Funding For Hardware-Based Startups: From Prototyping To Production

Securing funding for hardware-based startups is more challenging than for other business verticals. From prototyping to production, this is a capital-intensive industry. In today’s business ecosystem, the focus is more on accelerated product ideation, mean manufacturing methods, and integrating AI. And, all that needs money.

Even before the product is ready to roll out into the market, entrepreneurs need substantial capital. They’ll need money to invest in research and development, acquiring inventory, materials, and molds for fabricating components.

Sourcing parts from partnering manufacturers, shipping costs, and hiring skilled talent are expenses that you must meet. And that’s long before the actual product is ready for marketing. Unlike software, you can’t go back to the drawing board and edit the coding to remove bugs.

Tweaking hardware and components’ specifications, testing, and retesting for performance requires a lot of capital. You’ll need substantial seed funding to develop a viable product prototype. More so, you’ll need even more capital to get the business off the ground and take it through the initial stages.

Although acquiring funding for hardware-based startups is challenging, you can achieve the desired capital by targeting the right investors. Given the growth prospects of this sector, investors are eager to back projects that demonstrate potential.

Research indicates that the hardware market worldwide grew from $111.44B in 2022 to $121.34B in 2023. In the next four years, by 2027, the market will have a CAGR of 7.9% and be valued at $164.21B.

These numbers are encouraging, which makes this the ideal time to ideate hardware products and acquire funding to build businesses. Read ahead for more information about the best funding sources to approach and practical strategies to devise compelling pitch decks.

Funding for Hardware-Based Startups – Getting Started

One of the most critical errors entrepreneurs tend to make is to underestimate the amount of capital they’ll need. In a fast-paced tech landscape with cutthroat competition, you’ll need to minimize delays in getting the product into the market.

To scale the business and outpace competing products, founders should raise enough capital and estimate their needs well in advance. You’ll plan for the next funding rounds even before the ongoing round is complete and the money is in the bank.

Focusing on continuous technology development is a good move, but don’t lose sight of the capital you’ll need to manufacture the products and scale operations once sales start to pick up. Also, don’t underestimate the guidance and advice you’ll need to build infrastructure for the company.

Industry-specific accelerators, incubators, angel investors, and venture capitalists will provide you with technical training that can be indispensable. Reaching out to government grants, loans, and crowdfunding ensures you avoid dilution and maintain control over the company’s decision-making.

Before you start designing a compelling pitch deck and a list of potential investors, work out the startup’s funding needs. You’ll also determine the stage your company is at and target investors accordingly.

Bootstrapping, Family, and Friends

The tech industry is, undoubtedly, capital-intensive, requiring large injections of money to get started. Even if you’re at the pre-seed stage, bootstrapping is a great source of funding for hardware-based startups.

Before taking on significant amounts of capital and possibly debt, you’ll need to be confident about the business concept. You’ll start by investing personal savings, credit cards, and lines of credit. At this point, your focus should also be on securing any Intellectual Property (IP) you ideate.

To do that, you’ll minimize giving out information that could be essential for sourcing money from, say, banks. To acquire capital, you’ll have to cede company trade secrets, board seats, and equity, which may not be ideal. Committing to high interest rates may not be the right strategy at this point.

You’ll need funding sources that only provide you with capital without any other obligations. For this reason, you could consider approaching friends, family, colleagues, and other people in your network.

Reach out to individuals who believe in your skills as an entrepreneur. That is, even if you’re not open to discussing your business idea and they have no expertise in the area.

Incubators for Tech Ventures

Approaching incubator programs is an excellent option for pre-seed startups that need assistance with transforming their idea into an MVP. Although the funding they offer is not substantial, you can use the mentoring, technical help, workshops, equipment, and other resources.

You’ll connect with tech-specific investors and pitch your idea to attract their interest. When you’re looking for funding for hardware-based startups, getting their validation for your business idea is a critical benefit. Especially since you’ll source substantial amounts of capital to build the company.

On the upside, incubators don’t have timelines for graduation. So you can incubate the idea from prototyping to production and pass out of the program with capital.

On the downside, the tech industry is not exactly a sector where you can get away with delays. You’ll need to accelerate the prototype development and testing and have it ready for marketing quickly before the competition catches on.

Further, before joining the program, you should know how to secure the IP that drives your startup. Make sure you get legal guidance on how to do that.

Accelerators for Hardware Startups

Once you have a product prototype ready and you’ve started making the initial sales, you’ll need help with scaling the company quickly. That’s the right time to seek out appropriate accelerator programs.

These programs are short and intensive, targeting mature startups with mentoring and training from industry veterans and executives. You can expect assistance with refining the product design and learning how to achieve market traction.

Accelerators also provide workshops, seminars, lectures, opportunities for brainstorming with other entrepreneurs, and other resources similar to incubators. Improving the business structure and model and providing funding for hardware-based startups are the core areas of focus.

That makes these programs ideal for startups at their growth stage. However, you can expect much higher capital in exchange for equity of up to 10% in the fledgling company. At the same time, as with incubators, you’ll want to research securing your IP before signing up with the program.

The best advantage of working with accelerators is that you’ll get access to their investor networks. Tech accelerators typically have support from industry-specific entities committed to supporting new and upcoming ideas and promoting their sector.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Angel Investors

Angel investors are typically high-net-worth or high-income individuals interested in supporting new, innovative, and industry-disruptive concepts. Many of them are seasoned entrepreneurs who have successfully built and exited large companies.

In addition to supporting startups with capital, they may also be interested in providing advice and mentoring. You can also pick their brains for strategies that drive growth and connect with potential partners.

Performance monitoring, branding, advertising, marketing support, and operational assistance are some of the core areas where they can help. Acquiring angel support can open up more doors for acquiring later-stage funding for your tech venture.

Angel investors are open to offering long-term investment and taking on higher risk–especially with hardware-driven startups. That’s an added advantage.

You’ll attract angel investors’ attention and interest by publishing information about your company and products on industry news channels. Target platforms like Crunchbase, LinkedIn, and AngelList to build an online presence for the startup. These entities scour such portals for tech projects to back.

Researching angels that have a track record of investing in disruptive startups is a good starting point to look for funding for hardware-based startups. If you have a working product prototype and can prove traction with a proven customer base, getting investment is easy.

Ventures that are already established on their growth trajectory and looking for rapid acceleration can approach angels. However, angels are also open to supporting startups with seed money if they find the pitch appealing enough.

Venture Capitalists Supporting Hardware-Driven Startups

Once your startup is growing and is mature well on its prototyping to production track, the next source of funding is venture capital. Traditionally, VCs have not been open to offering funding to tech-driven startups. But all that is starting to change.

Later-stage hardware startups can consider approaching VCs for capital during their further funding rounds. This money can spur the company toward hyper-growth. However, you should prepare to offer them seats on the board along with equity shares.

Getting industry-specific VC support can be a positive since it can guide your startup in the optimum direction. On the flip side, that direction might not align with the founder’s objectives and goals.

You’ll approach VCs for funding only if you’re open to the prospect of losing control over the company and decision-making. Your pitch deck will have to demonstrate significant market potential with a strong possibility of scalability.

Since venture capitalists invest for around seven years, they’ll need assurance that your product will have consistent demand. Examining the risk mitigation measures you have in place is also a part of the due diligence they conduct.

Strategic Investment from Large Corporations

Several large corporations are always on the lookout for innovative ideas and products in their sector. These corporations may not want to invest in in-house research and development for several reasons.

The foremost is that the R&D may or may not yield viable results. The lack of assurance typically makes companies hesitant to divert time and resources toward ideating new products. Instead, they would prefer to fund smaller startups developing innovations.

Typically, later-stage startups that are looking for series B or C funding approach corporates. The investors are not interested in a board presence for decision-making, nor do they require company shares. Their objective could be to differentiate their products and diversify their market share.

Or to maintain their edge and technological advantage over the competition. Supporting founders with disruptive ideas also adds to their reputation as pioneering giants in their space.

Eventually, if the product design is especially good and gains adequate traction, they may choose to acquire or merge with the startup. You’ll look for these investors by researching their websites. Look for pages that advertise their interest in supporting new inventions.

If your product design has what it takes, securing funding for hardware-based startups is quickly done.

Securing funding is only one of the first steps to start your own business quickly. Need more information on what are the next crucial steps? Check out this video I have created. In it, I have answered all your questions.

Applying for Bank Loans, Government Grants & Low-Interest Loans

Applying to commercial banks is one of the most common sources of funding for hardware-based startups. On the upside, banks don’t require equity and may be open to offering large amounts of capital.

On the downside, you’ll make fixed payments and a high rate of interest that can be hard to honor. Especially in the case of startups with an irregular cash flow. When considering your application, banks may need assets as collateral for their funding.

This can be a challenge for early-stage or pre-seed startups that don’t have any collateral to offer. A better alternative is to look for government grants that support industry and innovation. Or, to be more specific, hardware-driven startups.

Research federal, state, and local websites for information about the funding they offer to startups. If your product idea has the potential to create more jobs and spur economic development, you could get funding.

Startups developing innovations that will have a positive environment and social impact can also attract grants. The Advanced Research Projects Agency-Energy (ARPA-E), DOE Vehicle Technologies Office (VTO), Energy Efficiency & Renewable Energy (EERE), and Department of Energy (DOE) are great places to start your search.

From Prototyping to Production – Funding for Startups

Securing funding for hardware-based startups is notoriously challenging, mainly because the sector is capital-intensive. Further, transforming a business idea or Intellectual Property (IP) into a Minimum Viable Product (MVP) requires substantial resources and time.

Although most investors are hesitant to offer capital, the best plan of action is to target entities that support the sector specifically. Reach out to incubators, accelerators, angels, venture capitalists, and corporations from your business ecosystem.

Taking your products to customers for beta testing and advance orders are also excellent ways to fund the new company. Watch this space for more information about how to pull that off.

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