With a combined market valuation of USD 65 billion, hardware upstarts are among the most promising extensively funded businesses globally.
Venture capitalist Aileen Lee coined the term “unicorn” six years ago, describing the United States-based software companies that started after 2003 and, sometime after that, were valued at over USD 1 billion by private market investors. Back in 2013, only 39 firms were qualified to join the so-called 'Unicorn Club' (UC).
Things have changed since then. The concept has become broader as 1) other countries have been breeding successful upstarts as well; 2) non-software private tech companies have also been growing, getting funded fast; 3) the 'date of founding' criteria has become somewhat flexible as some firms are prone to 'hibernate.' These shifts along with the economic development and a boom in the field of private equity opened the door to newcomers, which joyfully entered the UC.
Machine intelligence platform CBInsights keeps an eye on the majority of UC members and, as of August 14, 2019, 391 enterprises from all around the world were on the list. EqualOcean prepared a series of articles covering key economic sectors comprising the largest number of such enterprises. This narrative is about hardware developers.
EqualOcean distinguishes five subindustries in the hardware sector: semiconductors, robotics (industrial engineering and smart manufacturing), consumer electronics, data centers (IT hardware & real estate) and the Internet of Things.
Fifteen companies representing five countries (China, the US, Israel, the United Kingdom, and the Netherlands) make up the herd. Meanwhile, there are 53 Internet software & service companies, 48 retailers, 46 fintech giants, 31 AI-related businesses and some other big categories in the UC globally. Hardware firms are rare therein. Besides, a considerable note is that all the above-mentioned groups comprise firms that may also be classified as hardware companies. Moreover, the vast majority of so-called “tech companies” can’t exist without proper hardware infrastructure.
The consumer electronics category comprises six unicorns with a combined market valuation of USD 26.39 billion. Among them, three “middle-aged” Chinese companies (Meizu, Coocaa, and DJI) -- those yesterday leaders that now have to prove their resilience in the ever-changing Asian market. The US-based augmented reality company Magic Leap has recently been facing a wave of hype but is yet to develop its pivotal capabilities and thereby to solve the market positioning problem.
CBInsights tracks only one semiconductor unicorn. However, there are way more outstanding chipmakers existing out there. For one, Crunchbase has collected data on 10 pre-IPO chipmakers that have raised more than USD 250 million each to date. Only in China, there is a massive state-backed campaign for the semiconductor industry development that also has some interim results: four more-than-unicorn-sized companies went public on the Shanghai sci-tech board last month. One more firm joined them two weeks later.
The same story can be told about the budding IoT (Internet of Things) segment. Andreessen Horowitz-backed one-year-old Samsara Networks is definitely not the only highly valuated company building its business around connecting smart devices in intelligent ways. It looks promising though: the company was just founded in 2018 and reached the current heights in a bit more than one year.
A dispersed group of the four robotics companies includes manufacturing behemoth UBTech, industrial automation three-year-old company Geek+ (both from China) and American 3D printing enterprises Carbon and Desktop Metal. These four firms together constitute almost USD 10 billion of known venture capital funding.
'Data centers' is the most diverse category here. It contains British industry heavyweight Global Switch (that, by the way, was founded in 1998) and another European company -- blockchain advocate Bitfury. Surprisingly, the third player in the clique is also not from either China of the US: Infinidat, an IT unicorn, is headquartered in Tel Aviv.
A whole gamut of tech business models could be found in the 'hardware blessing' of today’s UC. More importantly, they differ not only by the nature of money-making mechanisms, strategy, culture and other qualitative aspects but also by some important performance indicators.
How long?
For startups time is everything. They usually either grow fast, driving development in the local ecosystems or die at the first stages of their respective lifespans. Unicorn status is a sort of acid test for the core business model. It is also a peculiar psychological threshold indicating that a firm has shown serious ambitions and obtained high market recognition to date.
EqualOcean parcels out two groups of companies within the hardware sector – industry veterans and game-changing rookies.
Industry veterans – experienced companies that entered the UC after a long period since establishment. They possess a well-built business, maintaining a significant market share. Some of them have already blazed their paths to the public markets, others – remain operating as a private company. Exposure to the new external challenges that industry veterans haven’t encountered before is among key risk factors.
Global Switch, an obvious outlier in the sample we have analyzed, is an 11-billion-dollar company that started selling its stakes a long time ago. It is currently preparing for an IPO in Hong Kong. The rest of the 'veterans' are the abovementioned 'middle-aged' Chinese corporations producing consumer electronics (Meizu, Coocaa, and DJI).
Game-changing rookies – relatively new firms that have hopped in the UC quite fast, closing numerous venture capital financing deals. The remaining eleven names fit into this category. One of the common features of these companies is their up-to-date business profile. Here we can meet all the robotics unicorns accelerating IIoT (Industrial Internet of Things) ecosystem creation on either side of the Pacific Ocean.
Beijing-based chipmaker Bitmain Technologies carried out Series B round of funding in 2018, after five years of development, – pretty unusual speed for ultra-intensive China’s market. The round was huge though: USD 422 million raised from Crimson Ventures, a firm focused on e-Business infrastructure and communications industries.
How much?
Funding is a matter of great importance and often the first thing to explain bloated market valuations. Let’s take a glance at how the leading private hardware companies’ financial landscape looks like.
The total market valuation of the 15 exceeds USD 65 billion when the amount of known investment is less than USD 15 billion. Thus, the hardware sector could be characterized by a valuation-to-funding (VF) ratio of at least 4.5. In fact, it is less than this number as a handful of companies raised an undisclosed amount of money through several funding rounds. According to EqualOcean’s estimation, the real ratio falls into the range between 3.2 and 3.8.
Augmented reality wearables producer Magic Leap has the second lowest (after Global Switch) VF ratio in the batch – 2.43. Receiving USD 2.6 billion in seven rounds of financing; the Florida-based firm is among the leaders by the number of investment events. Geek+, which develops robots for warehouses and factories, has a slightly higher VF ratio – 2.57. Mobile devices manufacturer Royole Corporation is trailing with a figure of 2.73.
Bitmain and Samsara Networks are forging ahead with VF ratios of 15.69 and 15.65 respectively. World-famous drone-maker DJI, being valuated at over 95 times funding, leads the list. This is the only sky-high number in the cohort. Although most of the subindustry verticals in the sector are knowledge-intensive, capital makes the lion’s share of input.
A bright future?
The recent several years might be called the era of software as a lot of 'new retail,' fintech, Software-as-a-Service (SaaS) and other enterprises have quickly scaled up, increasing their global influence. These players used to have a spacious room to develop their businesses as technology improvement spurred the markets. Since then, the markets have gotten saturated, and the game had changed. Connectivity trends, cloud computing, 5G, IIoT and other concepts are shaping the imminent era of hardware.
According to Crunchbase, there are 65 quasi-unicorns – companies that have raised over USD 100 million – worldwide, as of August 15, 2019. EqualOcean expects the 'Hardware Blessing' of the Global Unicorn Club to expand drastically over the next decade due to a handful of reasons, including: