Hardware startups are a capital-intensive undertaking. All startups need access to funds to pay for things like office space, employee salaries, and marketing materials. Hardware companies need additional capital to cover paying your factory, warehousing, fulfillment, customer support, and more.
Fundraising can be a time-consuming process…one that takes you away from building your product. Therefore, it’s important to carefully cultivate your target investor list. There are many ways to raise funds to grow your hardware startup, including bootstrapping, grants, friends and family, angel investors, venture capitalists, and strategic investors. Once you know the amount of capital you’ll need to reach the milestones you want to hit, then it’s time to identify the investors you want to target. If you’re looking at angels, VCs, and strategics, you’ll want to verify that they invest in your sector, and that they don’t have directly competitive investments in their portfolio. A few good resources for research include AngelList, Crunchbase, and Quora.
After you’ve identified the investors who are a best fit for your company, then you’ll need to reach out for a meeting. Mark Suster has an excellent post about establishing relationships with investors on his blog, Both Sides of the Table, where his advice is to Invest in Lines, Not Dots. A “dot” is a single interaction. As a relationship develops, there are more meetings, calls, or email updates—more dots. Eventually, the investor can draw a line connecting these dots, see the path the company has taken to date, and predict where it might go in the future. Very few investors write a check the first time they meet a founder who’s outside of their personal network, so building relationships prior to your raise is a good idea.
Once you’ve built your relationship with an investor and landed a meeting, you’ll get your chance to tell your story. A good pitch is a story about a problem and a solution. It’s a narrative that weaves together both your existing progress and your future vision. Here are seven points to include in that narrative.
1. The Problem. What is the customer pain point you’re trying to solve? Be specific. What is it about the problem that has appealed to you on such a deep level that you’re willing to devote years of your life to solving it?
2. Your Solution. What is your fix for the pain point you’ve just articulated to the investor? The solution doesn’t have to be absolutely innovative; it’s fine to be building a better mousetrap, as long as you’re able to articulate specifically why your mousetrap is better. Are you competing on price, on features, or on something else entirely?
3. Team. Why is your team the best possible group of people to be solving this problem? Do you have a background or personal experience in the space? The founding team is the most important criteria for many early-stage VCs. Ideas often change, so investors back solid people in who inspire confidence.
4. Addressable Market. Who are the people suffering from the problem that your product is solving? How many of them are out there? What percentage is likely to pay for your solution? Many founders find this difficult to quantify, but it’s important to understand the economics of the space you want to sell into.
You have to be able to make a compelling case for why your market is big enough to be appealing to an investor. Do your homework here, and be honest. There is a difference between total addressable market (e.g., all of the teachers in the country) and obtainable market (e.g., the teachers working in school districts with a budget capable of buying your awesome new ed-tech device).
You might be asked, “Are you a product or a platform?” This is the investor’s way of asking if he’s going to be backing the one product you are currently producing, or if there is a vision for a stable of devices that work together, or a software layer that can extend the experience. Will you be content making a single connected can opener, or are you striving to be the next OXO? It’s going to be difficult to convince a VC that a single product is going to sell enough units to produce venture-level returns. A well-articulated game plan for how you will become the next OXO is much more compelling.
5. Traction and Revenue. If you have any existing traction, get it out there, front and center. Investors love traction. If you are a hardware company with a software component, share your engagement numbers and relevant software metrics. Share preorder or sales data, mailing-list signup counts, the number of Kickstarter or Indiegogo backers you have, and the total dollars raised. If you’re a B2B product with a longer sales cycle, share letters of intent. Any data that you have that can indicate to an investor that there is demand for your product. Most early-stage investors aren’t looking for some specific magic number of orders or amount of revenue; they care about trends over time.
6. Competition. Every startup has competition. Period. You might argue that your device is the very first of its kind to be conceived. Even if that’s true, few problems are new, so your competition is whatever people are currently doing to overcome this difficulty. If they’re doing nothing, then your competition is “nothing.” In other words, people are not thinking this problem is important enough to bother spending money on your solution.
Be honest in your competition slide, because the investor is going to do her own competitive research as well. If you’ve conspicuously neglected to mention your closest competitor, you will seem either dishonest or uninformed about your market. Many founders like to draw a feature matrix if they’re competing on features, or a quadrant visualization if they’re competing on one or two primary differentiators.
7. The Funding Ask. Why are you asking this investor for $3M? What does that $3M get you? Be specific. Is it for hires or marketing or manufacturing? While most seed-stage investors ignore the financial projections of early-stage software companies, hardware is a different beast. A greater number of things need to be paid for early on: salaries, manufacturing, certification, warehousing, shipping, etc. Don’t forget about rent, legal costs, and marketing.
It’s important to have a clearly articulated estimate of your costs, particularly if you’re raising to go to market for the first time. Most founders prepare a spreadsheet in addition to the pitch deck. This doesn’t have to be anything fancy, but it should convey how the dollar value that you’re asking for gets you from point A to point B. The investor wants to see you asking for an amount of money that can plausibly give you 18 months of runway.
This article is excerpted from the “Fundraising” chapter of Renee DiResta’s book, The Hardware Startup (O’Reilly, 2015), which also offers guidance on funding options, building relationships with investors, competitive research, examination of financials, and round structuring.