Beginner’s Guide to Investing in Hardware Startups
Investing in a hardware startup can be an extremely rewarding experience. It’s a very exciting industry, with so many new and innovative technologies, so it’s difficult not to be fascinated by it.
2015 produced record numbers in crowd-investing, crowdfunding, and investing. In Berlin, €1.9 billion worth of investments were made in startups, in the first six months of 2015 alone, which was more than the entire previous year, according to a report by Ernst & Young. Investing in startups is also popular for first time investors, because of the amount of investment that you can choose to contribute. You don’t need to be a high roller to be part of the investment world.
There are many kind of investments, though these can be broken down into three main categories: Ownership, lending and cash equivalents. Simply put, ownership is when you exchange money for a share of the business, such as a stock. Lending is when you “purchase” a debt, that is expected to be repaid. They are lower risk, but also often lower reward. Cash equivalent investments can be a service (such as production), in exchange for shares or profit.
Each startup will have their own choice of offer that will suit their business needs. At LUUV, we offer a Profit Participating Loan. This is when the investor receives a selection of the profits or turnover of the company, in return for an amount of capital. We use a crowd-investing platform, and in our case investors can start with investments as small as €5, which is ideal for first-time and seasoned investors. In some cases, picking the right startup could yield returns of up to 100 times your initial investment, but it is crucial to do your homework and investigate the company, the market, and the founders.
Since our Companisto Crowd-Investing campaign began, many investors have approached us because they liked our product or company, but had never invested before, and weren’t sure about what questions to ask. It’s important to ask questions if you are planning on investing. It’s also vital that the company can answer most of your questions openly. We have put together a list of important questions, as well as advice, to help you step into the world of investing in hardware startups.
Is there a market for the hardware?
It’s always a good idea to do research before investing in any company. If you don’t know where to look, or are unsure, reach out to the startup. They will (or should) know the industry well, and be able to provide excerpts of white papers and reports, from third parties, to back their answers about the market.
What are you doing?
Enrico Bitto, Analyst, Investor & Blogger at Der Startup Investor says “Although this seems too obvious, you should really understand what the startup is doing. This includes the business model, but also what they literally are doing at this point in time”. Determining how far along the startup is, is important in figuring out what they have left to do. “Where are they in the process of becoming a successful business? What are the current hurdles? How did they get to the idea they are pursuing? What other ideas were analysed and discarded?”, commented Bitto.
Did the startup get initial traction?
Crowdfunding campaigns and press coverage are often a good indicators of traction and market need. You should definitely check these out and see how they went, and what the press have said about the product.
What are the founders goals?
Founders can often have very different goals and ideas of success. It’s important to know if the founder has ambition prior to handing over your money. “Some want to make lots of money, some want to work with their friends, others want to impact the world with their idea”, says Bitto, “try to understand what the founders really want. There is no right or wrong answer, but it gives you an idea of what drives them to succeed”.
What is the current funding situation?
“A lot of people have great ideas, but very few are able to execute them”, Bitto says, “having enough funding to reach market launch and profitability is a crucial element”. Every hardware startup running an investment campaign will have a financial plan. If they are on a reliable crowd-investing platform, this will normally be laid out in their campaign, like in our campaign with Companisto. This way the information is open to anyone thinking of investing.
Is the business model scalable?
Having a scalable business model simply means that the business can expand into multiple geographies and markets. For example, LUUV has a scalable model — once the product has achieved full market launch, it can be quickly reproduced for a new market. It doesn’t need to be redesigned specifically for that new market. This is important for the future growth of a company.
Does the product have a patent?
A patent helps to shut out cheaply made copies of the product. Patents are particularly important in hardware, where it can take years to produce a product to perfection. A patent allows for strong market position, demonstrates a high level of specialisation and technology, and shows how serious the founders are about the success of their startup — patents aren’t cheap.
Investing for the first time can be very daunting task, but with some simple steps and with the right questions in your arsenal, You can easily get a good understanding about the company that you want to invest in.
LUUV is a Berlin-based hardware startup and are responsible for creating the world’s first all-in-one video stabilizer for all action cameras, smartphones, compact and 360° cameras. LUUV is currently running a crowd-investing campaign on Companisto, and already have 400+ investors. Find our more information here: www.companisto.com/luuv