Although the fundraising process for software startups is largely formulaic, the same isn’t true for hardware.

By Renee DiResta (Associate, O’Reilly AlphaTech Ventures)

The hardware ecosystem is flourishing. But hardware is hard, and conventional wisdom is that VCs don’t like to invest in it. So how do you fund your hardware startup?

During the Hardware Unconference, the session on fundraising was one of the most widely-attended. The challenge of raising money is on the minds of many people in the hardware community. Some fall into the “Maker” category, others are trying to build companies, but they’re encountering similar issues.

Kickstarter is attracting a lot of hardware companies, and is widely thought of as the place to go first. Colin of Air Guitar Move started us off by talking about his experience raising on the platform, and a few others chimed in. The takeaways:

  • Get it right the first time! That Kickstarter debut is your product launch.
  • If the project is good, it will potentially attract investors. At a minimum, it’s going to attract your early adopter community.
  • Set expectations. This is very important. Tranche ship dates, make sure you think about fulfillment beforehand. Project funders are generally supportive, but aren’t happy if their item is delayed for a long time. A popular project can be a double-edged sword.
  • Both the Kickstarter pitch and the fulfillment process contribute to your reputation.
  • Investors monitor Kickstarter. If the raise doesn’t go well, that is potentially a red flag.

Although Kickstarter is a great place to start and raise funds for a project, another session member pointed out that it isn’t the place to raising capital to start a company. Most of the funds raised will go to fulfillment, and growing a business generally needs more than crowdfunding can provide.

Someone asked the investors in the room if they were concerned about the JOBS Act. The answer was no, but the investors cautioned the startup folks to think very carefully about what it means to raise $100,000 from 100 people… a messy cap table, the potential for lawsuits, etc. All of the investors said they would avoid doing a round following that type of initial investment.

Angel funding came up. Surprisingly, many of the entrepreneurs in the room had never heard of AngelList, or didn’t realize that hardware investors were on there. (So, hardware investors, if you’re reading this – add that tag to your profile!)

This got me thinking that although the fundraising process for software startups is largely formulaic, the same isn’t true for hardware. Incubators (such as those run by Lemnos Labs, Bolt, and PCH) were discussed; advisors are as important as they are in software, but one of the value-adds of a hardware-specific incubator is the access to manufacturing and industrial design contacts.

The discussion eventually shifted to later-stage investment, and there were some very useful insights:

  • Several VCs and angels are Makers or tinkerers themselves, and finding those folks can greatly speed up the process.
  • Many investors prefer the combination of software + hardware: “software wrapped in plastic.”
  • Successful hardware can be replicated in China, but community and audience are not easy to rip off.
  • Investors want to hear about your long-term vision. A single product may not be a venture-fundable investment.

And finally, grants and corporate relationships were discussed. Many larger companies aren’t that great at R&D, and are potentially interested in funding or working with hardware startups. Quirky was mentioned as another way to take a product to market, but with the caveat that there was a loss of creative control.

So if you’re a hardware entrepreneur looking for funding, this is an exciting time for you. Raising money is always challenging, but knowing how to navigate the options makes it a little bit easier. And if you’re interested in continuing the conversation, reach out! There’s a real community here in San Francisco, with a lot of fellow entrepreneurs and investors out who are eager to help.

Thanks to everyone who participated in this session at the Hardware Unconference!

This post was originally posted at No Upside.

Photo credit: Kickstarter/Romotive

About the guest blogger: Renee DiResta is currently an Associate at O’Reilly AlphaTech Ventures, where she researches emerging technology trends and supports portfolio companies. Prior to OATV, she spent six and a half years as a trader at Jane Street Capital, a quantitative proprietary trading firm in New York. Renee holds a B.S. in Computer Science and Political Science from the State University of New York at Stony Brook. Follow her on Twitter at @noupside and her VC firm at @oatv.