{"id":20428,"date":"2014-11-30T20:18:06","date_gmt":"2014-11-30T18:18:06","guid":{"rendered":"https:\/\/www.hiig.de\/?p=20428"},"modified":"2018-07-02T18:10:36","modified_gmt":"2018-07-02T16:10:36","slug":"hardware-startup-funding-what-makes-it-so-different-from-software-startups","status":"publish","type":"post","link":"https:\/\/www.hiig.de\/en\/hardware-startup-funding-what-makes-it-so-different-from-software-startups\/","title":{"rendered":"Hardware startup funding \u2014 What makes it so different from software startups?"},"content":{"rendered":"

The article was first published on<\/span>\u00a0webmagazin.de<\/a>.<\/em><\/p>\n

Investing in a startup company is about as risky as it gets. High uncertainty in respect to the\u00a0business model, the technology, and the team combined with inherent market risks gave rise to\u00a0miscellaneous methods to assess these young companies and inform funding decisions.<\/p>\n

However,\u00a0even the organizations lauded as the financing motors of the startup world \u2014 venture capital firms\u00a0\u2014 struggle to yield returns adequate for the risks taken. In fact, the majority of European VCs\u00a0do not make a profit at all.<\/p>\n

Venture capital funds remain a hoard though, primarily due to investors\u2019\u00a0portfolio diversification strategies and because capital has fewer and fewer safe places with decent\u00a0returns to go to \u2014 and of course because some VC funds indeed fulfill their yield promises.<\/p>\n

VC likes fast traction and rapid growth<\/h3>\n

Startups making a stab at a piece of these venture capital funds have to adhere to a set of rules in\u00a0order to succeed. These rules include an idea that is in some way innovative (e.g., in regard to the\u00a0technology, the revenue model and\/or distribution channels) and of course a market potential that\u00a0allows for the rapid growth of the company through soaring customers, revenues, and ideally\u00a0profits \u2014 i.e., what makes a startup a startup.<\/p>\n

A synopsis would read: Venture capital firms are\u00a0cautious and like proven business models that are nonetheless innovative enough to enable fast\u00a0growth and an enormously profitable exit in due time of the fund\u2019s term.<\/p>\n

VC likes software companies<\/h3>\n

Some say that the venture capital model is thus only suited for software startups. These\u00a0companies require relatively small upfront investments to arrive at a prototype or a usable product\u00a0that can be used to proof market demand and show traction.<\/p>\n

Once the startup arrives at a working\u00a0business model, rapid \u2014and often global\u2014 dissemination is possible thanks to the Internet and\u00a0standardized operating systems. Additionally, delivering digital products has minimal marginal\u00a0costs and allows for the scaling VCs are looking for.<\/p>\n

Any startup that doesn\u2019t work this way has a\u00a0hard time to outdo software companies in the fight for funding. Basically any firm relying on\u00a0manufacturing \u2014i.e., hardware startups\u2014 falls into this category.<\/p>\n

Hardware companies are too slow<\/h3>\n

Time restrictions induced by the funds\u2019 lifetimes establish an additional handicap for these\u00a0companies. Whenever development or \u2014dread the thought\u2014 research is necessary, venture\u00a0capital often shies away from the company and its particularly unforeseeable future.<\/p>\n

But even if the\u00a0product is likely to be successfully developed and the market potential is enormous (i.e., just good\u00a0enough for a VC), hardware startups are likely to require too much time to attract customers on a\u00a0global scale.<\/p>\n

Times are changing<\/h3>\n

In recent years, hardware has started to tread some of the same paths software walked decades\u00a0ago. Increasingly modular approaches, standardization, and open source hardware communities\u00a0have created an environment that makes hardware development increasingly faster, cheaper, and\u00a0more accessible.<\/p>\n

This gave rise to the maker movement that helped to bring devices such as 3D\u00a0printers to ordinary mortals. Some call it the hardware revolution, while others refer to it as the\u00a0hardware renaissance, acknowledging that grassroots hardware development is anything but a\u00a0new phenomenon.<\/p>\n

Founding and funding hardware startups<\/h3>\n

Startup companies sprout in this ecosystem of innovation, openness, and low entry barriers. A\u00a0pivotal element is of course the declining capital required to start a hardware business.\u00a0Bootstrapping a company to build a working prototype of a piece of hardware is possible again.<\/p>\n

During my last trip to Boston, I had the chance to talk to a few MIT hardware startups. What I found\u00a0particularly striking was that business angels investing in these companies seem to be a lot closer\u00a0to the product than it is the case in software startups. Founders told me that their angel investors\u00a0knew their devices very well and gave actual engineering advice \u2014 it has been a while since I heard\u00a0that from a software startup founder.<\/p>\n

Though this is highly anecdotal, it might hint at a greater non-monetary added value that business angels can bring to the hardware table and that it is\u00a0something founders should be looking for.<\/p>\n

Crowdfunding the hardware renaissance<\/h3>\n

As many hardware startups use the crowd to co-develop their devices (e.g., through open source\u00a0hardware communities) it comes at no surprise that crowdfunding too is an attractive way to get the\u00a0company started. Often, these startups even go through multiple crowdfunding campaigns and use\u00a0different platforms as their financial needs change.<\/p>\n

That could mean to start off with a donation-based mode that requires nothing more than to write a thank-you note to investors, to then \u2014 a few\u00a0months and successful prototypes later \u2014 move on to full-fledged equity-based crowdfunding with\u00a0six-digit investments and above.<\/p>\n

The corporate world is waking up<\/h3>\n

Notably, established players are beginning to notice this renaissance too. Stratasys\u2019 acquisition of\u00a0Makerbot, BMW Mini sponsoring hardware startup fairs in New York and Berlin, Google\u2019s\u00a0acquisition of Nest Labs, and, last but not least, venture funds specifically aiming at hardware\u00a0startups (e.g., haxlr8r) are indicators that some can tell which way the wind is blowing.<\/p>\n

Acquiring funding for a hardware startup still is a hassle and anything but easy \u2014but frankly\u00a0speaking, this applies to any new venture. What is changing is that it is not almost impossible\u00a0anymore. As hardware development goes the way software development went a long time ago, it\u00a0becomes easier to test and grow ideas.<\/p>\n

In alliance with sources of capital ranging from your\u00a0kindergarten teacher to corporate venture capital funds, I have a notion that it has never been\u00a0easier to get a hardware startup off the ground.<\/p>\n

Photo:\u00a0Subhashish Panigrahi<\/a><\/p>\n

This post is part of a weekly series of articles by\u00a0doctoral candidates<\/a>\u00a0of the Alexander von Humboldt Institute for Internet and Society. It does not necessarily represent the view of the Institute itself. For more information about the topics of these articles and associated research projects, please contact\u00a0presse@hiig.de<\/a>.<\/h4>\n