Hard Tech startups have a very unique place in the startup world.

They are know to be notoriously difficult to cold start, and hard to scale.

The biggest challenge for a hard tech company is often lack of capital. Capital is crucial for protyping and manufacturing as well as lab work or R&D, in addition to the salary costs that are involve with every company.

Thus, hardware companies need to be shrewd about their business models, employing models that can generate a recurring form of revenue over a longer duration, either through accesories or recurring sales. This is especially important for hard tech startups to show the ability to scale and thus attract venture capital.

We'll explore some of these business models in this article.

Device and Accessories: Direct Product Sales

At the heart of this model lies the straightforward act of selling the physical device, generating immediate revenue. Think Peloton's exercise bikes, Tesla's electric cars, or the simplicity of everyday kitchen gadgets.

The success of this approach hinges on a delicate balance of product quality, compelling features, and competitive pricing.

Commonly, a gross margin of at least 60% is expected for this model to work sustainably. This allows the company to reinvest in R&D as well as cover operating costs and salaries.

Accessories in this case can be a second revenue stream that can be recurring if the accessories are consumable.

Example: Nest, the smart thermostat, not only disrupted the market with its sleek design but also achieved profitability solely through the sale of its initial product. Thei value proposition was to reduce the end user's energy bill significantly.

Lock-In: The Razor Blade Model

This model entices customers with an affordable device, subsequently reaping profits from recurring consumable purchases. From ink cartridges for printers to blades for razors, the lock-in model creates a continuous revenue stream.

The first sale- the razor blade or printer can often be sold at a loss (commonly called "loss leader") and the subsequent sales, like blades or cartridges can have significant margins, sometimes over 100%.

Example: Nespresso's proprietary, single-use coffee pods are a prime illustration, creating an enduring revenue source for the company. The machine can be sold at a cost or even a loss, but the margins on the pods are immense, and contribute the most to the customers's Lifetime Value (LTV).

Ecosystem Model: Interconnected Devices

The ecosystem model, masterfully executed by Apple, seamlessly integrates devices and software. Each device enhances the functionality of others, fostering customer loyalty and encouraging repeated purchases.

Example: Apple is really the best example of this. Each of their products works with products outside their ecosystem to an extent, but provides unique functionality to the products in their own ecosystem.

Device Plus Digital Content or Subscriptions: Beyond Hardware

This model marries hardware with exclusive digital content or recurring subscriptions. Often the hardware is sold at break even or a loss, similar to the razor blade model, whereas the customer lifetime value (LTV) is recovered through subscription services.

This is similar to the razor blade model, except the secondary sales are subscriptions or software.

Example: Gaming consoles like PlayStation entice users with exclusive titles and online multiplayer access, ensuring revenue extends beyond the initial hardware purchase. Sony makes a cut off every game sale on their store. Oculus and its ecosystem uses the same model for the Quest Series headsets.

Selling Data: Monetizing the Bits and Bytes

Devices like fitness trackers and smartwatches amass vast amounts of user data. While ethical considerations are paramount, anonymized data insights can be sold to research firms or leveraged for targeted advertising, creating a valuable revenue stream.

Example: Strava, a popular fitness app, aggregates user data to analyze cycling trends and offers premium features based on these insights, attracting both individual users and corporate partners.

Health apps can often find both government and industry partners who need data insights.

Open Source Hardware

Embracing transparency, the open-source hardware model releases designs freely, fostering collaboration and innovation. Revenue can be generated through sales of pre-built kits, official add-ons, or by providing technical support and services.

This is probably the hardest model to execute and scale for profit!

Example: Arduino, a leading single-board microcontroller platform, fuels innovation through open-source hardware, monetizing through component sales and educational workshops.

Hardware as a Service and Leasing

This model shifts focus from ownership to leasing or renting devices, creating predictable revenue streams and fostering ongoing customer relationships. From medical equipment to industrial robots, the hardware-as-a-service model offers flexibility and reduced upfront costs.

Example: GE Aviation's offering of jet engines as a service revolutionizes the aviation industry, charging airlines based on operating hours rather than a hefty upfront purchase, providing both financial flexibility and a continuous income stream.