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Hardware Startups: The VC Perspective

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Among all the excitement for the Internet of Things and the resurgence of hardware as an investable category, venture capitalists, many of whom new to the space, have been re-discovering the opportunities and challenges of working alongside entrepreneurs to build hardware companies. Combined with a rapid evolution of the venture financing path across categories over the last couple of years, the increasing importance of crowdfunding and a certain frothiness in the market, this leads to a certain confusion, as both entrepreneurs and VCs try to figure out the best way of financing and scaling hardware startups. Some patterns emerge, however: for example, VCs are mostly interested in opportunities that include a strong software and data component; and they are increasingly demanding when it comes to seeing the product actually shipping and gaining early traction.

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Hardware Startups: The VC Perspective

  1. 1. Hardware Startups: The VC Perspective Matt Turck
  2. 2. About me Matt Turck Twitter: @mattturck Blog: www.mattturck.com
  3. 3. FirstMark actively invests in the Internet of Things and Hardware Helium San Francisco Enterprise IoT platform Sproutling San Francisco Connected devices for families Kinsa New York Connected health ROLI London Reinventing musical instruments
  4. 4. VCs are rediscovering hardware
  5. 5. After a lost generation, hardware investment is accelerating, propelled by the Internet of Things Source: Wall Street Journal
  6. 6. Although hardware is still small in the grand scheme of venture investing Source: PWC / NVCA MoneyTree 0 1000 2000 3000 4000 5000 6000 7000 $0.0 $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 #ofInvestments InvestmentVolume($bn)
  7. 7. Exit opportunities are less of a concern
  8. 8. 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
  9. 9. Hardware startup financing: land of confusion
  10. 10. “Traditional” VC financing path Friends and Family Seed Series A Series B
  11. 11. Today: many financing options Friends and Family Grants Incubator Seed Presales Venture Debt Series B Pre-seed Angel List Crowd- funding Mega Series A (up to $40mm) Series A (incl. “Straight to A”)
  12. 12. 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
  13. 13. A few things VCs have (re-)discovered in the last couple of years
  14. 14. Lost generation of hardware = many new VCs learning the realities of hardware investing
  15. 15. A recent history of hardware investing Great expectations 2011 – 2014 (?) Trough of disillusionment 2014 – 2016 (?) Cautious optimism 2016 (?) – Many new firms and partners! Hard lessons learned
  16. 16. Hardware is really, really hard Product design… Picking a CM… Selecting suppliers… Quality control… Product distribution… Retailer channel management…
  17. 17. Shipping can take forever – and there’s a HUGE difference between pre-shipping and post-shipping
  18. 18. 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
  19. 19. 2012 2014 20152013 $8.6mm Kickstarter crowdfunding $15mm Series A $10mm Alibaba investment Seeks a buyer Rumored dead = Uh Oh
  20. 20. So what do VCs want?
  21. 21. Dirty secret: very few actually want to invest in hardware
  22. 22. What people want to invest in: hardware-enabled software
  23. 23. It’s all about the software, the data, the community, and network effects
  24. 24. Investors love subscription models on top of hardware sales Dropcam
  25. 25. Big ideas, big markets
  26. 26. Preferably, less crowded areas
  27. 27. Great teams Experience matters A LOT in hardware.
  28. 28. Most VCs now want to see shipping (and early growth) before the Series A
  29. 29. What’s an entrepreneur to do?
  30. 30. Plenty of VCs willing to write experimental checks at the Seed level, but things get tougher at the Series A Series Seed Series A
  31. 31. Result: The “valley of death”
  32. 32. Need to do more with less
  33. 33. Make realistic assumptions & decisions Perceived Product Timeline More Realistic Product Timeline
  34. 34. Join an incubator / accelerator / network
  35. 35. Team up with a hardware / industrial design consultant
  36. 36. Crowdfunding still viable, but be very careful (understand your shipping timeline)
  37. 37. Pre-sales on website often better
  38. 38. Demonstrate how your business gets big (multiple products, etc.) Fitbit LIFX
  39. 39. 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.

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