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.

1. Hardware Startups:
The VC Perspective
Matt Turck

2. About me
Matt Turck
Twitter: @mattturck
Blog: www.mattturck.com

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. VCs are rediscovering
hardware

5. After a lost generation, hardware
investment is accelerating, propelled
by the Internet of Things
Source: Wall Street Journal

6. Although hardware is still small in the
grand scheme of venture investing
Source: PWC / NVCA MoneyTree
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7000
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
#ofInvestments
InvestmentVolume($bn)

7. Exit opportunities are
less of a concern

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. Hardware startup
financing: land of
confusion

10. “Traditional” VC financing path
Friends and
Family
Seed Series A Series B

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

14. Lost generation of hardware = many
new VCs learning the realities of
hardware investing

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. Hardware is really, really hard
Product design…
Picking a CM…
Selecting
suppliers…
Quality control…
Product
distribution…
Retailer channel
management…

17. Shipping can take forever – and
there’s a HUGE difference between
pre-shipping and post-shipping

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. 2012 2014 20152013
$8.6mm
Kickstarter
crowdfunding
$15mm
Series A
$10mm
Alibaba
investment
Seeks a
buyer
Rumored
dead
= Uh Oh

20. So what do VCs want?

21. Dirty secret: very few actually
want to invest in hardware

22. What people want to invest in:
hardware-enabled software

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

24. Investors love subscription
models on top of hardware sales
Dropcam

25. Big ideas, big markets

26. Preferably, less crowded areas

27. Great teams
Experience matters A LOT in hardware.

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

29. What’s an entrepreneur
to do?

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. Result: The “valley of death”

32. Need to do more with less

33. Make realistic assumptions &
decisions
Perceived Product Timeline
More Realistic Product Timeline

34. Join an incubator / accelerator /
network

35. Team up with a hardware /
industrial design consultant

36. Crowdfunding still viable, but be very
careful (understand your shipping
timeline)

37. Pre-sales on website often better

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

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.