Below is the ‘Tip of the Week’ from Ep80: Hardware Investing, Part 2 (Avidan Ross)
When we think of Trojan Horses, images of Greeks sneaking into Troy and destroying the city come to mind. What was a gift to be celebrated turned into a terrible, bloody nightmare.
Today we talked about the concept of a Trojan Horse, but in a different light. No longer was it a vehicle of destruction, but rather one of value. Avidan cited multiple examples of startups that are using hardware as a Trojan horse. Where startups are delivering initial value with a compelling reason to purchase, but with a deeper, hidden value, that increases the more one uses the product. This is reminiscent of software based businesses that we’ve discussed. Things like Netflix that we reviewed w/ Leo Polovets. Delivering immediate value in the form of on-demand video and increasingly more long-term value in the form of improving ratings algorithms allowing users to more easily identify content that they will enjoy.
However, the major difference today is that we’re talking about hardware; inherently more sticky, more firmly embedded into user workflows and w/ a higher degree of customer willingness-to-pay along multiple, parallel revenue streams. Products that create brand evangelism and tremendous brand affinity; intangible assets that drive much more value over time. While revenue and margin are the immediate value providers to a business, the ultimate P&L Trojan horse is brand value.
When I did M&A for Danaher, we would target companies that had created enormous brand value with hardware products. B2B companies with passionate customer enthusiasts that proudly recommended their products. These customers were firmly against switching to other brands. Cost could be driven out of existing products, sometimes with quality implications… and customers would stay. Price could be increased aggressively, multiple times a year… and customers would stay. Brand loyalty caused customer retention far beyond when customers would have abandoned other companies.
In this interview, Avidan talked about increasing sources of value. He talked about the significant brand value that can be created with physical products. He articulated the changing economics of hardware and why it makes much more sense than it did a decade ago. So, the next time that hardware startup sends you their deck, look for the delightful Trojan horse, not the destructive one.