Talking hardware startup funding with
When it comes to financing early-stage startups, there has been a continual increase in angel investment activity – networks such as the UKBAA, the Angel Investment Network, and Startup Funding Club have dramatically risen in popularity. When it comes to hardware, things become a little more tricky. Hardware startups, however, carry an element of risk in addition to the usual risks faced by a software startup. Engineering a reliable and certifiable product, building and managing a supply chain, protecting your intellectual property, quality assurance, logistics…
The list goes on. And on. And on.
We’re very fortunate to have angel investor and RPD non-executive director Pierre-Edouard Harant revealing his thoughts on hardware startup financing. Pierre’s background in finance and investment offers an insight into the decision making process of an angel investor in the hardware world.
M: What do you look out for when investing in hardware startups?
PE: All investors look for product-market fit, market size, growth potential, previous team experience, and so on. For hardware, one of the most important things is a product development roadmap. Being able to display understanding in manufacturing, supply chains, and distribution profit margins are pivotal. Your projected unit cost and your RRP must take into consideration the margins distributors and retailers will take. Additionally, established relationships with distributors, or a plan to contact them, is very important.
M: Great answer.
PE: And don’t forget cash-flow management and being able to address tooling and other manufacturing set-up costs!
M: Let’s flip the question – what do you think hardware startups should be looking out for when looking for angel investors?
PE: They need to have people who understand the hardware development ecosystem – so many investors don’t know anything about hardware! That’s why ‘hardware is hard’, people think (and rightly so) that it’s higher risk, and if they don’t know anything, they can spend a lot of time talking to the wrong people.
M: Are there any occasions where an alternative form of financing (i.e. crowdfunding) should be considered instead of more traditional routes?
PE: For B2B, you obviously won’t do a Kickstarter campaign. For B2C, it’s a good way to get engagement, test your product. It’s a double-edged sword, if your campaign does well, you’ll attract attention and investors. If it doesn’t go so well, it doesn’t mean your product is bad, but it may scare a lot of potential customers and investors away. Crowdfunding shouldn’t be your only route – look at grants, angel investors, crowdfunding, specialist VCs, strategic partnerships with relevant organisations – explore as many opportunities as possible.
M: What do you think will be the big hardware trends of the next few years when it comes to VC and angel investing?
PE: In IoT specifically, B2B products are what a lot of angels and VCs are looking at. We’re past the consumer-level craze in IoT, and we’re getting to more industrial applications solving problems in society and business. In my opinion, startups using AI and IoT in conjunction are very interesting. Hardware that builds a bridge between the digital and the physical are also very exciting. At RPD, we’re also seeing a lot of activity in the consumer healthcare, cleantech, infratech, agritech, robotics, and logistics industries; I am sure this trend will continue to rise over the next few years.
M: If you had to give one piece of advice to all hardware startups looking to get their product to market, what would it be?
PE: Definitely seek advice about manufacturing – the earlier the better. Don’t exaggerate (or lie!) to investors with regards to your development stage. There’s a pattern in the hardware ecosystem where startups tend to consider themselves further along in development than they think. In turn, this scares investors away from hardware. My advice to hardware startups is simple – get advice as early as possible on going to market, change the idea that ‘hardware is hard’, and gain the trust of investors – big or small.