Aside from the R&D costs, sourcing materials and components, mold fabrication, paying your supplier, and shipping costs, entrepreneurs have the worry of finding funding for hardware startups to pay for all of this, long before a product starts manufacturing and can be sold to return some profits.
Unless a hardware startup is sitting on a pile of cash, it’s going to be necessary to raise funding for the new product and a lot of it! Here are 8 traditional and more modern ways to do so:
The NPI process is more difficult than some startups think and funding is crucial for success
The NPI process to design, develop, and manufacture your new product is fraught with challenges and difficulties. There are lots of tasks on your plate before you can even think about manufacturing a product! Be warned, it is seldom smooth or cheap, as outlined here by a veteran product designer. There will be many rounds of prototyping to refine the product before it can go into production, for example, each costing time and money.
Some hardware startups think that the product launch process will go something like this:
However, it’s almost certainly not that straightforward. Rather, a more realistic expectation for the process would look more like this:
As you can see, there will be multiple peaks and troughs and there are a lot of stages and milestones to reach and pay for before you can get your new product on shelves.
Why might investors be hard to get on board?
Investors know that hardware startups are riskier investments than, say, software applications because there are a lot more variables in play when bringing a new physical product to market. With an app, if an iteration is required developers can work on the code to make the change, but iterating a physical product needs a new design, product engineering, testing, prototypes to be built, signed off, and then mass-produced, let alone being certified compliant with their market’s regulations, too. Not only that but launching a new product can’t be done in-house by a hardware startup. They are reliant on outsourcing to product designers, engineers, and suppliers, all of whom may be very far away and speak different native languages. As you can see, there’s a lot to go wrong and money needs to change hands with several parties in order to get a new physical product to market. Hence the risk of failure for many hardware startups.
Who might be prepared to take the risk and invest and what can be done to make your proposition more attractive to these would-be investors?
Here are the 8 sources of funding for hardware startups it’s possible to tap into and what they might be looking for:
1. “Friends, family, and other fools”
If you have personal connections who have the cash and might be interested in assisting your venture it can’t hurt to ask! Some of the most famous entrepreneurs started off with funding from family and friends, such as Sir James Dyson (who borrowed money from his wife), GoPro, Whole Foods, and even Amazon!
When considering funding for hardware startups from friends and family, taking a loan may be more suitable for founders who want to retain control unless you want them to have a say in the business as an investor (in which case you may have to provide them with equity)!
Borrowing from friends and family isn’t necessarily a great idea if you want to maintain good relationships, but if you approach it in the same way as you would, say, borrowing from the bank (have a contract, make regular repayments, perhaps pay interest, etc), then you can make it work and maintain good relations with the lender.
2. Commercial bank loans
One of the oldest and most utilized paths to startup success is to take out a bank loan. Some of the world’s most recognizable businesses started with a humble bank loan, such as Starbucks, for example.
Banks will be reluctant to lend to extremely early-stage startups who have little in the way of tangible assets and market traction, so it’s probably better to approach them when you’re ready to pitch to VCs. They will want to see similar evidence such as orders to convince them that they’re not risking too much when lending to you.
If you can get a loan, the benefits would include a fixed rate of interest (in many cases) and that the bank receives no equity in your business for the funding provided. Of course, if you cannot keep up with repayments this could lead to trouble as startups often have an unpredictable cash flow, so founders take a big risk when securing loans against their homes, for instance.
3. Sell to customers in advance and drum up pre-orders
Getting preorders from customers is one of the best ways of obtaining funding to press on and launch the product.
You don’t suffer from a dilution of equity, you get cash in advance, and you also get a commitment from the customers to give feedback.
Marketing is a helpful tool here for building some early buzz about your product and preorders can help give your product an air of exclusivity that’s attractive to customers.
The cost to produce a website, images, videos, and brochures about your product is probably substantially less than the funds you need to raise to launch that product, so that could be a wise early investment. This will allow you to show potential customers what they’ll be getting and take pre-orders (especially if you have an e-commerce website set up) and start building up an email list of interested parties.
You’re likely to require:
- Website build and design
- Photos (it will help if you have a prototype that looks very much like the final product)
- Payments set up – PayPal checkout, for example
- Social media channels setup
- Ads and promoted post budget
- Content created – blog posts, videos, brochures – a graphic designer may be required
Much of this work can be done by outsourcers who you can find for a reasonable cost on Upwork. Expect a lot of time and input to be required from yourself and your team to manage the process and get a result you’re happy with, but once it’s done maintenance of the site should be relatively low cost. Hopefully, your ad budget can get your new product seen by the right potential buyers.
Be aware, though, that the more information you put out into the open about your new product, the more you increase your risks of copycats taking the idea and running with it, potentially beating you to market.
This method works well if there are just a few such customers and your new product solves a big enough problem for them to splash out without the product being ready yet. That’s why marketing plays such a large role here to educate and excite the prospects enough to make them part with cash early on.
You may also like to listen to this podcast: Can Getting To Market First Stop Copycats? [Podcast]
4. Gain investment from angels, seed funds, & early-stage VCs
There are plenty of individuals and organizations out there who are willing to provide funding for hardware startups for an equity share, especially if the new product is particularly innovative.
Finding investors online and messaging them is a basic start, but some hardware startups join incubators and accelerator programs that usually put the startups they’ve been nurturing in touch with proven investors when they’re more mature.
Not being ready to showcase your product is a critical error that can hamper finding investment from angels, seed funds, and VCs. After all, they need to know what they’re investing in. If you’re at a very early stage in the product launch cycle, such as having a concept and still designing it, getting investment from these sources may be tough. In that case, incubators and accelerators may work better for you until your business and product are more mature.
Investors are looking for a product that’s better prepared to go to market soon, so not only will you need a ‘minimum viable prototype’ or even a full working prototype, but they will also likely want to see market traction. This would be engagement from customers and prospects online (pre-sales, for instance), letters of interest from customers, distribution deals, and a growing customer base. If your product has plenty of buzz already and is ready for manufacturing, that’s a good time to seek investment.
How much do you need and what share in the business are you willing to give up, though? If you are unsure, speaking to a mentor can help prepare you to speak with investors who are right for your needs.
Placing your product on these sites opens you to a valuable source of funding, either in the form of pre-sales or investment cash.
Some of the benefits include:
- You get pre-orders that constitute valuable funding
- Your product idea is validated (if people back it)
- Your startup’s credibility is enhanced (in the eyes of both investors and potential manufacturers)
- If your product goes viral, this can get valuable press and attention
However, it has certain drawbacks, too:
- The platform and payment system will take a cut of any funds made (Kickstarter takes a 5% commission, for example)
- Increased visibility and a successfully-funded product idea makes a tantalizing prospect for Chinese copycats
- Backers might quickly turn on you and be critical if you don’t deliver on time, even though they may not understand the full story behind any delays
- The relative success may also be a prompt for your manufacturer to find a way to increase the prices they’d initially agreed with you
Not every crowdfunding project is a success. Even fully-funded projects fail or suffer from huge delays. Take the Zano drone, for instance. This novel drone raised over £2.3m and still failed to make it to market causing much anger from backers because the working prototype couldn’t be successfully mass-produced.
One key reminder for entrepreneurs with a hardware startup is to increase your estimate for the amount of time and money you’ll need when settling on target funding. The backing you receive, less the platform’s fees, must be able to cover your expenses, upfront costs, manufacturing costs, shipping costs, and allow you to cope with any speed bumps you hit along the way. Keeping the product simple as a V1.0 could help you to get to market faster and make the sales you need to reinvest and iterate the product to a more complete V2.0 and manufacture that, with the cycle continuing from there.
You may also like to delve even further into how crowdfunding might help you here: Pros and Cons of Crowdfunding (Kickstarter/Indiegogo) for Startups
6. Government grants, subsidies, zero-interest loans, tax rebates, etc.
As the UK government says on its ‘Grantshub:’
The government is willing to invest in its most important economic resource, its human capital; a nation is only as good as its people.
Finding funding for hardware startups from your government, which may be local or national, is an interesting source of startup money for your business. This usually takes the form of a grant (free money), low-cost loan, tax rebate, or some others, and can be provided to companies at an early stage when they’re undertaking R&D, producing prototypes and developing the product, or operating and growing the number of customers.
The best thing to do is to go online and search for government grants in your country or local area and then check if they’re open to companies like yours (for instance, some may only be available to internet-based service companies or local). There are a huge number of options available for companies at different stages of the product launch process. Take the UK as an example, despite being a small country, the list of local grants and loans is huge!
If you feel that the opportunity to get ‘free money’ is worth your while, then taking the time to make the application may be worthwhile so go ahead and apply if your concept corresponds to a domain they want to encourage!
7. Hardware accelerators
If you’re lucky enough to reach the criteria to be accepted, there are plenty of hardware accelerators from the Founder Institute to Techstars, etc, who could really give your business the funding and impetus it needs to get that new product to market and become successful.
Incubators are generally less about providing funding, and more about providing support over a lengthy period, such as office space and mentorship, to hardware startups who’re at a very early stage in the product development and launch process.
However, accelerators are short, intensive programs that tend to focus on more mature startups and regularly provide funding in return for differing levels of equity. As well as the funding, the accelerator provides mentors who can help grow the business in a proven, structured manner, and also bring in numerous other VCs, angel investors, etc, to pitch to when the time is right.
Accelerators, like other investors, will want to see an innovative product that solves a real-life problem, market traction like pre-orders, if possible a real working product, etc.
There are many hardware startup incubators and accelerators out there, and we made a thorough list of them along with some key data points for each here: Incubator Or Accelerator? What Should A Hardware Startup Choose?
8. Equity crowdfunding sites
The market is changing and there are always new and inventive ways to get funding for hardware startups such as equity crowdfunding sites.
Unlike traditional crowdfunding sites where backers back mainly lower amounts in return for your product, some of these sites put serious angel investors in touch with startups they’re likely to be interested in.
Both startup and investor needs to register on the platform, and investors will commonly be paying several thousand dollars at least to become active.
Here are a few worth exploring:
- Wefunder.com – Users invest some cash and become angel investors in startups from industry sectors of interest. It provides a platform where investors can invest just a little into companies that they really want to help make progress, not the well-established companies they’d commonly find on the stock market.
The following are platforms that put investors and startups together with more or less strict vetting requirements to help provide businesses that’re most likely to be successful.
- primeCrowd.com – (Europe focus)
- Republic.co – (USA focus)
- FrontFundr.com – (Canada focus)
The success of a new product may well depend on the entrepreneur’s ability to obtain funding for hardware startups as new products can cost hundreds of thousands — or millions — of dollars to bring to market.
Hardware startups are notoriously hard to get off the ground due to the labyrinthine NPI process involving many expensive stages. That’s why the funding is so critical, as it’s the money available that protects a startup from failing even if unexpected problems occur.
With the right mentorship and careful adherence to a structured NPI process, it’s possible to build the startup to the point where investors want to part with their cash. So, the question is, which source of funding are you going to go after?