 You know, when you show up and you're like, where's your business plan? You're like, well, we're still robots. And they're like, get out. This needs to be a lot more clear than that. We were sitting with one of these well-respected funds, and my co-founder was running late. We were very nervous to meet them. Overall, I remember the part of being very interested in the technology we were building, the problem. He was taking lots of notes, and I remember getting an email after the meeting, and the email basically said something along the lines of, love the product, it's a worthy pursuit, but we're not really interested unless you have a path to a recurring revenue stream of some sort. I think it's always risky to change the business model, right? If you think about Adobe, when they switched from buy once and own it to essentially renting the software, people were up in arms, because it felt like a betrayal. It felt like a real betrayal. At some point, you were able to own the software, and now you have to rent the software from them. Making just a gadget doesn't cut it anymore. Hardware creators have to not only build a brilliant tech product, but also find a sustainable business model that keeps cash flowing in long after people buy a device. Subscription plans are everywhere, but why are they so prevalent and so important to hardware startups now? We literally needed probably $100 million. So that's the thing that nowadays we've raised about $170 million. But at the very beginning, we raised $1 million, and then we did $5 million, and then $5 million, and then $10 million, and then $50 million, and a lot more. But it was very incremental. It was like, let me see if you can make this at all. Adam Wilson is one of the co-founders of Sphero, a connected toy company that makes programmable robots. You've probably heard of them. The company came up through an accelerator called Techstars, which forced them to hone their business and think about how it could be sustainable. Although the company still sells one-off robots to people like you and me, that's only part of their business. Sphero has an entire team that's dedicated to selling robots to schools on a recurring basis. We usually do one 30-pack per school, sometimes more if it's a school that will be doing it a lot. And that's why the 30-pack needed to come in sort of like a little pelican case with wheels that plugs into the wall for all of them. Because we realized, again, if you ever watched or had to help a teacher, that was a thing, get involved with it for real. But we had to help teachers carry 30 of these boxes from this class to this class, and then get them all out and charge them. And you're like, oh my gosh, like there's no way this will work, right? How many schools are you in? About, what, 40,000 now. Oh my gosh. We're in quite a bit of schools. That's worldwide. So how do we make it so, A, you can get professional development on this? Because that was a huge question, was like, that's great. How do I teach this? And so professional development is a good recurring revenue. We do have a program, sort of the unlimited program. So here's your thing of 30. If any of them break for any reason, we'll replace any of them all the time. Have you guys pitched investors since education became a big part of your business? It's changed a lot. When we first started, we got laughed out of a lot of rooms, right? It was none of this other cool stuff, no education, just, hey, man, we want to make a robot ball and you connect it to an iPhone and that's the product. And, you know, a lot of people did not, like, what is that? I don't get it. A lot of investors nowadays want to see a recurring revenue model because hardware sales are very, very challenging. Businesses with the best economics are subscription businesses because there's this low, you know, cost to acquire the user and then you're making money on a recurring revenue basis on that existing sunk cost. And the successful businesses we've looked at in the space, it's always been, you know, hardware sort of this Trojan horse for a software play of some sort. Link is what we affectionately call a people compass. And what that means is anywhere in the world, if you have one and I have one, it's going to give you a really simple arrow and distance that updates in real time. We're working with ski resorts, music festivals, amusement parks, and we recently launched a successful Indiegogo campaign. We hit $1.7 million in revenue in two months and sold 20,000 units in under 60 days. Because Link is unique in the sense that we are independent from phones or networks or apps or anything of that nature, we had to be a little more clever or creative about how we got to that recurring revenue, and that's where that rev share model came about, where we're licensing the hardware and then rev sharing on the rentals to the end customer. Both Link and Sphero found a way to keep the cash coming in, but finding the best business model for them wasn't obvious. Haja Kamps is the director of portfolio at Bolt, a hardware-oriented venture capital firm. He advises companies on how to make their businesses work and how to make themselves profitable. I think really what you end up looking at with any business is how much money does it cost you to acquire a customer? Now, for some companies that might be $100, right? So you spend $100 to get a customer, you haven't made any money yet. The second part of the equation is how much money is that customer ultimately going to spend on your company? So if you spend $100 to acquire a customer and you make $80, you've lost $20. One half of that equation is usually known as CAC or the customer acquisition cost. The other half of that is the lifetime value or LTV. And really what you try and do is to have a lifetime value of a customer that is big enough to be a significant multiple over your customer acquisition cost, and if that works, then basically you've made it. Basically what Haja is saying is that it could take $100 worth of Facebook, Instagram, and Subway ads to finally convince someone to buy a new $300 coffee maker. That $200 of revenue is about as much as the coffee company is going to get out of that customer, maybe forever. People don't upgrade their coffee makers that often, and therefore these coffee companies need a way to get a more steady revenue. So that coffee maker company could sell proprietary coffee pods, which are required to use the maker, and that serves as its recurring revenue source. And it's that additional revenue that eventually makes up for that initial $100 ad spend and then keeps cash flowing in. So to bring it back to Sphero and Link, they both found a different way to get that recurring revenue. Sphero's education market allows them to sell robots to schools, while Link takes advantage of a revenue sharing option by working with amusement parks and other big spaces that license the devices from the company and then share the profit they receive when customers rent them. Basically, companies have gotten creative. I think in the hardware space there's a couple of companies that have really, really made it. I think Peloton is a really, really good example of that. For one thing, because it was a weird idea, right? It's like, it's an exercise bike. Are people really going to spend two grand, two and a half grand, whatever it is, on an exercise bike? And on top of that, spend 40, 50 bucks on a subscription every month to be able to ride that bike you've already bought. It was a huge gamble. The thing that was actually turned out to be really interesting is that if you think about the $400 exercise bike you can go to Costco and buy, versus a Peloton, yeah, the Peloton is nicer, but ultimately you get the same exercise. So the real value from Peloton came from the content. I mean, I'm a massive media nerd. I think content is really important, and I think that is a way to build a real relationship with your customers. So what they discovered was we're not a competitor to the $500 Costco bike. We are a competitor to spin classes, to SoulCycle, to all those kind of things. So if we want to replicate the SoulCycle experience, it isn't the bike that makes it good. It is the fact that there is somebody at the front of the room pushing you, that over time you build a relationship with, who points you to you and goes, Hiya, you can do better. Yes, I can do better. And you work a little bit harder. And what they were very, very good at doing was replicating that experience in the home. Armed with its subscription plan, Peloton is now reportedly looking to go public with an IPO. It's said to be worth at least $8 billion and to be profitable, all thanks to that recurring revenue. It's obvious why investors want to see that constant cash flow. It ensures they'll make more than they invested in the first place. As a person who does invest, and I have other things that look to investment, if you don't have that recurring revenue, you are literally going to spend a certain amount of money per robot or per device or whatever it is to sell them, your market cost. And currently in this world, that plus the builder materials for any hardware is usually about the price that you can sell it for. So without the recurring revenue, you just can't make a lot of money. And so if you want to, you could, but it'll be a much slower business. And that's not what VCs look for. I want to see, and so you do need to build that in. I can't imagine a robot or hardware or any other company that takes off without it. You think of Nest or Ring or any of those people who are like, the hardware part, honestly, pretty simple, like camera Wi-Fi thing. The recurring revenue, the software, the access, the easy use, there's your company. So I think what's great about a lot of these subscription businesses and licensing is that it kind of works better for both sides of the equation, especially in our case, like the end user is getting this really low barrier to trying the product. Over and over again, it's less capital outlay. And then the business is able to generate better economics on the hardware, the assets that they built. As an end user, you're paying this small nominal monthly fee that obviously does add up over the longevity of the product. But generally what that comes with is new updates, new products, the ability to use whatever is newest and latest and greatest. I think there are definitely hardware businesses that can do perfectly fine without subscription models. Casper being an example, they're doing perfectly fine. But I think it all really boils down to the cack to LTV arbitration. So how do you make sure that your lifetime value is high enough to make it worth acquiring the customers? And for a lot of companies, I just think that means that unless you can figure out a way of having a subscription model attached to that, it is very hard to meet that ratio that makes any sense. I've always wondered what it'd be like to live in a world in which I don't own anything. And I soon might be able to find out. I can already rent my car, my home and my clothes, so why wouldn't I rent my gadgets too? That might be one of the only ways to keep the hardware business alive. Hey there, thanks so much for watching this episode of In The Making. Stay tuned, May 14th is our final episode, so be sure to subscribe to The Verge so you don't miss anything. All right, we'll see you later. Bye!