Funding Hardware Start-ups and The Challenges Ahead
Finally some down time as I head out to Tokyo on a 7 hour flight. Traveling can be a hassle but it does give one a good clear mind with no access to Internet (or limited with planes all touting wifi these days). I chanced on a nice article written by the founder of a hardware company (see article title at the end of this post). In the article, Andrew Thomas shares that “Hardware is HARD”! And how true it is. As an engineer and venture investor with prior experience in hardware start-ups, the challenge can be another level.
Andrew Thomas is not belittling software companies but I concur with his view that hardware companies do take an extra level of risk, execution and vision. And quoting from his article, The costs are higher, you must carry inventory, and since you can’t just “change code” with hardware, a single mistake could kill you. Sounds dramatic, but it’s not an exaggeration.
As a venture lender, I enjoy funding hardware companies as much as software ones. As an engineer, I relish the challenge of rolling up my sleeves with an early stage hardware start-up with my knowledge of manufacturing processes, supply chain and achieving an optimal cost of goods structure.
Hardware start-ups requires an extra layer of debt financing for the company to leverage an efficient cost of capital to grow its customer base. Across my venture portfolio, I have matured together with more than a handful of hardware companies including a life sciences instrumentation “unicorn”, a lighting-as-a-service, a kitchen robotics as well as an electric vehicle company. Donning the role of a board member, I had to help find solutions to overcome the challenges of scaling manufacturing. This is not just cost related to supply chain, but also production and process, talent and an efficient logistics hub.
Most hardware companies work with a contract manufacturer but need to align a vision towards achieving a consistent manufacturing process and ensuring low (and eventually zero) reject and return rate that will in evidently ensure great customer satisfaction. Having two manufacturing locations – one located in a non-earthquake zone and politically stable country is becoming a key consideration factor.
Besides all the of the above, a young upstart company needs to find a venture investor who can invest patient capital but also bring strategic value add. Andrew Thomas shared a list of US VCs who belong to this category. In the Asia region and specifically to Southeast Asia, there are fewer investors who are comfortable with hardware companies. The early stage hardware investors I know range from Seeds Capital (Enterprise SG), SG Innovate and a few strong believers like Wavemaker Partners, Cocoon Capital, OpenSpace Ventures, ST Engineering Ventures, FocusTech Ventures. This is not an exhaustive list but it will be great to have a go-to list of investors for these hardware companies to approach.
Venture debt has its original roots in the US funding hardware companies some 3 decades ago and today still counts as a majority part of the funding to help hardware companies scale up. In Southeast Asia, hardware start-ups are beginning to get comfortable with debt financing with the availability of venture debt. For funding working capital needs to build inventory, supply chain and manufacturing processes, debt becomes a more efficient use of capital alongside equity. The start-ups that I engage enjoy not just the financial and debt structuring conversation but more importantly how we can use prior experience to help them avoid some of the costly mistakes and scale faster, exponentially. Reach out to me for a conversation to see how Genesis Alternative Ventures can help.
Article:18 Investors That Could Fund Your Hardtech Start-up
Hardware is hard. These investors know how to make it work.
By Andrew Thomas Founder, Skybell Video Doorbell