The State of Hardware-as-a-Service

Report by Silicon Valley Bank with support from Eclipse Ventures

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Key takeaways

Silicon Valley Bank, with support from Eclipse Ventures, is proud to present the State of HaaS report. As machines become more reliable and affordable, hardware companies have adapted to better serve their customers. The traditional transactional sales model for hardware companies is fading, with a new recurring model — Hardware-as-a-Service (HaaS) — taking over. These frontier tech companies are building richer customer relationships by replacing one-time sales with subscription services. Here are three takeaways from the report:

The six metrics that matter

After surveying hundreds of companies in the ecosystem, our partners at Eclipse Ventures helped us identify the primary KPIs for HaaS companies and investors to benchmark performance. Check out the formulas on page 12 of the report.

US VC investment in 2021

Investment in HaaS companies reached a record $10.4 billion over 289 deals with $2.2 billion awarded to early-stage startups.

The future of HaaS

To meet evolving market conditions, HaaS companies may consider alternative sources of capital, explore novel data sets and re-shore infrastructure.

Report highlights

The State of Haas is the first deep dive report providing key metrics for everything a HaaS business needs to consider such as contract structure, revenue models, machine cost analysis, assessing market opportunity and lead time on components.

US VC INVESTMENT

HaaS investment strong but cooling

Coming off a record year in 2021, HaaS US VC deals are down 18% in 2022 as macroeconomic headwinds hamper activity.

As the market enters what could be a sustained downturn, founder-friendly deals may be harder to find. HaaS companies may turn to alternative financing types, such as debt, to extend their runways instead of raising equity at a lower valuation or on unfavorable terms.

Note: HaaS deals include hardware companies with aaS business models. Deals as of 6/13/2022. Source: PitchBook and SVB analysis.

Note: US-based companies. Source: Pitchbook and SVB analysis.

VC INVESTMENT

HaaS pulls ahead of the pack in first VC round deal size

Since 2021, the median HaaS first VC round deal size trended higher than both traditional hardware and SaaS with the median deal size increasing 63% to $8.5M.

Formation rates of HaaS companies skyrocketed after 2015 as frontier tech investors shifted dollars to the HaaS model, increasing 150% by 2017 with a higher rate of formations than traditional hardware and SaaS companies

BUSINESS MODELS

A new and improved sales model

The HaaS subscription sales model is a win-win for both customer and vendors, offering customers lower upfront costs and hardware vendors higher earning potential and more predictable revenue streams.

Because their business model often requires ongoing customer support and hardware maintenance, HaaS companies can better serve their customers by engineering responsive features that justify higher price points and/or promote customer loyalty

Note: HaaS includes hardware companies with an aaS business model. Traditional hardware companies do one-time sales only. Source: SVB analysis.

Note: The payback period is the time it takes monthly revenue minus expenses to equal bill of materials costs. Source: SVB State of HaaS Survey results and SVB analysis.

HARDWARE PAYBACKS

Recouping machine costs

Across all HaaS life stages and sectors, the median payback period is 16 months with the top quartile recouping costs in 10 months while the bottom quartile is breaking even at 32 months.

Managing cash flows is probably the main drawback of the HaaS model as vendors outlay the full cost of a system that takes months or even years to recoup. But companies can potentially collect revenue for the full service life of a machine – seven years on average.