Funding is still elusive for many startups. The main reason is that if you play the game the way everyone does, it’s often a tedious drag.
You can find lists of hardware investors and trends, but in some way, it’s like someone giving you a pair of skis and telling you “Go that way really fast. If something gets in your way, turn.” In other words, it shows you the pieces but doesn’t tell you how to play the game.
Fortunately, I’ve outlined a few tips below.
The classic way
It’s the advice you hear everywhere—and then some. I managed to condense it to five words starting with “T.” 🙂
- Traction: This means real milestones like a technical demo, work-like-look-like prototypes, customer feedback, corporate pilots, etc. It shows you get things done! It is not media coverage, YouTube views, and other vanity metrics. Note that misguided customer discovery can also lead to undue confidence in the demand for your product.
- Team: Do you have the experience or pedigree? Have you sold a company? Do you have an ex-Google member? Are you knowledgeable in the industry? Did someone go to Stanford?
- Tech: Is it hard to do, defensible, and affordable?
- Timing: Why now? Did something change in the market or in tech enablers?
- Target: You can’t convince everyone, so just find more of those who believe. As I like to say, “If you want to change people, change people.” In particular, stay away from those who say “Hardware is hard.”
So traction, team, tech, timing, and target.
This is great, but reality is harsh.
Getting attention is really hard, so VCs often rely on filters to deal with the flow of demand, and a recommended startup gets immediate attention.
Insiders: A lot of deals are not cold calls but done via recommendations. They are never really “socialized” beyond the immediate network of founders. So, VCs have the choice between highly recommended deals and your deal. Tough!
Social proof: With the right labels and endorsements, VCs flock to a deal because it not only looks like it has high potential, but it also seems less risky.
Local: Going to Silicon Valley for greener pastures rarely works. Why? Because you have no local track record, poor intros, maybe the wrong legal setup, and no knowledge of the culture code. Unless you have outstanding tech and US customers already, look for VCs locally for your first round. Yes, you might not get as good a deal, but you’ll waste less time.
Cash flow: With hardware, cash flow is an issue. VCs hate to finance working capital. If you scale with structurally negative cash flow, you will just scale the problem.
B2B: B2C is mostly out. Five years ago, Hax was investing in ~75 percent in B2C. Now, it’s less than 25 percent. This is mostly because (1) consumers are very price sensitive, and (2) most consumer products are “nice-to-have,” not “must-haves.”
But all hope is not lost!
My extensive vocabulary allowed me to find eight hacks starting with “C.”
- Coverage: Media is mostly a vanity metric, but it can help. If you don’t have “hardware porn” to show off like a cyborg or a flying car, focus on human interest stories, humor, or an exciting vision of the future.
- Celebs: Engage with the right one, and you’re golden. One startup was making a high-tech microphone and said a BBC announcer loved it. Done!
- Cheap: Don’t starve but be frugal. This will make you less dependent on outside funding. Some companies in Illinois spend US$1,000 per founder per month. Others have relocated to Shenzhen until they ship. We have several companies at Hax who are getting complex products to market with no other external VC funding (sometimes they use grants or win prizes, and start selling POC or products to customers).
- Champion: You don’t have the network for warm intros? Find one angel who has it. Such a person can help syndicate a deal.
- Corps: Corporates can pay you for POCs or others. Some are considerate enough to be mindful of your cash flow and pay early.
- Conditions: Look at improving your cash flow by reworking your contracts with your suppliers, distributors, and customers. With some luck, your clients will pay you upfront, and you’ll pay your factory 60 days after delivery and reach cash flow nirvana.
- China: We at Hax are big advocates of prototyping and manufacturing in China. This is mostly because of speed and expertise. Contrary to popular belief, you don’t need high volumes. Another thing for which China is great is investment. There is more VC money there than in the US since 2017, and many Chinese VCs are happy to invest overseas, as they find these deals cheaper than in China.
- Crypto: If you can find a blockchain angle, you’ll be able to access another class of investors. At the moment, your best bet is to repaint your hardware company into an AI, machine learning, or even “behavioral analytics” company. You’ll get more attention.
This is a bit of a new topic, but if you have already raised a seed round or more and are considering your next round, it is worth asking yourself whether an early exit is not a better option.
- How much momentum do we have?
- What is the true market potential of our startup?
- Are conditions changing?
Fortune favors the prepared, and 90 percent of exits are M&A. Over 60 percent happens at series B or before, so be mindful of your asymptote and inflexion point.