When comparing the number of software-based startups to those incorporating hardware, it quickly becomes clear that physical product innovation is far less common. Hardware is often seen as slow, expensive, and risky—leading many entrepreneurs to favor purely software-driven business models. However, in an era where clean tech and sustainability are gaining importance, hardware-centric startups have the potential to create lasting impact. When return on investment is measured not only in financial terms but also in social and environmental value, developing a physical product can be a strategic and rewarding choice.
An estimated 80 percent of all tech startups focus exclusively on software, while less than 10 percent have a significant hardware component. This trend is largely influenced by market dynamics and entry barriers. While software development is widely accessible, traditional inventors were often engineers, not programmers. Yet today, most innovations incorporate some level of electronics and software integration, making hybrid hardware-software products increasingly relevant.
Lower Barriers for Hardware Development
Twenty years ago, developing a new electronic device required a full engineering team. Today, affordable, programmable microcontrollers like the Raspberry Pi and Arduino provide powerful capabilities in a compact, low-cost format. Even software programming no longer requires extensive expertise, as many tasks can be accomplished using pre-built modules and accessible tools.
Beyond controllers, a vast ecosystem of sensors and mechanical components is readily available, making it easier than ever to develop prototypes and minimum viable products (MVPs).
The Unique Challenges of Hardware Startups
Hardware-based startups often require larger, more specialized teams, integrating expertise from multiple disciplines. Unlike software, where bugs can be fixed via updates, hardware must function flawlessly upon delivery, resulting in longer development cycles and higher upfront investment requirements.
Unlike software, hardware cannot be instantly and costlessly replicated. Margins are typically lower, only improving with mass production. To counteract this, many hardware companies now pair their products with software-based revenue models. Even automotive manufacturers are following this trend, offering software upgrades for electric vehicles that unlock additional performance.
The Competitive Advantage of Hardware Businesses
For many startups, hardware is a necessity rather than a choice, dictated by the business model. Whether it’s sensors, mechanical parts, or user interfaces, some products must be physical to deliver value.
Despite its challenges, hardware offers a distinct market advantage. The higher complexity and entry barriers deter competition, making hardware markets less crowded than the hyper-competitive software space. While many software startups struggle to stand out, niche hardware markets can be highly profitable due to reduced competition.
Investor Perspective: The Exit Challenge
While public attention focuses on high-profile startup deals and exits, most investors operate within ten-year investment cycles, requiring fast growth and scalable returns.
Many hardware startups struggle to meet these criteria due to longer development timelines, higher capital requirements, and lower margins. While a well-engineered hardware business may be profitable, it does not scale as aggressively as software. The combination of higher capital intensity and slower growth potential makes hardware startups less attractive to traditional venture capital.
Is Hardware Less Attractive?
Software development has long since moved beyond technical circles and become widely accepted. In contrast, hardware tinkering still attracts a smaller, more specialized audience. The do-it-yourself mindset has been largely replaced by a highly specialized service economy, where hands-on technical skills are becoming rarer.
While some still perceive software as abstract and unexciting, it aligns well with modern work-life preferences. The idea of a digital nomad lifestyle, working from anywhere in the world, appeals to many, while hardware development often requires physical presence, prototyping, and manufacturing.
Why Start a Hardware Business Anyway?
Despite these challenges, there are many compelling reasons to consider hardware-based entrepreneurship.
Hardware serves an entirely different customer base than software and provides unique revenue opportunities. The process of creating a physical product is highly rewarding, and hardware businesses often attract greater public interest. Consumers love physical products—they want something tangible to interact with.
Before launching yet another software app, why not explore a hardware solution? If you’re faced with a choice between the two, ask yourself: how do you want to spend your time as an entrepreneur?
What Is Your Take?
Has your company or startup worked with hardware-based products? Where do you see the biggest challenges?
We would love to hear your thoughts. Share your feedback, questions, and insights—let’s discuss!
