A dependable mid tier company receives many business inquiries daily. Some are speculative, others financially lucrative. Others are phishing scams designed to carjack your entire system. It is a mixed bag – snakes and ladders.
I asked Claude, the tame AI, to play the role of young entrepreneur who needs IoT hardware (and potentially software + development), but can’t afford the table stakes. The chat quickly became a conversation about risk and reward. OPM, other people’s money is the biggest issue. When the person making the proposal has no skin in the game (and you do), things go downhill fast. The prisoner’s dilemma with only one inmate. Most conversations end there.
Genuinely good ideas
Let’s say, an entrepreneur has a genuinely good IoT idea. That idea can be developed into a prototype without too many intellectual, resource or time inputs. Simple units reformatted and rebadged to fit a new sector or project. This happens all the time with E- bikes. The market for light engineering is saturated with Chinese imports. Data management becomes a differentiator, a branding tool and an upsell. It also raises the potential of fleet deals – selling an entire shipping container in one go. So, yes, we would like data tools. But no, margins are already wafer thin and we’ve invested all our spare cash in inventory. So we cannot afford it at the unit-volume we are now selling – chicken and egg roll.
Unit-volume and startup success
The potential of any new product is like popcorn. Some pop, some don’t. If the timing is right and optimum market conditions appear, things can grow fast. This is the definition of the “craze” or viral moment. In this scenario, the mid size company is playing the role of the “angel investor” but with an ulterior motive – the product and the market fit are being proven by someone else. It is not OPM (other people’s money), but OPT (other people’s time, effort, and energy).
There are also the collected resources available to a bigger company that do not devolve to an unfunded startup with no MVP; contacts, referrals, marketing outreach, domain knowledge, events and showcases. All things which cost, but are not available to an early stage entrepreneur with a fresh idea.
Hardware is a means to an end.
While we are a hardware company, the real value proposition to clients and end users is not the hardware, but its ability to move data. Hardware is a means to an end. If the data is valuable, hardware becomes valuable by proxy. If that data can be used to either avoid catastrophic failure or predict incoming beneficial events, then it assumes significantly more value. Prophets and profits are similar words for a reason.
There are plenty of ways around the trust, ownership and intellectual property issues, as long as there exists a will to negotiate. Below are just a few, of many, ideas…
- Payment split at the source. Fees come straight out of the customer’s documented revenue stream.
- Title retention plus remote shutdown. The units stay yours and can be switched off.
- Third-party guarantor. A fund or investor backstops the hardware.
- Convertible note. The hardware price converts to equity at a discount when a funding round closes.
- Warrant for a small stake. It gives upside without taking control.
- Exclusive supply rights. Vendor supplies every unit if the customer scales.
- Replacement reserve. A percentage of revenue funds new units, so vandalism becomes extra sales.
- Small paid pilot with criteria agreed upfront. It comes with a term sheet, so there’s a deal at the end and not a fresh negotiation.
In the e-mobility sector many clients prefer to outsource the development cost (of data tools) and hardware to aftermarket vendors. This position is understandable. Upsell falls to the end user. Extras cost extra. When end users want to resell their bike/e-bike/scooter on the secondary market, the data tracking unit can be removed at minimal cost and at no cost to initial seller. Nothing smells as bad, sells badly, or looks as bulky, as outdated, faded electronics.
Let’s theorize that hardware becomes not the principal cost, but simply the means of leveraging data sets. Returnable to the vendor like a used glass coke bottle. In a lot of app based mobile connectivity use cases the recoverable cost of hardware can be a loss leader (or discounted) on the basis of long-term revenue streams for subscriptions. This creates a more flexible creative relationship between connectivity vendor and e-bike or EV manufacturer. The risk/reward matrix is reset in a different frame. The circular economy model is doing this right now for batteries.
Everybody has good ideas, each and every day. The first 25 people to put money down and invest in Apple probably didn’t think they’d be sitting on a balcony in the Bahamas bored with life in designer Uggs. They might pretend to be geniuses for comic effect, but what they did was to provide the financial resources for somebody else to execute. The other guy Jobs, he did a solid job. It was an efficient division of labor. You reap what you sow, in your 300 USD bathroom slippers.
