The Raise Problem: Hardware Startups and VCs


TheThinkerBy: Phillip Bogdanovich

Every person who has spent more than 15 minutes in Startup Land has heard the phrase “hardware is hard.” It’s a saying for a reason.

Everything about running a hardware startup is difficult: Research and Development (R&D), market penetration, customer acquisition, manufacturing, and of course raising money. There’s a general sense in the tech space that small, new companies can’t afford to effectively build and support new hardware nor protect their Intellectual Property (IP).

On more than one occasion I have been asked questions like “What makes you think you’re more innovative than Apple/Microsoft/Intel?” The perceived difficulty of building, proving, and protecting new hardware combined with the problem of convincing the tech world that a small startup has outrun a behemoth on the innovation front leads to a brick wall when it comes to the raise. And, even if your deck, financial models and proof of concept overcome the concerns outlined above, there’s still the issue of competing with software startups who have a lower barrier to entry, a potentially higher Monthly Recurring Revenue Multiple (MRR Multiple), and the ability to develop a customer base/followers more quickly.

The Money Paradox

No one gets into the start up game to lose money long-term. That includes VCs and PEs. The job of partners in an investment firm is to invest in as many potentially profitable companies as possible thereby increasing the value of their portfolio. The job of every entrepreneur is to build a successful, healthy company the byproduct of which is positive cash flow.

When investors and entrepreneurs get together the investors want to say yes; they want to invest. You as the entrepreneur want the investors to invest in you. No sane founder willingly wastes time by getting into a room full of people who have no interest in making money.

Often this is where the problem begins for the entrepreneur. Even though investors want to invest they want to make money and increase their bottom line more. This makes them risk averse to unknown start ups or leaders/founders.

This is also why it’s often difficult to raise money for a hardware start up – there are too many variables. As founders, we frequently hear the Pebble and Theranos horror stories cited as reasons why investors are ultra-cautious about hardware investments. Entrepreneurs want the money, investors want to give entrepreneurs the money they need, but because of negative past experiences in the investor market, and an often-profound lack of technical understanding deals don’t materialize.

Safe Guards or Roadblocks

Currently, we are seeing more non-physical product-based startups getting funded, going public or being sold, and yielding high returns for investors. Over time, this has led to investors building processes to make investment decisions based on soft product.

Customer base, followers, revenue and working demonstrable product have become requirements for many PE firms, family offices, angel investors and VCs to make investment decisions. While I clearly agree that having a customer base, following and/or physical product, and revenue mitigates a startups risk profile, I also understand that the timeline for developing a new, unique product is long and generating those things without investment is extremely difficult.

The cost of R&D is high and the associated capital requirements are not limited to skilled labor. There’s also physical materials and production cost. Metrics currently being used to determine the viability of investing in a new, cool software startup don’t necessarily apply to hardware and, in fact, can lead to investors passing on a solid opportunity or worse becoming an unrealistic shareholder in the event a deal is made. This dynamic has slowed the rate at which truly innovative and meaningful hardware is being invented in the United States when compared to current trends in Shenzhen or Singapore who are booming in the global hardware space.

My experience has been that due to investor risk aversion, the cost of IP protection, and the cost of R&D, universities and large companies are being looked to for innovation. Unfortunately, history shows us that great hardware development often occurs with outliers not associated with educational or corporate institutions.


Waiting for the universe to concede and change to fit your needs will only lead to dying disappointed. As founders and leaders in the startup space, we must identify hurdles and devise methods for overcoming them. We must adapt. It’s our responsibility to grow our companies, and the harsh reality is that in the investor/startup dynamic your success most likely depends on the raise more so than the success of the investor hinges on rolling your startup into their portfolio.

The power dynamics on their face are not in favor of the founder. Understanding the mechanics of the investor relationship now – it does change – gives a startup leader an advantage over their peers. Knowing what an investor needs means you can spin your pitch to give them what they want.

When I think about what this means I think about a friend of mine who sold private jets for a while. He was literally selling a money pit. He had to convince buyers to spend millions of dollars on an item that would depreciate heavily the day they bought it and cost them more money to own than they could ever hope to recoup in a sale. How did he do it? He sold time machines. He sold the idea that owning a private jet meant that more money could be made long-term by transacting deals because more time would be spent negotiating and brokering contracts than traveling. It worked. A lot. He went from selling a money pit to selling a mechanism by which buyers could maximize their most precious commodity. Time.

Teamwork makes the dream work

Entrepreneurs need to adapt and investors need to adjust the way they evaluate the startup landscape. And not because it’s the “nice” thing to do. More companies building innovative hardware means more manufacturing, more selling, and more software and firmware development to run and support the hardware.

Everything is interconnected today because standalone devices die the painful death of becoming irrelevant. The list of collateral opportunity is massive, and the synergy is real. Entrepreneurs wanting to raise money and build a company and investors wanting to invest in something meaningful with big financial upside are both maneuvering to the same goal. Investors and entrepreneurs working together gets everyone to the end goal faster.

All is not lost

Conferences like Collision are specifically geared toward putting investors in the same room with founders and listening to pitches, sharing stories and collaborating. Events like these will prevent the American market for innovation from stalling out, provided we continue to de-emphasize massive tradeshows like CES for startups and focus as an industry on collaboration, access, and speed.

Startups don’t need to attend CES and it shouldn’t be used as a metric for determining the legitimacy of a startups business premise. Judging an entrepreneur by whether or not they attended a trade show is like judging an investment firm by whether or not they attended the international doughnut bakeoff – it just doesn’t make sense. Focus on events that get money, talent, and opportunity in the same room.

Don’t run process through the complicator

Startup Land is a harsh place that’s unbelievably rewarding for the very few who survive living here. Because starting and growing a company is so difficult, we don’t need to make it worse by artificially raising the barriers to success. Founders need to keep in mind that leading, team-building, and getting a product to market are hard because they’re actually difficult tasks to accomplish; not because dues need to be paid or because navigating liftoff sucked for someone else so it has to suck for every founder.

Similarly, investors making founders wait for access until said founder finds an entre through someone else the investor knows is an unnecessary hoop. So is expecting a founder to wait to meet with you until such a time that they have sufficiently suffered. Just because starting a company and navigating to a successful exit went a certain way for an investor doesn’t mean that’s the right path for everyone. Don’t make a process more complicated than it needs to be.

The Suck

My grandfather was the typical “In my day I walked up hill both ways in the snow barefoot for 5 miles just to get to school” type. I loved his stories, but I did not love the idea of having to trudge cold and wet to a playground where I was going to get my ass beat (I was a small kid and public school is not for the faint of heart).

The idea of that walk to school sucked; in my head it was basically a death march. Looking back this wasn’t my truth – aside from the fact that I lived in California and snow wasn’t really a thing – school didn’t have to be a terrible experience. Stories like my grandfathers primarily succeeded in one thing: making the idea of an experience worse than the actual event.

This is critical because visualization and perception are the building blocks of success or failure. No one wants to do a “thing” where they’ll be cold and wet all the way to an ass-beating. The same is true for startups.

When a process is presented as, or even made to be, exceedingly painful and difficult few will succeed and innovation will slow. A perceived negative experience = lower probability of success and a decrease in innovation. On a large scale the system suffers and in this case the system is American entrepreneurialism. More specifically companies focused on building a product.

Positive Change in the Founder/Investor dynamic

Affecting positive change is a simple premise but difficult to enact and enforce. The general rules are simple:

  • As an investor, don’t make things more difficult than they have to be. This includes using metrics devised to valuate software companies to evaluate hardware companies.
  • As a founder, don’t buy into the “it was hard for them so it will be hard for me” rhetoric. Everyone will experience challenge in their own way.
  • As an entrepreneur, don’t expect anyone to see your vision simply because you see it. Be able to articulate what your company is in a meaningful way that resonates with your listeners.
  • As founder, it’s your job to understand what an investor is looking for to make a decision. Be an educated entrepreneur. Do homework.
  • As an investor, make your requirements known and make it a point to understand the startups seeking your investment. Be an educated investor. The time for “dumb money” died with the rise of the connected global market.

Make it a point to understand your audience and be courteous. Give them the benefit of the doubt irrespective of which side of the transaction you’re on. Being open-minded is not the same as being weak, and unknown entrepreneurs are just as likely, if not more likely, to build innovative product. At one point, Apple was just a few guys working in some kid’s garage.

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