Venture capital investments in electronics and computer hardware are on the rise. According to data from Dow Jones VentureSource venture investments in U.S. -based companies have risen from $2.2 billion in 2000 to $2.6 billion in 2014, representing 159 financings compared to 128 financings and $2.2 billion in investment in 2000.
Matt Turck, managing director of FirstMark Capital, an early stage venture capital firm based in New York City, explained at the recent Connected Conference in Paris why VCs are showing more interest in hardware startups and what entrepreneurs can do to capture venture capital.
First off, the traditional funding route for startups has been changing recently with more options becoming available. While crowdfunding is a popular choice, it’s not always a reliable gauge of a product’s viability. There is no one-investment-strategy-fits all. A lot of it is case-specific and as in the case of Magic Leap, huge financial commitment from leading companies is a very real possibility. Magic Leap attracted huge series B funding of $542 million led by Google before anyone even new for sure what the startup was up to. (The startup has developed technology that lets users see virtual 3-D objects in the real world).
Yet, VCs have not traditionally been overly eager to invest in hardware startups. In fact, says Turck, very few want to invest in hardware. This is partly because many lack experience in the hardware sector. Also, hardware is hard with challenges every step of the way from product design and validating demand to quality control and shipment delays and more.
What VCs are looking for is hardware-enabled software of companies like nest, dropcom, Oculus Rift and Magic Leap. Magic Leap for instance has patent applications for a head-mounted device, a tiny projector, special prisms and lenses that will beam images into a user’s retinas creating a digitized magical world.
While VCs are mostly generous at the seed stage, series A rounds get more difficult with the result that startups often grind to a halt. Turck warns startups to be more realistic when making projections like time scales for prototype development, manufacturing and delivery dates. He advises startups to join an incubator, accelerator or some network that can help them fast track their business idea.
VCs also tend to support business plans that provide for income revenue that, in addition to the sale of hardware, includes subscription plans. Truck also advices hardware startups to consider working with hardware design consultants. Hardware design requires a high degree of familiarity with complex state-of-the–art components and technologies along with a broad range of design skills. This kind of collaboration can facilitate the development of robust system designs and minimise the time to market. Hardware startups looking for funding must also be able to illustrate how their business will grow in terms of multiple products.
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