By Samantha Huang and Scott Walbrun

HaaS, or hardware as a service, is transforming hardware procurement and management. For customers, HaaS can influence performance, competitiveness and financial health, and for founders, it is an excellent opportunity to drive predictable, long-term revenue streams.

HaaS providers are part of the growing movement toward selling business performance outcomes through agreed-upon service-level standards. Customers pay on a subscription or pay-per-use basis, allowing them to access the latest hardware without significant upfront investment or paying for ongoing upkeep.

Spreading the wealth

Samantha Huang, principal at BMW i Ventures

Building a HaaS business is good for more than just customers. Silicon Valley Bank reports that HaaS companies raise more capital at better valuations than hardware companies with traditional business models due to higher multiples. In addition, median valuations are 35% higher for early-stage HaaS companies.

This doesn’t mean that hardware startups need to jump into HaaS immediately. During early seed stages, it’s not always advisable, but as the company scales, pushing the business model in the HaaS direction is vital.

Scott Walbrun, principal at BMW i Ventures

In Series A, companies should have some HaaS customers. By Series B, startups should have significant HaaS traction across their customer bases.

As a founder, there are six factors to remember to succeed with a HaaS model:

1. Evaluate nondilutive financing: Ultimately, you will need to get nondilutive equipment financing to support the upfront working capital required to manufacture and own the underlying hardware assets.

2. Ensure a fast payback period: In the case of HaaS, the payback period is the cost of the bill of materials and installation costs of deployment. You want a faster payback period to optimize your working capital and cash flows.

The best companies we’ve seen in robotics, for example, have a payback period of less than one year.

3. Monitor gross margins/unit economics: HaaS companies command higher multiples partly because they can command significantly higher gross margins than traditional hardware companies. Whereas the gross margins for hardware companies typically stay around 30%, HaaS companies can see cumulative gross margins of greater than 70% over time.

With HaaS, the cumulative gross margins for the underlying asset should hit over 70% by the end of its useful life, which is more aligned with traditional software gross margins.

4. Capitalize on faster sales cycles: Because HaaS deployments are typically treated like OpEx instead of CapEx, companies are less bound to the annual CapEx budgeting cycle. Additionally, there is a natural sales motion where trials and proofs of concept can auto-convert to paid contracts without any changes.

5. Track the service-life-value-to-BOM ratio: Monitoring the service-life-to-BOM ratio is also essential. According to Silicon Valley Bank, the median for HaaS companies is 7.7x.

6. Accelerate your bookings to realized revenue: While we have seen HaaS companies book large contracts with customers, sometimes in the tens of millions of dollars, a big pitfall to watch out for is the time it takes for these companies to convert the bookings into realized revenue upon the actual deployment.

Getting it done

It is critical to have the right customer support and implementation team, processes and KPIs to push the deployments forward. Also, earning buy-in from operators, thoughtful training and simple documentation will drive customer utilization and retention, and help mitigate significant stoppages at the customer site.

To measure the company’s efficiency in machine deployments, we recommend tracking the deployment multiple to ensure the bookings-to-conversion-time ratio is satisfactory. The ratio should be near 1.0, and is calculated as the change in deployed ARR in a period divided by the change in committed ARR in the same period.

Managing cash flow and unit economics is essential for a successful HaaS model. In the early stages, your metrics may not align perfectly with the benchmarks outlined above. However, the first crucial step is to set up a reporting dashboard that tracks the six key metrics above. This will provide the visibility needed to monitor performance and refine your metrics over time.

Samantha Huang is a principal at BMW i Ventures, where she focuses on investments across AI and big data, automotive, Industry 4.0 and sustainability. She also serves as head of content and board director for the Emerging Venture Capitalists Association, a pre-partner nonprofit organization for empowering the next generation of venture capitalists. Huang holds a law degree from UC Berkeley School Of Law and a master’s degree in history from Stanford University.

Scott Walbrun is a principal at BMW i Ventures, where he focuses on building companies in sustainability, mobility and industrial automation. In this capacity, he has served on the board of nine companies as a director or observer. Walburn also actively supports hundreds of startups annually as a mentor and workshop leader at a number of accelerator programs across the country. Prior to joining BMW i Ventures, he held roles in technology investment banking, private equity, startup incubation and corporate finance. He holds an MBA from the University of Chicago.

Illustration: Dom Guzman