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What should I be thinking about when raising venture capital?
Welcome to Highway1's hardware advice column, where we take questions from our startups and pose them to our amazing community of staff, mentors, partners, and suppliers.
Today’s question is sure to be on the mind of most hardware entrepreneurs.
As a hardware company, what should I be thinking about when raising venture capital?
For our answer, we turned to Valery Komissarova, principal at Grishin Robotics:
The thing the most mindful entrepreneurs tend to think about is whether you should try raising from VCs in the first place. It feels good to raise money from VCs, everybody talks about it, and everybody wants it, but not every hardware company out there should try it — not because something is wrong with VC firms, but because they’re a very specific asset class: they’re looking for very specific things in very specific types of companies. In general, VCs are looking for big markets, unique product-market fit, and growth curves that point to a large potential future exit for a given company, whether through acquisition or IPO. As soon as you take money from VCs, there are certain expectations you have to meet in a specific timeframe; there’s some flexibility, but you don’t want to disappoint your investors or yourself. It’s a marriage that’s a bit difficult to get out of, and one you should think twice about before entering into.
Many of the biggest Kickstarter campaigns for hardware products we’ve seen over the last few years are great products, but in no way are the kinds of companies VCs want to invest in. As an example, there are many startups out there doing essentially hardware components, which is a particularly difficult kind of company to get VC backing for, because their place in the value chain is sometimes hard to define. Often they say “We’re just going to license our technology to a big player out there,” and while that might be a good business for you, it seems unlikely you’ll be able to build a multibillion-dollar public company out of that model.
If you do decide you want to raise, the next question for you is who to talk to. We started to invest in hardware four years ago, and it was a super novel thing; we had hardware entrepreneurs coming to us saying “We couldn’t raise money just because we were doing hardware — as soon as they figured out we weren’t building another app service or mobile game or whatever, they didn’t want to talk to us.” It got better as more and more VCs here in the Bay in particular started to become more familiar with hardware: after a couple of investments, they started to understand what the unique pitfalls and advantages were, as well as the common mistakes. A lot of interesting things started to happen as the ecosystem became more supportive of hardware entrepreneurs. I think it has changed considerably, but of course I’d be lying if I said that this level of funding and interest is anywhere as high as the amount that traditionally goes to purely web or software-focused companies. It’s important to get to know people and build a list of the ones who understand hardware, and hopefully have made some investments in the past that are at least remotely related to the markets you’re working with. Don’t waste your time talking to people who don’t understand hardware or don’t want to invest in it — the funny thing about raising funds in the Bay is that everybody talks to everybody else. You don’t want to get a “no” for the wrong reason from a particular investor, especially if they’re top-tier, because other people will talk to them and ask why they passed on you. You don’t want to create negative momentum.