Execute in Hardware ≠ Execute in Software

Many founders and VCs that we encounter think that executing in hardware is the same as in software.

In software, execute means a startup is pushing out code, live with their webpage, and is leading customers into the sales funnel. Then the monetization switch is flipped and it’s off to the races.

Stakeholders look for analogous things in hardware and in the past considered a pre-order campaign as a signal that a startup was ready to execute.

And millions poured in. And thousands were hired. Bring it on!

Yet in most cases, stakeholders were disappointed with the post campaign reality.

Hardware startups can use a pre-order campaign at different phases in their development. What many software people forget is that the earlier phase campaigns result in higher uncertainty and risk to both founder and backer. In these high-risk cases, founders throw their gross margin into product development and non-recurring manufacturing costs.

Over the past two years, both Indiegogo and Kickstarter have urged more founders to wait on their campaigns until they are “really” ready for manufacturing. What they mean is that they want to promote founders seeking executing capital and not development capital.

Execution Capital

Founders lower their risks when they leverage crowdfunding for Execution Capital. Execution Capital is warranted when a startup has (1) built something amazing (based on extensive customer discovery), (2) sorted through engineering and manufacturing challenges (thanks to key hires and experts), and (3) knows how to use capital efficiently to acquire more customers.

As founders talk to customers they get excited and often wish to jump to sources of Execution Capital.

However, this can be a good chance to pause, take on engineering tweaks (assuming significant engineering costs have been deferred), and re-evaluate timelines. Our best founders are constantly evaluating what has changed, how can they please early evangelists, and how to build a business to satisfy the masses.

Done right, pausing after initial customer discovery can flow naturally into a pre-order campaign where customer acquisition costs are narrowed. Done poorly, startups may chase expensive customers or make a mass product that sits on a shelf.

In hardware, the execution phase coincides with PVT — when major tooling and supply chain hurdles have been resolved and the primary focus is moving that first batch from kit to ship (Instrumental posted a “must read” roundup of manufacturing phases). PVT is an important milestone and one that has to be understood by key stakeholders such as backers and investors.

While traditional venture investors are smart and savvy about execution, we see many of our finest co-investors become impatient when prototypes enter mass manufacturing but have yet to reach PVT. That process can take months (or even years … YIKES!). If alignment falls apart, as we see more often than we would prefer, companies become unable to receive follow-on funding from their previous investors.

Make in LA and our peers operating hardware funds understand the phases of pre-market hardware. We help founders understand how to get to market in a capital efficient manner, and we are patient as they hit hardware-specific milestones.

Going forward in 2018 and 2019, we will continue to demystify the world behind investing in awesome hardware innovations. Follow us on Medium and Twitter to stay in the loop.