companies on Kickstarter have surged in popularity, to the point where Kickstarter had to change its policy to require physical prototypes in order to curtail some of the irrational exuberance of consumers.

What’s Next

We have already seen the rise of hardware startups through companies that we have screened, seen on Kickstarter or watched graduate from the most recent Y-Combinator class.  Most of these companies are still in their infancy, so questions of sustainability still remain, but their initial success is a positive indicator.

The underlying question for hardware startups is scalability. Could the next Kickstarter project eventually compete with a major hardware producer? Some on Wall Street seem to think so, as 3D printing startup Form Labs was flooded with calls from Wall Street Analysts asking about the future of the company, during their Kickstarter campaign. Some even contended that drops in 3D Systems (DDD) stock price were attributable to Form Labs Kickstarter campaign. 3D Systems seemed to take notice as well, they recently filed a lawsuit against the fledging startup. As 3D Systems demonstrated, large corporations will staunchly defend their market share, which could be dangerous for future hardware startups.

Another issue facing hardware startups is the ubiquity of the mobile device. The perverseness of the mobile device is leading a lot of new hardware to become focused on its interaction with the mobile device rather than it own platform. While mobile accessories are an exciting field, focusing on mobile as a platform rather than a channel is limiting for future hardware innovation.

Its not all bad news though, startups have the benefit of building hardware for niche markets, or other markets that larger companies would deem too small or too risky.  Apple demonstrated  both with the personal computer and the iPhone, that products can define the scalability of the market rather scalability determining the viability of the product.

Lawsuits aside, it is an exciting time to be a hardware startup.

Are you dreaming about a white picket fence and two-car garage? Want the newest Rolex or gas guzzling Range Rover? While the 1990s and 2000s saw the rise of McMansions, MTV Cribs, and “Bling, Bling”, more recently we’ve seen a shift in consumer patterns from owning things to “experiencing” things. The movement, which we are calling “The Experience Economy”, is being driven by young people who have come of age during one of the worst periods of recession in our history. Frugality and value have begun to supplant overspending and excess in the U.S. Even while student loan debt has exploded, individuals have continued to deleverage themselves. The savings rate, which plummeted from its 12%+ peak in the 70’s to slightly north of 1% just before the recession, now hovers around 4.6%. The demonization of the 1% during the Presidential Election further illustrates this changing social construct. 

Evidence of this trend is widespread. Dramatic population shifts are occurring back to urban centers, as people want to be closer to the action. Young people are more likely to spend their money on travel instead of purchasing durable goods. Individuals are shifting their focus from consuming mass produced products to a more customized experience. It would make sense that Apple, the fastest growing company over the last few years, is obsessed with user experience and the design of their products. Social media has become a major catalyst for the Experience Economy. Not only do we share our experiences with the people around us, but also with our closest 1000 friends!

Rise of the Humblebrag

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Bragging is an innate behavior. According to Harvard psychological studies, researchers estimate that we spend 30-40% of what we say in life to telling others about our own experiences. In what shouldn’t come as a surprise, they found self-disclosure “activates parts of the brain that form the mesolimbic dopamine system, widely associated with our desire and reward mechanisms”. The amplification of social media has given people the megaphone to shout these experiences to a much larger audience. In fact, 91% of people that use photo-sharing sites have posted photos of their vacations.

So how is all of this connected? Where buying luxury brands once conveyed a message of wealth and allowed you to show off to the people that you came in contact with, social media has allowed you to show off your experiences to a much larger audience, in real-time. But shouldn’t that just mean that people would continue to show off their luxury goods to others via social media? Experiences offer a much higher utility for consumers, meaning those experiences are much more memorable and offer more satisfaction than goods purchases.

Luxury Experiences Trump Goods

Speaking of luxury goods, according to the Boston Consulting Group, the Global Luxury Market is a $1.4T industry. The experiential luxury category made up grew to 55% of the total market last year. This segment is not only made up of traditional luxury experiences like exotic African safaris, but also includes experiences like deluxe hospital rooms with specialty chefs or high-rise luxury apartment buildings offering virtual golf-facilities.  Experiential luxury is actually growing 50% faster than the luxury goods segment.  According to a study by Unity Marketing, consumers were three times more satisfied with purchasing luxury experiences than goods. The report chalks this up to a number of factors including an aging, affluent population that have reached an age where experiences are much more valuable than goods, a younger generation who define themselves by what they’ve done and not what they have, backlash from the recession, and consumers seeking a greater sense of purpose and satisfaction.

Flight to Cities

Another phenomenon is the flight to cities and urban areas back from the suburbs. In the nine months between July 1st, 2011 and April 1st, 2012, 27 of the nation’s 51 largest metropolitan areas exceeded their suburbs in population growth, according to census data. This is the first time this has happened since the 1920s! Many factors have contributed to this shift, which is largely perpetuated by young adults. Sustained high unemployment the continued search for jobs has certainly attributed to the flock to cities and an affinity for renting apartments over buying homes, but there are a number of other factors including the downtown revitalization efforts, reduced crime rates, reliable public transportation, and the growth of cultural amenities. Young adults are also delaying marriage and having children later, another impetus for a flight to the suburbs. Work locations also shifting back to more urban areas away from corporate campuses, drawing adults back to cities.

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The revitalization on former industrial areas has also attributed to this shift. The Wall Street Journal notes:

“… A decades-long migration of factories to the suburbs and rural America has rid cities of the heavy industry that used to make them smoky, loud, and smelly. Take New York: In the 1940s, freight traffic ran on an elevated rail line on the city’s west side. Today, that line is now the High Line, an elevated public park.”

Participating in the Story: Mass Customization and Crowdfunding

Two major consumption shifts are fueled by the experience economy: Mass Customization and Crowdfunding. Mass customization gives people more tailored options. Consumers are demanding products that fit their own needs and are willing to pay more for a customized experience. Starbucks is probably the best example of this, turning the standard $1 coffee into $4-5 personalized coffee drinks. Other companies like Nike and Coca-Cola are investing millions in mass customization. Nike ID allows customers to customize their shoe choices (and is now a ~$100m portion of their business) and Coca-Cola has invested over $100m in their new Freestyle vending machines that offer literally thousands of potential soda combinations of their beverage portfolio. Startups like Cafepress and Zazzle have jumped on the opportunity to offer customized products for their customers.

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Crowdfunding is also a phenomenon related to the experience economy. People are willing to fund projects with no guarantee that it will ever get manufactured! It’s the ability to participate in the story of the product and the experience of bringing a cool consumer product to life. According to Kickstarter, over $336m has been pledged to over 33k projects in 2012.

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The Asset-Light Generation

In her most recent Internet trends presentation, Mary Meeker identifies the Asset-Light generation as digitalization and technology’s affect on all the “stuff” that people own. Think about how much space all the VHS tapes, video games, CDs, DVDs, filing cabinets, and books took up in your house. All of these things have been digitalized, allowing people to live in smaller apartments/houses in urban areas. Why own an “asset-heavy” vehicle that sits 90% of the time in a garage when car-sharing sites like Zipcar allow “on-demand” options? Why own expensive textbooks when book rental sites like Chegg offer cheaper options to rent? New startups and enabling technology has allowed people to downsize their assets to save space, money, and inefficiency.

Conclusion

Many different trends have affected consumer patterns. From the impact of social media shifting our focus to “brag” about experiences to technology enabling the downsizing of our lives, consumers are much more focused experience than physical goods. The Experience Economy will affect how companies target and market consumers, manufacturing goods, and raise money for new projects. No longer does one size fits all. Consumers are their own individual market. Consumers are demanding unique and personalized items that may challenge traditional supply chains. Both major companies and startups will have to tailor their experience individual users. Because good or bad, you know they will be Tweeting about it!

Launch Capital portfolio companies benefitting from the “Experience Economy”:

  • Zozi – Literally a marketplace for experiences!
  • Fashion Playtes – Lets young girls customize their clothing.
  • Custom MadeMarketplace for local furniture artisans for those who are sick of IKEA
  • Daily Grommet – New product discovery, “experience” eCommerce.
  • QuincyTailored fit for women’s business attire with an online shopping experience.