231. Why Hardware is Hard (And When It's Worth It): Lessons from Apple, Tesla & Nvidia

Every time a founder with a hardware idea comes to me for advice, I tell them they're choosing one of the toughest paths in tech.

But sometimes, that path leads to trillion-dollar success stories.

In this episode you'll learn from three stories of hardware innovation: Apple, Tesla and Nvidia.

Apple had to spend $175 million to fix an iPhone problem that couldn't be solved with a software update. Tesla had to rip robots out of its automated factory.

Meanwhile, Nvidia turned from a gaming company into a $3.3 trillion AI powerhouse.

Why do some hardware companies become global giants while others crash and burn? Listen to this episode to find out.

You will learn:

• Why physical problems need physical solutions (and why that's so expensive)
• How Tesla's 'production hell' reveals the true cost of hardware innovation
• The real reason VCs are scared of hardware startups (and when they're wrong)
• Why combining hardware with AI might be worth the risk

This episode is essential for anyone building, investing in, or curious about hardware innovation.

Timestamps

00:00 Introduction

01:14 Hardware vs. Software

03:05 Apple's Story

06:00 Tesla's Story

09:00 The Value of Successful Hardware Companies

11:30 Why Nvidia is Important

13:49 Lessons for Founders and Investors in Hardware

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Transcript 

Sophia Matveeva (00:00.238)
Do you know what mistake cost Apple $175 million to fix? And why did Elon Musk have to rip robots out of Tesla's factory? In today's episode, you'll learn why hardware is so much harder than software and what every founder and investor needs to understand about hardware tech companies before diving in. You'll also learn how AI is changing the risk and opportunity profile of hardware companies. And yes, that includes Nvidia.

I think you'll really enjoy this episode.

Sophia Matveeva (00:37.582)
I'm your host, tech entrepreneur, executive coach and Chicago booth MBA, Sophia Matilda. My aim here is to help you have a great career in the digital age. In a time when even your coffee shop has an app, you simply have to speak tech. On this podcast, I share core technology concepts, help you relate them to business outcomes,

And most importantly, share practical advice on what you can do to become a digital leader today. If you want to have a great career in the digital age, this podcast is for you. Hello, smart people. How are you today? You know, I'm now neck deep in the innovation ecosystem. So I've been teaching tech for non-technical founders. I'm now on to cohort two in Bahrain. I've been mentoring at the Chicago Booth Polsky Center at the University of Chicago.

I've led a textiles program and I have literally just spent my weekend teaching at a visa accelerator program for female founders. And there is something that I keep seeing over and over. When a founder with a startup idea for a hardware product comes to me for advice, I often see that they don't understand just what a difficult endeavor they want to get into. I basically just ask them, are you sure you want to do this?

Today's episode is for all of the innovators and investors in our community because I want you to understand the basics of why hardware is harder and how this is changing now in the age of AI so then you can make smart informed decisions. And if you've listened to a few episodes of the Tech Fun on Techies show already and if you've learned from this show, then I am asking you to do something very useful for me. Can you please leave the show rating in a review?

I'm giving you high quality, free education to help you have a successful career in the digital age. So in return, please do something wonderful for me and help other smart people like you find this show too by writing a review and giving the show a rating. Literally pressing five stars on your podcast app takes less than a minute. And it makes such a big difference to the podcast, to the show, to other listeners and to me.

Sophia Matveeva (02:54.732)
And also, if you know somebody who's thinking about hardware innovation, then send them this episode and be a helpful friend. And now, let's begin with a story about Apple. So when Apple launched the iPhone 4 back in 2010, they made what seemed like a really brilliant design choice. So in this design, the metal band around the phone's edges was actually part of the antenna system. And this was beautiful and innovative.

everything we expect from Apple. The antenna was built right into the external case, which allowed for a slimmer design. But, my dear smart person, there was a problem. If users held the phone in a certain way, which then became known as the death grip, their hands would bridge the gap between two parts of the antenna. And this would make the signal drop, and sometimes it even made calls drop, which is obviously not great. That's actually destroying functionality.

So users started complaining about this and obviously this became a public thing. And you know what Steve Jobs said? He actually told users, you're holding it wrong. So can you imagine? I mean, actually it's Steve Jobs, so you probably can. Obviously telling users that the product that you have made is not functioning because they're holding it wrong, well, that made the PR crisis worse. so Apple then had to call an emergency press conference where Steve Jobs

finally acknowledged that there was a problem and then Apple decided to give out free cases to all iPhone 4 users because the case that they were giving out would prevent direct contact with the antenna. What was the cost of this? It was $175 million. And obviously, reputational damage. mean, the reputational damage didn't last too long because, you know, Apple is doing very well now, but it probably didn't feel particularly nice. And I can imagine Steve Jobs bristling at the thought.

of having to admit so publicly that he had made a mistake. So, my dear smart person, this story shows us the first big challenge of hardware. When you have a physical problem, you need a physical solution. Because Apple couldn't just push an update like they could do with software bugs. And this is expensive. And this is why venture capitalists are typically more cautious with hardware investment. Because they know the risks. Development

Sophia Matveeva (05:19.058)
usually takes longer than planned, costs run higher than expected, and there are just so many more things that basically can go wrong with hardware compared to software. And so this is why hardware companies often get lower valuation than software companies at the start, because investors basically know that they'll need to invest more money and that they'll need to be more time invested before seeing returns. And this makes fundraising for hardware companies harder.

basically, and this is especially true if you're outside of the hardware innovation hubs of Boston and Silicon Valley. And so I'm going to give you an example of just how much things cost from Tesla. So this year in 2024 alone, they are spending over $10 billion on infrastructure and development. And you know, obviously if you're Elon Musk and you're adored by a large part of the VC community, you're the world's richest man.

then some of these rules don't really apply to you. But if you're not Elon Musk, then things are going to be harder, right? So you see, the Apple story shows us that hardware problems need physical solution. And Tesla's example shows us just how expensive these solutions can be. And here's another example from Tesla. So back in 2018, 2019, they tried to automate their Model 3 production and built this highly automated factory and

Elon Musk called this a machine that builds the machine. And this sounds really great for cost control. And as an investor, my ears would perk up. But then this machine that builds the machine turned into what Elon Musk himself called production hell. So Tesla actually had to rip out some of the robots and bring in human workers instead. So goodbye cost savings from automation. And when things go wrong in hardware,

They really go wrong. in just one quarter in 2019, Tesla lost $702 million because of these production problems. So you see how these stories connect. Whether you're Apple with your antenna problem or Tesla trying to build your new type of factory, hardware challenges need physical solutions and those solutions need serious money and serious time. And this is why hardware companies need to pay for

Sophia Matveeva (07:43.264)
inventory upfront, they need to buy expensive hardware, need to buy expensive equipment upfront, they need to manage complex supply chains, and then they often have to wait to get paid by retailers. So the cycle of money coming out and then the cycle of money coming in, it's a very long cycle. Whereas a software company can run on a laptop and Wi-Fi.

And compare that to hardware, So hardware needs factories, warehouses, and millions in inventory before making their first sale. So when you actually look at the speed of fundraising of hardware versus software, well, software is just in a different category. And you know, I was recently at a startup pitch competition and I saw a really innovative hardware solution.

and their business model was good. They were doing really well. The innovation was really interesting and could actually be world changing and nobody wanted to invest in them. It was really sad. There were four other software companies which were decent but probably wouldn't have been as world changing, but the risk was much lower. So basically everybody was interested in them. So my dear smart person, you might be wondering with all of these challenges, why would

anybody build a hardware company? Well, there is a very good reason. Because when hardware companies work, they can be incredibly valuable and they can be very hard to compete with. And so just think about it this, what are you listening to this episode on? You are right now using a connected device and that device, the company that made that device, well, that company has made somebody a lot of money, whether it's Apple, whether it's Android, whatever it is.

Somebody's made a lot of money from the thing that you're holding. So let's think about Apple again. Yes, they had that antenna problem, but they've built an ecosystem of hardware products that's nearly impossible to replicate. So once you have an iPhone, you're likely to buy AirPods and then maybe a MacBook and then an Apple Watch. I literally have all of these things. And suddenly switching to another company's product becomes really difficult. And then you buy upgrades.

Sophia Matveeva (09:59.446)
And so this is what investors call a moat. Once you win in hardware, then you are really hard to beat. And Dyson is another example. They don't have the same kind of ecosystem as Apple, but they basically started with just a better vacuum cleaner. And now they're a global brand. And because they're this global brand known for very high quality and innovation, they charge premium prices for everything from hairdryers to air purifiers.

And you know, my mother just got a Dyson hairdryer and the way she talks about it, it's like the second coming of Christ. So for anybody who's shopping for Christmas presents for women right now, the Dyson hairdryer, that is my tip for you. When you create a superior hardware company that solves real problems, people will pay more for your product and they will keep on coming back. And this is true for B2B hardware companies, but

In this episode, we're using consumer examples basically that you can all recognize. The thing is that successful hardware companies, don't just sell products. They often build ecosystems. They solve real physical problems and with that, they create barriers to competition and innovation is basically harder. Creating an innovative hardware product that solves a real problem really well, better than other hardware products.

It's hard. So the rewards are higher when you get there. So it's harder than software, but the rewards can also be much, much more enormous. So higher risk, higher reward. And these days, things are getting even more interesting with AI because there's a whole new category of hardware companies, ones that are building the physical infrastructure needed to make AI work. So this is why this happens. When you ask ChatGPT or Google Gemini a question, that

interaction, it has to happen on physical computers somewhere. So there has to be some sort of computation that has to happen on a physical computer somewhere. The thing is regular computers, they're just not powerful enough to handle these complex AI system because AI needs special computer chips to run these computations and AI also needs to just have a lot more electricity to run these computations. And so this is why companies like Nvidia

Sophia Matveeva (12:24.13)
have become so crucial to AI development and this is why Nvidia is doing so spectacularly well right now. So Nvidia started as a company making graphics cards for video games way back when, but they discovered their chips were perfect for AI computing. And today they're one of the most valuable companies in the world because their hardware is powering the AI revolution. And its valuation jumps wildly, but at the time of recording, Nvidia is worth more than

$3 trillion. So that's not bad. And now we're seeing new companies like Cerberus and Grok trying to build even more specialized chips just for AI, because there's a lot of interest and investment in the space because basically nobody wants to depend entirely on Nvidia's chips. So you see, my dear smart person, the Nvidia story shows that, well, hardware is incredibly challenging to get right.

Once you do get it right, whether you're B2B like Nvidia or B2C like Apple or Tesla, the rewards can be absolutely enormous. this is why founders keep on trying. This is why VCs keep on funding the space, even though it is difficult. So what does this mean for you? Well, if you're thinking about building a hardware product or investing in one, you need to understand three key things. So think one, physical problems need physical solutions.

Remember Apple's $175 million phone cases. They were phone cases, physical product, not just a bug update. Thing number two, you need enormous capital before you even know if your approach will work. So this is something we can learn from Tesla. Number three, there is no such thing as a quick fix because every change involves physical infrastructure, supply chains and

real world testing. But there's also a fourth lesson. If you can combine hardware innovation with emerging technologies like AI, you might find investors who are much more willing to take on those hardware risks. The key is to show them why your hardware is essential for the future and how it will be part of an ecosystem and not just another gadget. Because actually, when you look at Nvidia, they're also building

Sophia Matveeva (14:47.19)
a new type of ecosystem. It's not just chips. They're not only valuable because of chips. By the way, if you want to learn more about the Nvidia story, I highly recommend you listen to a podcast called Acquired. On Acquired, they have several really long episodes about Nvidia. You can really dive deep into the story and what makes them so special. Now, after this episode.

You have an in-depth understanding of how software companies differ from hardware companies. You can now impress your friends with how knowledgeable you are, so you are welcome. And if you found this episode useful, which I assume you did because you are still here, then please leave this show a rating and a review. It really helps other smart people like you discover these lessons and succeed in the digital age.

And also if you have friends or colleagues who are thinking about hardware innovation or investing in hardware companies, please share this episode with them because literally if you just send them a quick WhatsApp message, it could save them millions in mistakes. Literally, if you just send one person a message today and suggest that they listen to this episode, it might be exactly what they need before they spend their life savings on a hardware startup. And on that note,

Thank you very much for being with me today and listening to this episode. You have invested in your career today. You've invested in your future and you should feel really proud of yourself. And I'm proud of you. So have a wonderful day and I shall be back in your delightful smiley tears next week. Ciao.