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Can generative AI jump-start hardware VC investment?

Investing in hardware has always been hard.

Generative AI is coming for your gadgets.

OpenAI CEO Sam Altman has reportedly partnered up with former Apple design chief Jony Ive and SoftBank CEO Masayoshi Son on a hardware venture; Samsung is marketing its latest smartphone as an “AI phone"; and at this year’s CES, AI was woven into everything from televisions to vacuum bots.

Once at the beating heart of the tech world, consumer hardware has languished in recent years among VCs that balk at the high costs and risks of developing new gizmos. But a new era of generative AI hardware startups could shift that mindset.

Take Rabbit, which makes a camera-enabled device that runs a proprietary large language model that acts as an AI assistant. The company has sold out of four pre-order batches for the R1, which will be available at the end of March. The startup has raised $30 million from backers including Khosla Ventures.

Humane, another AI hardware startup started by former Apple engineers, raised a $100 million Series C in March backed by investors including Microsoft, Sam Altman and Kindred Ventures. Their AI pin, a screenless clip that leverages OpenAI’s large language model to provide holographic projection and voice search, starts shipping in March as well.

Tab, a newer startup, raised a $1.9 million seed round from Caffeinated Capital and Perplexity co-founder Aravind Srinivas, among others, in January. The company’s AI pendant captures daily conversations and analyzes them using ChatGPT to provide insights.

Beyond the travails of bringing new tech to market, these companies face another hurdle: convincing VCs that hardware can be lucrative.

“I don’t think people really take a moment to think about what’s actually hard about hardware,” said Julian Eison, managing partner at Next Ventures, whose firm has backed Humane. Eison and his firm have also backed Oura, which makes a wearable health device.

Eison thinks hardware investment is worth the risk, given declining barriers to entry and attractive opportunities for innovators.

“There are deep moats and new areas of compute that become very defensible,” Eison said, but admitted this view is “not a consensus bet.”

Hardware is hard

Developing hardware can be a capital-intensive endeavor, and startups are at the whim of shifting consumer sentiment.

“When you’re investing in hardware, you’re adding in even more dimensions of risk: supply chain risk, inventory risk, it goes on,” said Max Gazor, general partner at CRV.

Gazor pointed to his firm’s last hardware investment—smartwatch startup Pebble, which became one of the most funded projects on the crowdfunding platform Kickstarter—as a reason for why CRV doesn’t invest in hardware anymore. The startup folded in 2016 after failing to hit sales targets and struggled to compete with the Apple Watch.

“It’s not like people can’t succeed,” Gazor said. “It’s just that it’s very difficult because everything needs to line up.” Gazor also pointed out that hardware has slim margins and can be difficult to grow. “We’ve seen it with any number of companies that go through initial euphoria of ‘Wow, cashflow looks great.’ But then how many Pelotons do you need, or how many GoPros do you need?”

These devices can also be cost-prohibitive for the majority of consumers. Humane’s pin costs $699 and requires a $24 per month subscription, while Tab’s pre-orders sell for $600. Humane laid off 4% of their workforce in January, citing cost-cutting measures, The Verge reported.

Part of the challenge of hardware investing is that it’s hard to quickly iterate on hardware. Dmitry Alimov, founding partner at Frontier Ventures, says that unlike SaaS startups where products can be fixed and tweaked instantaneously, hardware can take months or years to fix.

“You have a situation where you invest a lot of money—millions if not tens of millions of dollars—before you know if the product actually works,” Alimov said.

But all these challenges aren’t deterring Humane investor Eison from investing in other hardware startups. Eison said he embraces the difficulties and encourages others to do the same:

“As an investor, I run toward this type of risk.”

Featured Image by Joey Schaffer/PitchBook News

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