Latest / The Series A Show with Fexingo: Early-Stage Funding, Pitch Decks, and Startup Milestones / Why Series A Startups Are Pitching Subscriptions for Hardware
Transcript
- Lucas: So there was a headline this morning on TechCrunch that I think is going to be on a lot of Series A decks by the fall. It's asking whether we'll still buy our next smartphone or subscribe to it instead. Luna: Subscribe to a phone? I mean, we already lease phones through carriers, but I think you're talking about something different. Lucas: Exactly. Not carrier financing — that's just a payment plan. This is the product itself becoming a subscription. You pay a monthly fee and you get hardware, software, updates, maybe even a trade-in path built in. And I'm starting to see this framing in pitches for smart home devices, wearables, even some laptop startups. Luna: So you're saying the pitch is 'hardware as a service' but with a literal subscription attached to the device itself. Lucas: Right. And it changes what investors actually underwrite. Instead of just unit economics — cost to build, margin per device — you're now underwriting subscriber lifetime value and churn. Those are very different metrics. Luna: But isn't that just a lease dressed up? I mean, are founders actually building new business models or just relabeling the old one? Lucas: That's the million-dollar question. Some of it is definitely window dressing. But there are a few startups that are genuinely restructuring the hardware — making the device cheaper because they know they'll make money over time on services, data, or even resale. That's a real shift. Luna: And I guess the iPhone's been doing that for a while with Apple Care and things like that, but you're saying this is now the primary pitch for a hardware startup, not an add-on. Lucas: Exactly. And it's not just consumer hardware. I've seen B2B hardware pitches — think industrial sensors or point of sale devices — where the recurring revenue is the core of the business model, not the hardware sale. The hardware becomes the hook. Luna: So how do investors actually evaluate these? Because traditional hardware angel investors are used to asking about margins, inventory, supply chain. What do they ask now? Lucas: They're still asking about margin, but now it's gross margin on the subscription, not the device. They want to see a path to a positive contribution margin within a few years, knowing that the device itself might be sold at break-even or even a loss. Luna: And churn. I imagine churn becomes the thing that keeps them up at night. Lucas: Huge. If your device is durable and the service isn't sticky, people just cancel after a year. So the whole pitch hinges on proving that the recurring revenue is not just a nice to have but something users genuinely rely on. And that's hard to show in a seed round. Luna: Right. In a seed round, you might have a few hundred users on a subscription. That's not a lot of data. Lucas: So founders are using cohort metrics to show early retention, like a 90 percent retention over six months. But the skepticism is real. A lot of investors are asking, 'Is this a real business or just a clever way to raise?' Luna: And speaking of skepticism, look at the market this week. Apple's down over eight percent in five days, which is rough. Microsoft is up nineteen percent. There's clearly a rotation happening in tech. Lucas: It's a good context for this trend. Apple has been the master of hardware plus services — they're basically a subscription company now. If even Apple's stock can get hammered on concerns about services growth slowing, then imagine what a startup pitching a subscription phone has to prove. Luna: That's a brutal benchmark. You're going up against the best in the world at this exact model. Lucas: Right. And the recent stuff — like the humanoid robot ban, AI agent middleware — those were the previous episodes. This subscription-hinge is a different, maybe more fundamental shift in how hardware startups are positioning themselves. Luna: So what does a good Series A pitch look like now for a hardware subscription startup? Lucas: It's really three things. One, you need a compelling reason why the subscription is not just a pricing mechanism but a product feature — like automatic updates or proactive maintenance. Two, you need to show that the unit economics work at scale, even if you lose money upfront. And three, you need proof that customers see it that way too — not just that they're willing to pay, but that they'd churn if you took the subscription away. Luna: That last point is interesting. It's like the reverse of a freemium model. You have to prove that the paid tier is so valuable that removing it would cause people to leave. Lucas: Exactly. And that's hard to test in a short time. But some startups are doing pilot programs, offering a one-time purchase option alongside the subscription, and then showing that the ones who subscribe actually have higher lifetime value — not just because they pay more, but because they use the product more and stay longer. Luna: I can think of a few companies doing that in the smart home space. They sell the hub for a low price but then charge a monthly fee for monitoring or AI features. Lucas: Right, and that's becoming almost the default. But the key is that in a Series A pitch, you have to show that the recurring revenue is growing faster than the hardware cost — and that's the tension. Hardware is capital intensive, so you need a lot of upfront cash just to build inventory. That's why these startups often have to raise bigger rounds or get creative with supply chain financing. Luna: So it's not just about the subscription model — it's about the capital stack behind it. Lucas: Yeah, that's the part that founders sometimes underestimate. Investors aren't just asking about your gross margin on the subscription; they're asking how much cash you'll burn before you hit critical mass. And if you're selling hardware at a loss, that burn can be scarier than a pure software startup's burn. Luna: But if you get it right, the upside is huge. You're creating a recurring revenue stream that's backed by a physical asset, which can be harder to copy than an app. Lucas: That's exactly what a few smart investors are betting on. They see hardware as a service as a way to differentiate in a crowded market. And some of the most interesting pitches I've seen recently are from founders who started with a hardware problem — like how to make a sensor that's accurate enough — and then built a subscription model on top, rather than starting with the subscription and trying to bolt on hardware. Luna: Which is probably the right order. Lucas: Yeah. And I think that's the key insight for anyone listening who's building or investing in hardware. The subscription isn't the point; the value you're delivering over time is the point. The subscription is just how you capture that value. Luna: So before we go further, I want to circle back to something you said earlier about how these conversations are useful for what we're building or running. It's a good reminder that this show is ad-free, and it's supported by listeners like you. Lucas: Yeah, and if this kind of deep dive is helpful for your own pitch or your investment thinking, we'd appreciate it if you'd consider supporting the show at buy me a coffee dot com slash fexingo. It keeps us honest and ad-free. Luna: And we're not asking for a subscription with a free trial and a credit card — just a one-time coffee if you feel like it. No pressure. Lucas: Right, no pressure. So back to the hardware subscription trend — one more thing I want to mention is how this is playing out in the actual Series A numbers. I've seen a couple of deals in the last month where the valuation was based on a multiple of annual recurring revenue, not on the hardware sale. That's a shift. Luna: So investors are literally paying for the subscription stream, not the product. Lucas: Exactly. But the risk is that if the hardware fails or the churn spikes, those multiples contract really fast. So it's a higher-risk, higher-reward game. Luna: And what about the consumer side? Are we actually going to be subscribing to our phones in a few years? Lucas: I think we'll see more options, but it's not going to be the only way. There's still a huge segment of users who want to own their device outright — they're keeping their phones for three, four years now. But for those who always want the latest and care about sustainability, a subscription that includes trade-in and recycling could be really compelling. Luna: And for startups, it's a way to build a relationship that lasts well past the initial purchase. That's what Series A investors want to see — a company that can grow with its customers. Lucas: Yeah. And I think the ones who nail it will be the ones who figure out how to make the subscription feel like a natural extension of the product, not an annoyance. That's the challenge. Luna: So if I'm a founder listening, what's one thing I should do this week? Lucas: Look at your own pitch and ask: if I had to justify my subscription price with a single metric, what would it be? And then make sure that metric is actually in your deck, not buried in the appendix. Luna: That's a good takeaway. And for investors, it's probably to dig into churn assumptions, because that's where the fantasy often lives. Lucas: Exactly. So that's the hardware subscription trend. It's not just a pricing trick — it's a fundamental shift in how hardware startups are built and valued. And we'll be watching to see which ones survive that shift. Luna: And we'll be here to break it down. Thanks for listening, and we'll talk to you next time. Lucas: See you then.