Being an innovator is exciting and fun. And the tech world is always “abuzz” with the latest software startups, especially in such areas as fintech, healthcare, entertainment, and AI. A tech-savvy gamer can create a new game app and become a millionaire in short order. Crowdfunders and venture capitalists love to invest in software startups. Why? Because software development, while it may be complex and time-consuming, is relatively inexpensive.
But What About Hardware Innovations?
Cost has been the big problem for individual or small team hardware innovators. Traditionally, hardware has been developed by the “big boys” because it is just so expensive. According to Simon Baker, chief technology officer of the UK-based company Radfan:
“When listening to a hardware idea being pitched, it must be hard for investors to justify kicking in $500,000 to a company with no traction when they can invest the same amount in a software startup that already has customers, a proven business model, and a clean balance sheet. And scaling up software is relatively easy.”
Just developing a prototype can cost thousands. And that development occurs within a vacuum of not one customer on the horizon. It’s been hard to attract investors.
Yet, things are changing for hardware companies.
Software development has become so competitive, that investors have difficulty identifying those startups that will ultimately make it. And so, they are looking at hardware startups with a new “eye.”
In 2014 alone, according to an TechCrunch estimates, investments in hardware startups reached a total of $503.8 million, with a breakdown as follows:
Big winners that year, both in crowdfunding and in VC were medical devices and wearables, although Oculus got a large chunk.
Things are looking up for hardware startups, as funding is becoming more available. For the small innovator, this is great news. But there is still the question of just how to launch a hardware startup.
The post below should give you some guidance!
Always Start With a Prototype
In the past, a prototype has typically meant thousands in seed money which an innovator or a small team may not have. Now, however, there is all sorts of open-source hardware stacks, such as Paris-based Arduino. This allows innovators to build systems for just a few hundred dollars. 3D printing and CAD packs are also cheaper- prototypes can be crafted that are functional and also look great.
There are other unique and new resources for making prototypes. Recently, Jamie Hyneman, of TV “Mythbusters” fame, was in Ukraine to act as a judge of the Vernadsky Challenge, an annual event that supports hardware startups through competition for grant funding. During an interview, he spoke to one of the newer resources now cropping up all over the U.S.
“…there are a number of businesses that have started makerspaces…the one in San Francisco, TechShop… has machining, 3D printers…And TechShop is busy 24/7…They are just tools and the facility to work…they have popped up all over the country…that go from the basic tools, but also 3D printers and Arduino, computing and all of this kind of thing, which is taking it into robotics…and it is exploding.”
Image Credit: Vernadsky Challenge Facebook
It is important to remember that the inexpensive prototype will not translate to the same low cost of an ultimately manufactured product for consumers. This cost should be calculated, so you know what your ultimate investment needs will be.
Get Some Hype and a Following
You do this through the Internet and social media. Creating a cool YouTube video that shows off your prototype can be a great tool to get the buzz you need. And when you get that buzz, crowdfunding platforms may become your source for the money to get to market, even though you are not a “proven commodity” yet.
A word of caution: Be careful how much you reveal about your product in your Internet/social media “campaign.” You want to give enough detail to whet appetites of potential crowdfunders, and yet you must guard against revealing too much. It’s a delicate balance to find.
Look for Funding Opportunities Which are Springing Up Globally
This spring, the third Vernadsky Challenge was held in Ukraine. It is the “brain child” of Max Polyakov, managing partner of an international asset management firm called Noosphere Ventures and co-founder of Association Noosphere. Association Noosphere is a non-profit, non-government sponsored organization that promotes science, research and technology. The Challenge, held in Dnipro is the opportunity for selected finalists in hardware innovations to introduce their prototypes and make their “pitches.” The winners receive around $75,000 in financial support to move forward with their business development.
While startup contests are a great opportunity for new players to secure some funding, they also offer entrepreneurs a chance to “rub elbows” with industry experts and receive mentorship advice on their further product development. In addressing the young innovators, Max Polyakov “hit the nail on the head,” as he reminded them of their real mission:
“I would like to advise every startup that will be making a pitch today, or in the future, to always keep their business model and the true value of the product in mind. For instance, when a company builds a rocket, the rocket as a product is not the ultimate product. It should be considered as the means to overcome gravity or to retrieve exclusive data from space.”
Image credit: Noosphere Global
Remember, as you make pitches and as you conduct your web-based campaigns, you are solving a problem with your product. That is called the value proposition, and you must focus on that.
This is but one example of competitions all over the world.
Next, there’s always the crowdfunding route you can take. Some of the most funded Kickstarter campaigns of were organized by innovative hardware startups including:
- Pebble Time
- Pono Music
Next, there’s always the venture capital you can pursue directly. As Techcrunch suggests, look into making connections in the SF bay area, where some 161 hardware startups have publicly raised over $1 million in 2016 alone.
Paris-based Hardware club have closed a couple of successful rounds in 2016 and currently boasts $500 million in VC funding assets available for innovative companies. Boston-based Bolt states to issue an average pre-seed check of $200.000 to promising startups and recently partnered with Y Combinator to jointly consult their member on product design, engineering and volume manufacturing.
Build The Real Thing
Once you have the funding you need, it is time to build the real thing, with an eye to real marketing and sales. During this phase, it will be critical to keep your funders informed. They may be waiting a while before the actual product begins to come off the assembly line, and you want to keep them excited and supportive. Recently, the Israeli startup StoreDot presented its prototype of an electric car charger – one that will charge a car in five minutes. It raised $66 million and does not see full production in place for three more years. Investors will be patient, so long as they are in the loop. And, they can be some of your best “brand ambassadors” down the road.
More Money? Yes, You Will Need It
Once you have production underway, it will be easier to get additional funding, especially from venture capitalists, so that you can scale production. Growing production of hardware can be expensive, and while you may be making a profit on each unit sold, you will not have the big infusion of cash you need to really scale. If your business model is sound and if there is demand for your product, investors will notice, and your pitch for scaling will be far easier to craft.
The Future is Bright For Hardware Startups
There are three great phenomena that will motivate and support hardware startups in the coming years.
- There is a continuing new supply of open-source hardware platforms that will give innovators access to electronics that are cost-effective. The maker movement will continue to grow – an innovation that brings together the necessary expertise of engineers and builders. SparkFun is just one example.
- 3D printing continues to improve and is an inexpensive method to produce both prototypes and parts for small runs.
- Crowdfunding has now become a source for hardware startups. The innovators of the Pebble, Ouya, and Elevation Dock received millions through Kickstarter. It is obvious that hardware startups are becoming good little money-makers.
If you plan to launch a hardware startup, there is no better time than now. If you follow these steps carefully, you have every chance for success.
This post is part of our contributor series. It is written and published independently of TNW.