How to fund a hardware startup? Crowdfunding vs VC explained

Jun 18, 2014
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[LIVEBLOG] The Connected Conference, the first international conference dedicated to the Internet of Things, hosted this afternoon in Paris a panel dedicated to hardware funding. The panel included Barbara Belvisi, former VC who now accompanies hardware startups in their crowd funding strategies at Elephant&VEntures, Severin Marcombes, CEO of Lima, Fred Potter, CEO of Netatmo and Pierre-Eric Leibovici, co-founder of Robolution Capital . The panel was moderated by Madelynn Martinière.

 

New business models for the hardware revolution

What are hardware startups? According to Babara Belvisi, they used to be heavy tech, implied expensive distribution, and were not sexy. Nowadays, hardware can be low tech, lean manufactured and cheap distributed. Hardware now is “the new sexy”.

Barbara explains this “hardware revolution” by 5 factors:

–       hardware components are cheaper and commoditized

–       connectivity and software systems have improved

–       prototyping and manufacturing are easier

–       smartphones and tablets are widespread

–       Kickstarter has enabled crowdfunding.

It means that hardware startups are now VC fundable. For instance, NEST raised $120M, Oculus $91M. There were 31 fundraisings in 2013 in the US (2 times more than 10 years ago – that is to say the last hardware bubble in 2000’).

Barbara Belvisi presents four innovative business models for hardware business models:

–       HaaS – Hardware as a Service, meaning selling your product through monthly subscription, like Space Monkey. This business model implies recurrent revenue and a longer lifetime value of customers, yet need huge capital to launch.

–       Hardmium” : a software service where the device is the premium feature, like Paper 53. This business model is great to build a strong community but has a great chance to cause a free-rider effect.

–       HaaP – Hardware as a Platform, like Leap Motion. The pros of this model is that it can generate infinite potential revenues, yet it needs a large community of developers.

–       Hardata: a revenue model based on the monetization of data collected by a hardware device. Data represents a great potential yet its monetization is still obscure.

“Crowdfunding has nothing to do with funding. It has to do with launching”

One thing to be remembered by startups in hardware: “Cash is king”. According to Marc Barros (founder of Contour, a product similar to go pro camera), quoted by Barbara Belvisi, “Hardware is a cash flow business”. Indeed, funding is needed for prototyping, industrialization and expansion. As a consequence, margins are critical, which means pricing must be done right.

Barbara Belvisi explained that pricing takes into account: the costs of goods sold, the distribution channel (e-shop, online commerce, or retail), and the brand positioning (which defines how much consumers are ready to spend). Pre-orders are a great way to determine a hardware pricing, but how to choose a crowdfunding platform? Kickstarter is about a huge organic community and a great media coverage. The downside is that the traffic is not yours, it’s Kickstarter’s, which is why the post-kickstater is known as the “valley of the death”, it is very difficult to build your own e-shop after a campaign. Another option is to start a campaign on your own webpages, which means no middle-man fee and you keep your own traffic. A third option would be Indiegogo, which has a smaller community, but access to the data is easier, and the campaigns are more flexible, there is no selection.

Ms Belvisi reveals good questions to ask yourself before choosing: are you customers already on Kickstarter? Can you raise funds before launching a campaign? What stage are you in?

VC funding or crowdfunding?

Fred Potter, CEO of Netatmo, highlights the limits included in crowdfunding by pointing out first that there is a lot of buzz around Kickstarter, yet we don’t know how long it will last. According to him, if you sell a “B2G” device (Business to geeks) then Kickstarter is perfect. If you sell a product for the general product, Kickstarter is not fit. Pierre-Eric Leibovici also points out that crowdfunding might not be suited for B2B or industrial hardware products.

Besides, according to M. Potter, since R&D costs are going to grow, Kickstarter will certainly not be enough to fund them – especially since the campaign itself costs a huge amount of time and money in marketing. Finally, he points out one limit of crowdfunding: you can’t change the device once you raise money from a platform, because you made a promise to your customers. Speaking from his experience with Lima, Severin Marcombes tells us: “We changed our product because we raised a lot more than we aimed at. It’s not wrong to change as long as you keep the same promise.”

Barbara Belvisi insists: “Crowdfunding is not about funding, it’s about industrializing the pre-ordering process” and reminds the crowd that VC funding is needed to scale.

Raising money from VCs is easier after a crowdfunding campaign is easier since you can already prove you have customer attention and you are market fit. Yet some startups raised before pre-orders (Space Monkey, Occipital or Play-I for instance): they usually get team members that already have an exist in their career or built technologies protected by patents.

Fred Potter also reminds that a 3rd option would be to borrow money from the bank. At Netatmo, the strategy is to be profitable year on year, which implies they cannot develop as fast as they want but they can prove to banks that they are capable to reimburse their debts.

 

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