While venture capital and working with an angel investor may be good funding options for software developers, the same cannot be said for those who create new hardware. Some of the reasons for investor hesitation include:
- High cost of research and development
- Too expensive to create a proof of concept
- Longer time required until product is ready to market
- Problems with the manufacturing process
- More expensive to scale
Fundraising for start-up hardware projects can be difficult to impossible because of this. It takes an average of 25 million dollars to develop and launch a new hardware project.
Although the exact amount of funding varies by project, hardware developers need to understand the reality that their work is considerably costlier to produce than their software developer counterparts.
For this reason, they need to undertake each new project with an open mind when it comes to locating funding sources.
The Crowdfunding option
Crowdfunding allows hardware developers and others who might have difficulty obtaining traditional funding the chance to appeal to a large number of people through the Internet. Most of these campaigns take place through social media and a crowdfunding website.
This also provides a public relations campaign for the inventor trying to raise funds. It can be ideal for consumer devices, but difficult to pull off for upstream hardware. However, angel.com, 66s.com, and gust.com offer some possibilities for hardware start-up companies.
Other possibilities for fundraising
Start-up accelerators focusing on hardware development are getting to be more plentiful all the time. This benefits start-up hardware organizations in many ways.
Forming a strategic partnership with an accelerator brings technical expertise and greater industry experience to the table. It also provides seed funding and the opportunity to expand beyond the initial production of a single product.
How to appeal to potential investors
Whether raising funds for hardware startups via venture capital or through crowdfunding, investors want to see an entrepreneur who remains involved with every phase of the project. Those who outsource some of the work to unknown entities understandably raise concern with investors.
They’re also looking for outside-the-box thinkers who are more interested in building a new platform rather than a one-time product that may quickly fade in popularity.
While the primary inventor should be intimately involved with all design aspects, he or she should also possess the ability to hire the most talented people in the hardware industry.
The opportunity to be involved in the creation of hardware that can significantly impact people’s everyday lives is what attracts top talent. It’s important to demonstrate to investors that the entire design and production team believes strongly in what they are doing.
Related: Raising Money: Practical Advice From an Entrepreneur Who Raised $20M in Funding
Things to consider after receiving crowdfunding for a hardware project
Many hardware development projects still fail even after receiving adequate funds through crowdfunding. Although each start-up has its own unique reasons for failure, they tend to share three common traits. These include:
1. Placing too much emphasis on raising funds through an accelerator and building the product and not enough on what comes next. Getting enough funding and launching a demo of the hardware project is indeed a huge milestone, but it’s only the beginning.
Hardware start-ups also need to devote time to planning how they will surpass the expectations of investors and customers while also turning a profit.
2. Failing to build a product that offers long-term value. Since new hardware can become outdated quickly, it’s important to think of it in terms of the larger picture.
Entrepreneurs should focus on growing their new company and not just releasing a product. Each new product should be flexible enough to build around, whether by the start-up itself or another organization with whom it develops a partnership.
3. Focusing too much on building a prototype rather than mass production. Even when creating the exact same hardware, logistics change when it comes time to create hundreds or thousands of the new product.
To avoid the mistakes of growing pains, start-up organizations need to have a thorough understanding of their supply chain. Taking the time to build a supply chain prototype forces developers to consider such factors as minimum quantities, where to obtain supplies, and what to do with unused inventory.
While it’s still challenging to obtain funding for hardware start-ups, new avenues such as crowdfunding all them to pursue capital much more effectively in the early stages than ever before.
About the Author: Andrew Armstrong is a digital strategies consultant based in the San Francisco Bay Area. Follow him on Twitter @KickStartSearch