Why It Is So Hard to Find Investors for IoT Startup?
Over the last couple of years there has been thousands of articles written about IoT as a next big thing and you could probably notice that every article has some amazing numbers in it followed up by more amazing predicitons.
Two digit monthly growth, billions, millions, users, devices…everything in those articles looks amazing and creates fairy tail. A man could think that this is the field where all startups should go and develop their business in this arena.
But wait, not so fast! Think twice before creating a IoT Startup. There is more details to know before entering this arena.
I will write here from my perspective which is I would say quite based on experience. I’m the CEO and Co-founder of Fueloyal (Chicago, USA) a (quite early) startup that developed a Smart Fuel Cap that prevents fuel theft and fuel card misuse in trucking industry. It is a $10 bln annualy worth problem only in USA so we thought, let’s solve it!
Together with my team I have a huge experience in Fleet Management and Trucking Industry because prior to Fueloyal we founded and build from scratch then succesfully sold Roadmiral which was Fleet Management Software Company SaaS which provided sevices to trucking companies.
Difference between founding Software and Hardware Startup?
I’ve been in both worlds and I can tell you that there is no way you can compare these things. Starting an IoT company is atleast 5 times harder, longer and more expensive. On top of that you need bunch of people to assist you that have some special skills and knowledge.
Those kind of people are extreemly hard to find and once you find them very few of them want to work with you. The reason is that you need highly skilled people that can help you invent and develop something. People that know how to do it already work somewhere for big salary and it is up to you to convince them to help you for pocket money or free :)
10 Most Important Differences between Hardware and Software Startup
- You are deveoping hardware. Phisical device. Warranty responsibilty.
- There is a lot of paperwork about certifications (FCC, Bluetooth, IC…)
- Investor want you to patent product. Adds $10k cost for entire process.
- You need to develop client side software (Mobile or Web App)
- Also you need to develop Firmware (special software that runs device)
- Planing and arranging overseas production and quality control
- Customs and Import Procedure
- Set Up Supply and Logistic process (is it air freight or sea?)
- Packaging Design and Optimization
- Warehouse and Storage
All the things mentioned above don’t exist in software startup world. In software you create it, push it online and start marketing and sales. What ever happens you can fine tune it from you office. Fix all bugs, polish code. You main concern in how to get users arrive to your web/mobile and become user. Of course there is a ton of work here as well and I don’t want to underestimate people starting software startups and only few of us will succeed in this because it is extreemly hard.
10 Things To Have In Mind When Starting an IOT Startup
But, in hardware it is not 5 times harder, It is 10 times harder and I need to be honest you need to be a bit crazy to step into this adventure. You just go step by step and you then you finish it. There is some things to have in mind I wish someone told me before so I want to share it with you prior you start working on your IOT Startup:
- It will take you 3 times more time to develop a product than you estimate at the beggining.
- Be prepared for huge expenses. Moulds, Tools, Hardware Design, Protoyping…You can easily burn 100k for 3 months.
- Bootstraping is King. Figure out how to live and invest a ton of money/time into this journey.
- Patent/Certification/Paperwork will take you quite amount of time.
- Carefully choose people that will help you or work with you on development of phisical device. Small changes in design could increase or lower the device production price by 100%.
- Make decision are you using CNC machines to build your device or moulds. There is a huge impact in price but it all depends what is the quantity you need is it thousands or hundred thousands.
- All the devices or components you order now can be delivered to you within 60 days. So if you run out of devices and start ordering now your next batch of devices will arrive to you in 90 to 120 days.
- To order those devices/components you need to have money to confirm purchase order. You need to spend now and you will get it back in 120 days under term that you can sell it in just 1 day. No one can’t.
- Cash is King! Carefully plan your cashflow (have a daily plan for 12 months in advance) and setup perfect business model because if you don’t do this you will bankrupt despite selling devices with 90% gross margin.
- Prepare yourself for a lot of delays. You are working with minimum 10 different suppliers and most of them will be late in deliveries because you are small buyer for them.
But let’s say you somehow managed to discover what would be the perfect device to invent/develop. You managed to solve all the problems and obstacles mentioned above. You managed to find some Angel or FFF money to get you to working BETA or maybe you are that far that you are market ready and generating some revenue.
What next? You think that what you did is amazing (it is actually) and that after finishing that phase investors will fight for you?
Nope! Nothing happens. All of them have some concerns and they are worried by a lot of different things compared to software startups so I will just share few of the that we’ve heard from investors:
- Is this really working?
- Is it good quality? What if we invest and you have a bug in device?
- What if someone from Asia makes a 5x cheaper copy?
- Do you have patent? (You spend 10k on patent and you think this is important to Investors — Well they spend around 3 seconds thinking about that)
- We don’t invest in IoT
- We don’t invest in Trucking Industry (Helou — It is worth $700bln annually)
Our experience and conclusion is that most Investors (all of them, even startup incubators/accelerators and also seed investors) want to avoid risk and when it comes to IOT they want to join you at later stages.
Once you have market ready device, setup full team (software dev, hardware dev, sales, marketing, supply and so on…) and you generate money and steady monthly income. Then it is much easier to find investors but the truth is that it is so hard to be at that phase and it so crazy expensive.
We at Fueloyal are now in that phase and even now it is not easy to get a meeting with investors. We have a device on the market, team of 12 people, amazing R&D and next product ready, growing 25% MoM, huge industry experience, knowledge, networking.
To sell devices and to make money you need to have money to produce them and for that reason I would suggest all the IoT Startups to divide roles among Co-Founders. One should be focused on hardware/software development and the other one on Sales/Getting Investors. To make IoT Startup big you need fuel (money). Find it.
If any of you need more info or is thinking to start an IoT startup just drop me an email on email@example.com and I’ll be happy to share info and help you. There is a ton of things to share but it would take all Medium to write it.