Note: this article was written with hardware startups in mind, but most of it applies to any other startup.
We Know Who Funds Hardware (or Other Categories), But Not Why
To take the case of hardware startups (our focus at HAX): you can find lists of hardware investors and trends, but it is a bit like giving you a pair of skis and telling you “go that way, really fast, if something gets in your way, turn”. It shows you the pieces but doesn’t tell you how to play the game.
In a presentation I gave recently I highlighted the following:
- Classic way
- End game
Mostly because the game is not always what it appears to be.
Let’s get started.
The Classic Way
It’s the advice you hear everywhere, and then some. I managed to condense it to five words starting with “T” 🙂
This is real milestones, like technical demo, work-like-look-like prototype, customer feedback, corporate pilots … Show you get things done! It is NOT media coverage, Youtube views and other vanity metric. Note that misguided customer discovery can also lead to undue confidence in the demand for your product. What i-Corps does really works, just do that.
Do you have the experience or pedigree? (Sold a company? ex-Google? Industry? Stanford? Etc.).
Is it hard to do? Defensible? (secret sauce rather than patents) Affordable?
Why now? Did something change in the market or in tech enablers?
You can’t convince people. Just find more of those who believe. Or as I like to repeat “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.
All this is great, but the reality is harsher than that.
2. The Reality
The game is rigged!
Well, not really, but you’ll see what I mean.
Getting attention is really hard, so VCs often rely on filters to deal with the flow of demands. A recommended startup gets immediate attention.
I couldn’t find a clever alliteration nor an acronym this time, so bear with me.
A lot of deals are not cold calls but done via recommendations, and are never really “socialized” beyond the immediate network of founders. So VCs have the choice between highly recommend deals and … your deal. Tough!
- Social proof
With the right labels and endorsements, VCs flock to a deal because it not only looks high potential but less risky. It makes sense that serial entrepreneurs have learned something in previous ventures (founder is a career) and will mostly make new mistakes.
Let’s go to Silicon Valley for 2 weeks! There is so much money there, you’ll have no problem finding some even if it’s from a second or third tier VC! As it turns out, it rarely works. Why? Because you have zero track record locally, poor intros, maybe the wrong legal setup, and maybe you don’t know the cultural codes. Most VCs don’t have a problem if you’re not in the Valley (it’s too costly and hard to recruit at early stage), but outside the U.S. is another story. Unless you have outstanding tech and U.S. 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, and you’ll get a deal.
- 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.
Consumer is mostly out. Enterprise / Industry and Health Tech are in. Five years ago HAX was investing in ~75% B2C, now it’s less than 25%. Mostly because (1) Consumers are very price sensitive. $100? Better have Apple quality! and (2) Most consumer products are “nice to have”, not “must haves”. There seem to be higher motivation for STEM, because it’s an investment in the future of kids.
But all hope is not lost! I also listed a few #hacks.
My extensive vocabulary allowed me to find an unprecedented EIGHT hacks starting with “C”. Coverage, Celebs, Cheap, Champion, Corps, Conditions, China, Crypto.
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. For more ideas, read the timeless presentation by Mike Butcher from TechCrunch.
Engage with the right one and you’re golden. Think Beats and Dre. One startup was making a high-tech mike (which I bought on the spot as I am considering podcasting) and said a BBC announcer loved it. Done!
Don’t starve but be frugal. This will make you less dependent on outside funding. Some companies in Illinois spend $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). Bootstrapping all the way to profit! (and keeping 90% of their company)
You don’t have the network for warm intros? Find ONE angel who has it. Such person can help syndicate a deal.
Corporates can pay you for POCs or other. Some are considerate enough to be mindful of your cash flow and pay early.
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. Factories can be your bank, and it’s non dilutive! Be sure to meet the owners, who are often entrepreneurs, and make friends. If they can’t give you good enough terms, take your (tiny) business elsewhere.
At HAX we are big advocates of prototyping and manufacturing in China. Mostly because of SPEED and EXPERTISE (ask Tim Cook). And 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 U.S. since 2017, and many Chinese VCs are happy to invest overseas (in USD) as they find the deals cheaper than China (they also see more potential as they include the Chinese market in their projections).
- Crypto ;p
We haven’t found a way yet, but if you can have a blockchain angle, you’ll be able to access another class of investors. At the moment you best bet is to repaint your hardware company as A.I., Machine Learning or even “behavioral analytics”. You’ll get more attention. Many of our robotics and health tech startups are legit A.I. or ML companies. Maybe yours is too!
4. End Game
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 you have?
What is the true market potential?
Are conditions changing?
Fortune favors the prepared and 90% of exits are M&A (CB Insights reported 3,358 total tech exits in 2016–3,260 M&A, 98 IPOs — so M&As are 30x more common). Over 60% happening at series B or before so be mindful of your asymptote & inflexion point.
If you find more Ts, more Cs, or have comments, comment away, tweet or email me at [email protected]