The aspiration of the transformative smart fridge that will remake the kitchen has gone flat. So tomorrow, the ambitious smart refrigerator company—which raised $400 million in venture funding—will announce its shutdown. This is yet another victim in the brutal graveyard of consumer hardware startups. Nothing gets investors and consumers excited like innovative technology. Yet, the journey to building a successful hardware business is riddled with obstacles. Tomorrow’s obituary is a harsh reminder of all the bigger uphill battles these companies face. They struggle with macroeconomic pressures as well as the macro imperative of keeping people’s trust.

The shutdown of Tomorrow underscores the often brutal realities of the consumer hardware market. Simply having a revolutionary concept isn’t enough. Startups need to just as deftly traverse the gauntlet of manufacturing, supply chains, distribution, marketing and sales, all while pivoting to shifting consumer tastes and fending off competition from cash-rich, established players. Let's examine the factors that likely contributed to Tomorrow's downfall and extract valuable lessons for aspiring hardware entrepreneurs venturing into the digital wilderness.

Macroeconomic Tides: A Sea of Uncertainty

Several key macroeconomic indicators can significantly impact these businesses:

  • 10-year Treasury Yield: Changes in the 10-year Treasury yield reflect investor confidence in the economy. Higher yields, signaling a potentially less favorable environment for growth, can negatively affect the valuations of growth-oriented startups like those in the consumer hardware space. These startups often have long-duration profiles, meaning their expected future cash flows are heavily weighted towards the later years. Higher risk-free rates, as reflected in the Treasury yield, can discount these future cash flows more heavily, making the startup less attractive to investors.

  • Interest Rates: Rising interest rates directly impact consumer spending. As borrowing costs increase, consumers tend to cut back on discretionary purchases, including big-ticket items like smart appliances. This can create a significant hurdle for hardware startups trying to gain traction in the market.

  • Inflation Expectations (10-year Breakeven Rate): Inflation drives up the cost of components, manufacturing, and shipping. For startups, this can squeeze profit margins and force them to raise prices, potentially alienating price-sensitive consumers. The 10-year breakeven rate is a measure of expected inflation over the next decade. When this rate rises, it signals that investors anticipate higher inflation, which can impact the cost of producing goods and, subsequently, the pricing strategy of consumer hardware startups.

  • US Dollar Index (USD): A strong dollar can make it cheaper to import components but can also make exports more expensive, impacting competitiveness in international markets. Fluctuations in the USD can significantly impact the profitability of consumer hardware startups, especially those that rely on global supply chains or target international customers.

  • Oil Prices (WTI Crude Oil Prices): From the cost of raw materials to transportation, oil prices ripple through the entire supply chain. Rising oil prices increase the overall cost of bringing a hardware product to market. Changes in oil prices can affect the cost of production, transportation, and distribution of consumer hardware products, impacting their overall profitability.

Simultaneous macroeconomic factors have resulted in a harsh landscape for consumer hardware startups. They have to organize more strategically, protect the bottom line, and be nimble in an increasingly volatile new normal.

Navigating the Storm

Hardware startups can implement strategies to mitigate the impact of these macroeconomic headwinds:

  • Diversify Supply Chains: Reduce reliance on single suppliers to minimize disruption from currency fluctuations or geopolitical events.
  • Hedge Currency Risk: Use financial instruments to protect against adverse currency movements.
  • Optimize Energy Consumption: Implement energy-efficient manufacturing processes and explore alternative energy sources to reduce exposure to oil price volatility.
  • Price Strategically: Develop flexible pricing models that can adapt to changing input costs while remaining competitive.

By doing these things proactively, hardware startups can be more resilient to these macroeconomic risks and set themselves up for success in the long term.

The Trust Deficit: Earning Consumer Confidence

Outside of the macroeconomic climate, the most important thing that will make or break a consumer hardware startup is—surprise! In an era of almost daily data breaches and privacy scandals, consumers have grown wise. In fact, they’re often hesitant to use new brands or untapped technologies.

  • 83% of consumers won't buy from a brand they don't trust: This statistic underscores the paramount importance of building a strong reputation and fostering trust with potential customers.
  • Trust is a deciding factor in consumer choice: The rise of cyber attacks and threats has highlighted the importance of trust in consumer relationships with companies. Consumers are more likely to choose brands that they believe will protect their data and act in their best interests.
  • 61% of consumers prioritize trust in information provided by companies: Consumers place a high value on trust when interacting with companies, particularly when it comes to the information they provide. This means that startups must be transparent and honest in their marketing and communications.
  • 9 out of 10 people trust customer reviews over company claims: Consumers are more likely to trust the opinions of other customers than the claims made by the company itself. This highlights the importance of encouraging customer reviews and addressing any negative feedback promptly and professionally.

Building a Foundation of Trust

Earning consumer trust requires a multi-faceted approach that permeates every aspect of the business:

  • Be Transparent: Clearly communicate your company's values, data privacy policies, and warranty information.
  • Protect User Data: Implement robust security measures to safeguard user data and be transparent about how data is collected and used.
  • Provide Excellent Customer Service: Respond promptly and effectively to customer inquiries and complaints.
  • Encourage Customer Reviews: Actively solicit customer feedback and address any negative reviews constructively.
  • Build a Strong Brand Reputation: Engage in ethical business practices and be transparent in all communications.

By fostering trust from the outset, hardware startups can win an instant, loyal customer base that can provide long-term competitive advantages.

Lessons for Aspiring Hardware Entrepreneurs

Here's some advice to consider:

  • Set clear, ambitious goals: Having a clear vision and goals is essential for driving success in business.
  • Fear can be a motivator: As an entrepreneur, you will face uncertainty and fear, but it can be channeled into motivation to drive progress.
  • Start with a financial safety net: It's essential to have some savings to fall back on when starting a business, as it can take time to generate income.
  • Leverage automation and systems: Implementing automation software and systems can help streamline business operations and improve efficiency.
  • Learn from mistakes: Every entrepreneur makes mistakes, but it's essential to learn from them and move forward.

Strategic Planning and Execution

  • Focus on objectives and key results: Hardware startups can focus on setting clear objectives and key results, prioritizing management by objective, or setting S.M.A.R.T. goals to ensure everyone is working towards the same targets.
  • Develop a strong startup strategy: Having a well-thought-out startup strategy is crucial for hardware startups to succeed. This involves clarifying what the company wants to accomplish in a year, five, and ten years, and setting long-term goals such as reducing business expenses, increasing website traffic, or hiring new employees.
  • Conduct a SWOT analysis: Hardware startups can conduct a SWOT analysis to identify their strengths, weaknesses, opportunities, and threats, and use this information to define a list of explicit activities for individual targets.
  • Set measurable key results: For each objective, hardware startups can set 3-5 measurable key results that let them know if they're hitting their target, and ensure that OKRs across the startup support one another.
  • Prioritize and take one step at a time: Hardware startups can prioritize their goals and take one step at a time, setting deadlines and assessing progress regularly to maintain momentum and adjust as needed.

While the ultimate failure of Tomorrow Photo is a disappointment, it can be seen as a cautionary tale, highlighting the extraordinary pitfalls consumer hardware startups must navigate. These macroeconomic factors play an outsized role in determining success or failure. They found that establishing consumer trust and undertaking a smart planning process were key to realizing positive benefits. Tomorrow’s hardware entrepreneurs should take heed of what went wrong. By taking these proactive strategies, they can increase their odds of successfully making it through the digital wilderness and getting their innovative products to market.