HaaS, or hardware as a service, is changing the means of purchasing and managing hardware. For customers, HaaS can impact performance, competitiveness and financial health, and for founders it is a great opportunity to generate predictable, long-term revenue streams.
HaaS providers are a part of a growing movement to sell business outcomes through agreed service level standards. Customers pay on a subscription or pay-per-use basis, allowing them to access the latest hardware without a significant upfront investment or paying for ongoing maintenance.
Spreading the wealth
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Building a HaaS business is not only good for customers. Silicon Valley Bank Reports that HaaS firms raise more capital at higher valuations than hardware firms with traditional business models due to higher multiples. Additionally, median valuations are 35% higher for early-stage HaaS firms.
This doesn’t suggest hardware startups need to jump to HaaS immediately. This is not all the time advisable in the early seed stages, but as the company scales, it is necessary to shift the business model towards HaaS.
In Series A, firms should have several HaaS customers. According to Series B, startups should have significant HaaS traction in their customer bases.
As a founder, there are six aspects you wish to keep in mind to succeed with HaaS:
1. Rate non-dilutive financing: Ultimately, you have to to obtain non-dilutive hardware financing to cover the initial working capital required to produce and own the underlying hardware assets.
2. Ensure a fast payback period: In the case of HaaS, the payback period is the bill of materials cost and installation and implementation costs. You want a faster payback period to optimize working capital and money flow.
For example, the best robotics firms we have seen have payback periods of lower than a 12 months.
3. Monitor gross margins/unit economics: HaaS firms achieve higher multiples, in part, because they will achieve much higher gross margins than traditional OEMs. While gross margins for hardware firms typically stay around 30%, HaaS firms can see cumulative gross margins in excess of 70% over time.
In the case of HaaS, the cumulative gross margins of the underlying asset should reach over 70% at the end of life, which is more in line with traditional software gross margins.
4. Take advantage of faster sales cycles: Because HaaS implementations are typically treated as OpEx moderately than CapEx, firms are less tied to the annual CapEx budgeting cycle. Additionally, there is a natural sales flow where trials and proofs of concept can mechanically turn into paid contracts without any changes.
5. Track life to BOM ratio: Lifespan monitoringBOOM ratio is also necessary. According to Silicon Valley Bankthe median for HaaS firms is 7.7x.
6. Accelerate your bookings to get realized revenue: While we have seen HaaS firms land large contracts with customers, sometimes in the tens of hundreds of thousands of dollars, a big pitfall to be careful for is the time it takes for these firms to convert reservations into realized revenue after actual implementation.
Getting it done
Having the right customer support and implementation team, processes, and KPIs to enable implementation progress is critical. Additionally, gaining support from operators, thoughtful training, and easy documentation will increase customer utilization and retention, and help reduce significant downtime at the customer site.
To measure your company’s efficiency in machine deployments, we recommend tracking multiple deployments to make sure you’re satisfied with your booking/conversion time ratio. The ratio ought to be close to 1.0 and is calculated as the change in implemented ARR over a period divided by the change in approved ARR over the same period.
Managing money flow and unit economics is essential to a successful HaaS model. In the early stages, your data may not perfectly align with the benchmarks described above. However, the first key step is to arrange a reporting dashboard that tracks the six key metrics described above. This will provide the visibility you wish to monitor performance and improve metrics over time.