Ramping Quickly: The role of VC at hardware companies
Kane Hsieh of Root Ventures describes the potential pitfalls in taking on funding for your new hardware company at HDDG21.
Supplyframe’s mission is to create more access to information about electronics design and manufacturing. As such, we do a meetup in San Francisco called, Hardware Developers Didactic Galactic. These events include talks by industry experts in hardware and software. The speakers are often building hardware for recreation or as part of their employment. The common thread is that they want to give a view “under the hood”.
HDDG21 was held May 18th, 2017 at the Supplyframe San Francisco office. We welcomed Kane Hsieh, who spoke about working with venture capital as a hardware startup. He is one half of Root Ventures, a “Micro VC” firm that is focused on industrial and consumer hardware companies. The other half is Avidan Ross, who had previously been scheduled to speak.
Surprisingly, Kane started with reasons to not take VC funding. Wouldn’t a VC encourage people to join in the system that would benefit them? Perhaps, but a VC’s job is basically figuring out whether there is a mutually beneficial match between themselves and the hardware company; it’s better to find that match by educating potential matches. Kane gave a series of practical considerations about taking on funding.
Once money has been offered by an investor (and accepted), the control structures of the company change. Namely you are no longer in charge of your company‘s destiny; there are now others involved. Each has their own set of requirements and desired outcomes. The example that Kane gave was based around if an inventor in the room had created a device and then was offered a cash acquisition of that device and the IP associated with it. While a lone engineer might be glad to get money directly for the thing they designed, a VC will “nuke” the deal because it does not created the desired outcome for the fund. This example illustrates the trade of control for funding. Taking on money for an initial build or a small expansion means that the entire trajectory of the company can change as a result. In Kane’s words, “You’re doubled down on the company whereas the VC is hedging their bet.”
VCs in the hardware space look for certain types of software/hardware models that are proven to work with past companies. Examples such as:
- Recurring revenue — A piece of hardware that also has a subscription service so that the company continues making money after selling the hardware.
- Network effects — Each new user creates more value for the user and the company.
- Platform building — Creating a new standard that other people then build upon.
- Razor blade model — Sell the core hardware at low margin, while the consumables are high margin.
Build your skills
Kane also talks about the trials of moving a prototype into a higher volume production run. Regular readers of this blog will know we have been talking about DfM via case studies. Kane notes that the skills involved in prototyping are drastically different than DfM and manufacturing. However, engineers who can do all three are highly sought after.
For companies looking to succeed as a business and not just the creator of a single project, more savvy is required. Kane mentions how successful hardware companies manage cash flow just as well as the design.
Small hardware companies should be cautious when taking on investment. After the first dollar is accepted from an investor, the nature of the company changes. For more tips, watch the talk and Q&A with Kane linked in above.