By Lee Chilcote
Felipe Gomez is busy. Twenty-one years old and a rising senior at Case Western Reserve University in Cleveland, he’s balancing his studies with a job, a social life and yes, a startup. But Gomez is no Soylent-chugging code jockey aspiring to be the next Mark Zuckerberg or Brian Chesky. Gomez’s startup, FTC Plasma Solutions, uses plasma technology to reduce emissions and improve fuel efficiency in jet engines. Different than venture capitalists betting on the next Facebook or Airbnb, his backers are Boeing Corporation, the Department of Energy and NASA.
“The technology actually started at a high school science fair,” says Gomez, a south Florida native who is majoring in mechanical and aerospace engineering. “I read some papers about the interactions between electrical fields and combustion reactions, made a simple set up, and took it to an international science fair. My teacher said, ‘Can you imagine if every jet engine in 10 years contained something you built?’ That kept me motivated.”
When he arrived at Case Western, Gomez built a prototype that showed it could reduce fuel consumption by up to 10 percent. Yet this is where his story departs from the billion-dollar-company-born-in-a-dorm-room narrative that’s become a staple of startup lore in the last 15 years. Testing jet engine technology, unlike software, requires access to specialized laboratories and costs hundreds of thousands of dollars — resources Gomez didn’t have. The college student was mentally preparing to see his big idea die on a hard drive somewhere when, last year, one of his mentors mentioned a new accelerator program for hardware startups like his. Unlike most traditional accelerators, Cleveland-based LaunchHouse was willing to take a risk to build something that wouldn’t live solely on the Internet.
The accelerator provided Gomez with $20,000 in startup capital, training and mentorship and access to 3D printers in exchange for a 6 percent equity stake in his company. His new mentors also connected him to people at NASA who could help him secure labs and equipment for testing his prototype. Since completing the program in February, he’s raised $100,000 in follow-on funding from the Department of Energy and Boeing and begun talking to other partners.
“The jet engine was made by one guy named Frank Whittle in England,” Gomez says. “The Wright brothers were two guys who owned a bike shop. It’s strange but not impossible for a solo entrepreneur or two entrepreneurs to innovate in the aerospace industry.”
While Gomez’s success is far from assured — about half of new businesses fail in the first five years, according to the Small Business Administration — the fact that he’s gotten this far is testament to the growing market for hardware.
Hardware startups are companies integrating cutting-edge technology into physical products. They are more viable than ever thanks to evolving prototyping technology and in many places, a renewed emphasis on advanced manufacturing. Nowhere is this more apparent than in Rust Belt cities like Cleveland. While software’s promised land has long been Silicon Valley, the Rust Belt is fast becoming a land of milk and honey — and plasma — for hardware. In cities such as Cleveland, Pittsburgh and Youngstown, Ohio, there is already an infrastructure for affordable manufacturing in place. Plenty of institutional partners like NASA in Cleveland are eager to support new entrepreneurs.
“The conventional wisdom is that the startup model doesn’t work for hardware because the capital levels are too high and VC firms aren’t interested,” says Mark Muro, senior fellow and policy director with the Metropolitan Policy Program of the Brookings Institution. “Lo and behold, the more I poke into this, I think there’s more substance here than most people get or understand. Hardware startups are moving from long shots to real possibilities because of some of these tools.”
Building on a Local Foundation
Todd Goldstein, 32, founded LaunchHouse in 2011 with Dar Caldwell. Based in a renovated auto dealership in the largely residential suburb of Shaker Heights, the company spent its first five years investing in software companies that often struggled to obtain follow-on funding, Goldstein says. Then he had an epiphany: Why not invest in something that builds on Cleveland’s manufacturing base?
“As accelerator programs continued to grow, we knew that to get really good deal flow, we’d have to try to beat out places like Techstars and Y Combinator,” says Goldstein, who got his start in commercial real estate before moving into the technology sector. “So we’re sitting here in Cleveland, Ohio — which is not a major tech hub — with limited follow-on expertise and thinking, ‘How do we play on our strengths?’ Cleveland was built on manufacturing history. And we have investors right in our backyard who want to invest in products they can feel and touch.”
LaunchHouse isn’t the only urban entrepreneurial organization that’s investing in hardware companies either. AlphaLab Gear is a two-year-old Pittsburgh hardware accelerator that’s located just a short walk from Google’s local offices and Pittsburgh TechShop, a 16,000-square-foot makerspace with three 3D printers and hundreds of other fabrication tools. AlphaLab’s eight-month accelerator program provides office space and $25,000-50,000 in funding for promising startups. The accelerator, a program of Innovation Works, a nonprofit that invests in early-stage technology companies in southwest Pennsylvania, has already graduated 15 companies.
“Two guys with a computer and 25 grand didn’t run a hardware company 10 years ago,” says Ilana Diamond, managing director of AlphaLab Gear. The key to success, she says, is allowing hardware companies more time — the typical accelerator gives startups three months to sink or swim — so they can tinker with prototypes. AlphaLab also provides resources like connections to manufacturers and experienced mentors, helping them get to market faster and obtain funding.
Muro says the hardware trend could help return more manufacturing activity to cities. “For any place, it adds viability to manufacturing as an urban activity,” he says. “At turn of the last century, it often was an urban activity, but it moved more and more to exurbia given that manufacturers needed size for scaled production. If we’re saying that more of this can have the footprint of a small startup, then suddenly all of this becomes scalable in cities.”
One accelerator graduate, Dick Zhang of Identified Technologies, moved from Philadelphia to Pittsburgh to launch his company. Identified, which uses drones to do survey-grade mapping of large-scale construction sites, recently raised $2 million in venture capital funding. “We were fortunate to have manufacturers close by, so that we could iterate on our product in days, instead of waiting weeks and months,” he says. “You’re never going to get it right the first time, or the second, third, fourth or fifth, so you make the first one, get feedback, then fix the feedback.”
In Youngstown, a startup named JuggerBot 3D is developing a more affordable, reliable desktop 3D printer aimed at manufacturing companies. Jim D’Andrea, who cofounded the company with fellow Youngstown State University engineering graduates Dan Fernback and Zac DiVencenzo, says they’ve developed a working prototype with the help of the Youngstown Business Incubator and the National Center for Additive Manufacturing.
“As a hardware company, one of the hardest things is creating the product because of the capital you need,” says D’Andrea. “In Youngstown, everybody in your network has some involvement in manufacturing, so it’s easy for them to help us out when we’re making our first prototypes.”
The Rise of Garage Hardware
Until recently, cities like Cleveland or Youngstown did little to connect nascent tech scenes with the manufacturers who had long defined local economies. These companies that relied on blowtorches, welders and drills were the economy of the past while the future was sleek offices where the only tool in sight was a MacBook Pro. It was a shortsighted but rational decision based on the fact that it’s harder and more costly to prototype hardware than it is to make software and thus, considered a riskier investment. Software companies attracted nearly $11 billion in venture capital and saw 1,523 deals in 2013, whereas consumer electronics lured just $848 million and 31 deals, according to TechCrunch.
That has begun to change for three main reasons. The advent of 3D printing and additive manufacturing makes it easier to prototype. Companies can validate their products and raise money using Kickstarter or other crowdfunding platforms. As a result, they’re gaining customers and becoming profitable more quickly than before, which is attracting the interest of investors and venture capitalists.
“Just like in the late ’90s, it cost millions of dollars to build a website, but by 2005, you could build a website in your dorm room, the same thing is happening right now with hardware,” says Goldstein of LaunchHouse.
Recent success stories include Nest, the home automation company acquired by Google for $3.2 billion, and Oculus VR, whose virtual reality head-mounted display was bought by Facebook for $2 billion.
Arden Rosenblatt, cofounder of PieceMaker, a Pittsburgh-based company that has developed a 3D printing kiosk geared toward big-box retailers, is hoping for similar success. The genesis of his startup was frustration with the 3D printers he had available to work with while studying for a master’s degree in engineering and technology innovation management at Carnegie Mellon University. In 2013, Rosenblatt and classmate Alejandro Sklar set out to build a 3D printer that would be more accessible and intuitive. Yet after what Rosenblatt calls “a long journey” of tinkering with prototypes, they discovered that the market wasn’t quite ready for their product. The duo decided to focus instead on building a retail kiosk. “We wanted to create a full-service way to find the right product you want, personalize it on spec and print it out automatically,” Rosenblatt says.
Two years later, Sklar and Rosenblatt have begun rolling out their Factory 3D printing machines to retailers. For a kid-friendly price between $5 and $20, shoppers can print and personalize 50 items aimed at the tween market, including guitar picks, whistles, pendants, fashion accessories, toy bricks and stuffed animals. So far, PieceMaker’s biggest challenge has been the one all hardware companies face, the very reason why investors have always been so leery: Success requires tinkering.
“We’ve spent two years building systems to make them reliable,” says Rosenblatt.
Rosenblatt says that AlphaLab Gear’s accelerator program and manufacturing connections in Pittsburgh have sped up PieceMaker’s route to the market. The Pittsburgh company has been able to source almost every aspect of its machines locally by working with area manufacturers over the last few years.
In Cleveland, BoxCast CEO Gordon Daily understands Rosenblatt’s “long journey” all too well. BoxCast is a four-year-old Cleveland-based startup whose hardware simplifies live-streaming of events. While working full-time building computing systems at Rockwell International, Daily began tinkering in his basement using a $90 drill press he bought on Craigslist. Back then, the young dad worked until his wife came down at 4 a.m. and told him to go to bed. It took four years, but he’s now on the seventh generation of his product.
“Everything you read, the stories in magazines about overnight successes, it’s Disneyland not reality,” says Daily, who employs 12 people in his offices at Burke Lakefront Airport in downtown Cleveland. “Especially with a hardware company, you never get it right the first time. First, you have to get enough money to even build a prototype, then you have to prove you have a business model, then you have to prove people will buy it, then prove you can manufacture it. It’s a consecutive series of minor ‘aha’ tweaks that help you, over time, grow something.”
Like PieceMaker, Daily has benefited from his relationships with local entrepreneurial groups and manufacturers. Nearly every piece of BoxCast’s equipment is produced in Northeast Ohio.
Ecosystem Is King
For every successful hardware accelerator, there are others that flounder. LaunchHouse just nixed its program for a less deadline-driven approach that gives companies more time to succeed. “While we’ve moved away from the formal accelerator process, we’re still investing in hardware-based businesses that have a clear path to revenue and potential job and business growth,” says Goldstein.
There are several instances where high-profile hardware startups bit the dust too. The Kreyos smartwatch raised $1.5 million via Indiegogo and later collapsed due to problems with the product and its Chinese manufacturing partner. Coin, a company that aimed to create an electronic credit card that could merge many cards into one, has yet to fulfill preorders dating back to 2013. The company delayed the release of its product so it could keep working on it.
Given the mixed record, not every manufacturing expert believes the accelerator model is the best one for this industry. “The problem is that most accelerators are IT focused, and hardware often takes longer,” says David Crain, director of entrepreneurial services at Magnet, a manufacturing advocacy and support organization in Cleveland. “You can’t always generate a prototype in 16 weeks and get that vision in front of customers.”
Ethan Karp, president of Magnet, says that the key to helping hardware startups flourish in places like Northeast Ohio is not creating more accelerator programs, but helping spur manufacturing innovation across the board. Startups can only succeed if there is a healthy ecosystem to nourish them. One example is Gomez. His company could have easily died on the vine if there wasn’t a NASA facility in the region that he could rely on for laboratory resources and an existing relationship between the accelerator and the federal facility.
“He told me they had a connection to NASA. I wasn’t sure if a business accelerator was right for me, but the NASA connection sealed the deal,” says Gomez. “It helped me get through the door, which was difficult, get a testing agreement in place, and run more tests on the technology. These are things you can only do at [NASA’s Glenn Research Center].”
Karp is optimistic that the Rust Belt could be the Silicon Valley of hardware, but only if everyone understands that the new companies aren’t all that different than the “startups” that defined the region 100 years ago. Companies like Gomez’s are the successors to the innovators who have always been tinkering in the garages and warehouses of Northeast Ohio.
“I totally believe Northeast Ohio will be the place where hardware products are created, but I don’t necessarily see them as a new industry,” he says. “The better we can get at producing entrepreneurs, the more hardware we will get.
Nonetheless, both entrepreneurs and investors are taking more interest in hardware startups, and one reason for that is the recurring revenue model. The success of the software industry has been driven in part by the fact that these companies not only sell their products, but also service them through annual subscriptions, maintenance and updates — what is called “software as a service.” Now successful hardware companies are beginning to incorporate the very same model.
“A decade ago, if you’re selling hardware, you’re paying 10 bucks, you get a product and that’s all you get from me,” says Zhang, whose Identified Technologies offers subscriptions and paid services for drone mapping. “Now we’re seeing hardware as a service.”
Morris Wheeler is a Cleveland investor whose Drummond Road Capital firm has been ranked one of the top 50 seed investors in the U.S. He has become more interested in hardware in recent years.
“The biggest insight of the lean technology movement is being able to very early on validate the products, iterate the products and make sure you’ve got a customer base for the products,” he says. “That only became possible with hardware companies with the advent of Kickstarter.”
That’s good news for entrepreneurs like Chris Wentz, a recent Case Western graduate and founder of Everykey, a wrist bracelet that is aimed at replacing keys and passwords. Wentz just raised $117,000 on Kickstarter last fall. On the heels of that success, he recently raised the one millionth dollar of seed funding for his company. This summer, Wentz will be busy filling Kickstarter orders, hiring staff and officially launching his product. “Before that, we were just a bunch of 20-somethings trying to do this,” he says of his success on Kickstarter.
The 24-year-old entrepreneur, whose company merges both hardware and software and came out of the cluster of tech startups in Cleveland’s University Circle neighborhood, sounds like a Silicon Valley protégé as he speculates on his future. “Most successful entrepreneurs do it in their mid-20s,” says Wentz, “so I’ve got a couple more years to make it big or not.”