(This is the first in a two part blog post. The second part can be found here)

Bug Labs is a fascinating NYC startup that builds a “modular, open source system for building devices.” Basically, they have a collection of programmable hardware modules that snap together to make custom devices.

I have to admit: the idea baffled me at first.  It seemed like Bug Labs makes a really cool device for technology hobbyists and students — similar to the Arduino or my friend Michael’s company Nerdkits. Bug Labs also focuses heavily on developing a passionate community of users.  But isn’t the product basically a toy aimed at a very narrow niche?!  Why was the company worthy of investment from one of New York’s top VC firms, Union Square Ventures?

Things became clearer when I had a chance to sit down with Matt Cholerton at the Bug Labs offices this past winter.  He demoed the device for me and explained the real uses for the company’s product: rapid prototyping, market testing, and serving the long tail of manufacturing.

BUG is intended less for individual hobbyists and more for companies that can use BUG to rapidly make prototypes of new electronic devices (think handheld electronics: digital cameras, alarm clocks, location based devices).  BUG allows companies to market-test new device concepts before beginning a expensive round of mass production.

Additionally, BUG is perfect when there simply isn’t a big enough market to mass produce a device — this is what Bug Labs calls the “long tail of gadgets.” For example, perhaps some utility company needs twenty very specific custom device for their field technicians?  Enter Bug Labs.

Bug Labs has a really cool thing going and I love the idea of capturing the long tail of device manufacturing.  It’s an incredibly non-traditional idea for a startup and innovative hardware companies are rare these days.

Bug Labs is certainly our most “out there” investment.
-Fred Wilson, Union Square Ventures

BUG’s configurability is based on its modular design.  Modules are added to the base unit ($249) and each adds specific device functionality:  a motion detector/accelerometer ($59), a GPS receiver ($99), a full-color, hi-res, touch-sensitive LCD screen ($119), an audio module with a speaker/microphone/mini-stereo jacks ($99), and a 2gb extendable memory chip ($10).

And here’s where I start to worry.  Can you think of any other devices that have ALL of these features and more?  Oh right, the iPhone/iPod Touch. These two ubiquitous little devices might just pull out the rug from under Bug Labs…

(Continue reading part two of this blog post)