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Rather than fight Apple and Google, investors are backing niche and enterprise hardware

Key Points
  • The hype around Apple Watch 3 and iPhone 8 may be fun for tech enthusiasts, but it's daunting for hardware start-ups.
  • Consumer electronics start-ups aren't raising much venture capital this year, but makers of enterprise and industrial hardware are fundraising more easily.
The new iPhone 8, iPhone X and iPhone 8S are displayed during an Apple special event at the Steve Jobs Theatre on the Apple Park campus on September 12, 2017 in Cupertino, California.
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Apple's smartwatch and iPhone announcements last week set off a wave of excitement among consumers and investors.

But they also highlighted a harsh reality for start-ups — it's nearly impossible to compete with big brands in consumer electronics.

Those following in the footsteps of DJI, GoPro, Fitbit or Keurig are now finding it hard to raise funds beyond an early seed round. With well-funded companies like Juicero failing and Intel shutting down its wearables division, investors have cooled on consumer electronics in 2017.

"Investments in consumer hardware are down partly because some of the consumer and internet-of-things devices haven't really delivered," said Cyril Ebersweiler, a veteran hardware investor and general partner at SOSV. "Other start-ups are doing well but taking longer to scale than most investors would like."

At HAX, a hardware-focused accelerator funded by SOSV, a majority of start-ups in the latest batch are focused on anything but consumer devices, Ebersweiler said. Instead they are making niche health and medical devices, or industrial hardware like systems for use in logistics, farming and manufacturing.

The same thing was seen at Y Combinator, another prestigious accelerator, where hardware start-ups in the last batch included zero consumer electronics companies, but did include companies working on autonomous and unmanned aerial vehicle tech.

So which hardware companies are in a good position to raise venture capital these days? A midyear report from Osage Partners' Natasha Azar said: "'Big swing' investments are on the rise in areas such as quantum computing ... edge processors, robotics and non-traditional computing."

Ebersweiler said this could become a lasting cycle. When investors don't make big, follow-on investments in them, hardware start-ups won't go after the biggest opportunities in consumer markets. That's because it takes a lot of money to manufacture and market devices (let alone hire great tech talent) when you're up against Apple, Amazon and Google.