Hardware Startups: The VC Perspective

Matt Turck

About me

Matt TurckTwitter: @mattturckBlog: www.mattturck.com

FirstMark actively invests in the Internet of Things and Hardware

HeliumSan Francisco

Enterprise IoT platform

SproutlingSan Francisco

Connected devices for families

KinsaNew York

Connected health

ROLILondon

Reinventing musical instruments

VCs are rediscovering hardware

After a lost generation, hardware investment is accelerating, propelled

by the Internet of Things

Source: Wall Street Journal

Although hardware is still small in the grand scheme of venture investing

Source: PWC / NVCA MoneyTree

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Exit opportunities are less of a concern

Hardware companies can be built capital efficiently

Date Created

2007 2005

2014 Revenue

$745mm $124mm

2014 Net Income / (Loss)

$132mm $(169)mm

Total Amount Raised

$66mm $563mm

Source: Capital IQ; Crunchbase; CB Insights

Hardware startup financing: land of

confusion

“Traditional” VC financing path

Friends and Family

Seed Series A Series B

Today: many financing options

Friends and

FamilyGrants Incubator Seed

Presales Venture

DebtSeries B

Pre-seed Angel ListCrowd-funding

Mega Series A (up to

$40mm)

Series A (incl.

“Straight to A”)

We’re all trying to figure it out – a lot is case-specific and in this hot market

everything is possible for the right team/vision

Magic Leap$592mm Series A / B

Pre-launch

A few things VCs have (re-)discovered in the last couple of years

Lost generation of hardware = many new VCs learning the realities of

hardware investing

A recent history of hardware investing

Great expectations

2011 – 2014 (?)

Trough of disillusionment2014 – 2016 (?)

Cautious optimism2016 (?) –

Many new firms and partners!

Hard lessons learned

Hardware is really, really hard

Product design…

Picking a CM…

Selecting suppliers…

Quality control…

Product distribution…

Retailer channel management…

Shipping can take forever – and there’s a HUGE difference between

pre-shipping and post-shipping

Crowdfunding is not a reliable predictor of success

Sometimes only captures “techie” early adopters

Many successful campaigns are run by companies that are already VC funded and run active PR / marketing campaigns

Shipping delays can cause crowdfunding to backfire

2012 2014 20152013

$8.6mm Kickstarter

crowdfunding

$15mm Series A

$10mm Alibaba

investment

Seeks a buyer

Rumored dead

= Uh Oh

So what do VCs want?

Dirty secret: very few actually want to invest in hardware

What people want to invest in: hardware-enabled software

It’s all about the software, the data, the community, and network effects

Investors love subscription models on top of hardware sales

Dropcam

Big ideas, big markets

Preferably, less crowded areas

Great teams

Experience matters A LOT in hardware.

Most VCs now want to see shipping (and early growth) before the Series A

What’s an entrepreneur to do?

Plenty of VCs willing to write experimental checks at the Seed level, but things get tougher at the Series A

Series Seed Series A

Result: The “valley of death”

Need to do more with less

Make realistic assumptions & decisions

Perceived Product Timeline

More Realistic Product Timeline

Join an incubator / accelerator / network

Team up with a hardware / industrial design consultant

Crowdfunding still viable, but be very careful (understand your shipping

timeline)

Pre-sales on website often better

Demonstrate how your business gets big (multiple products, etc.)

Fitbit

LIFX

VCs have high expectations; while the road will be long and there may be some bumps, we’re excited for the ride… Many opportunities ahead.