TABLE OF CONTENTS
Hardware startups often need to raise significantly more equity across the same number of funding rounds than software companies. This difference, which can be between 20% and 50% more, proves why it’s important to secure enough funding before getting too deep into product development.
As we enter the Fourth Industrial Revolution (4IR), where technologies like IoT, AI, and robotics are reshaping manufacturing, hardware startups face hurdles from substantial capital needs to longer development timelines to market uncertainty.
This guide will provide practical strategies to help you overcome these hurdles, align your business with current industry trends, turn your hardware ideas into market-ready products, and secure the funding you need.
Common challenges in hardware fundraising
Raising capital presents unique challenges for hardware startups. Hardware companies need substantial upfront investment to cover the costs of materials, shipping, and manufacturing.
Here are some of the biggest roadblocks to hardware fundraising:
- Substantial Capital Needs: Hardware startups require large upfront investments for product development, prototyping, and production, as well as potential warehouse and laboratory space, making it harder to secure funding. Plus, scaling production and operations can be costly.
- Prolonged Development Timelines: Developing hardware is a lengthy process involving prototyping, testing, and regulatory compliance, often leading to delays.
- Supply Chain Complexities: Finding a stable, cost-effective, and reliable supply chain is difficult to establish due to the instability of today’s geopolitics.
- Investment Preferences: Investors often favor software startups due to perceived lower risk and faster returns.
- Exit Strategy Challenges: Defining clear exit strategies in the hardware industry can be tricky due to market unpredictability and differing stakeholder expectations.
If hardware leaders can take the time to understand these hurdles, it will help them accelerate the fundraising process.
How to prepare for funding
Drafting your business plan
To create an effective business plan, start with a clear executive summary that outlines your company’s mission, the products or services you offer, and the market you’re targeting. This summary should provide a concise snapshot of your business, capturing the key points that will engage potential investors. Next, the company description should include details like your business structure, key team members, and company history.
Although this goes without saying, conduct thorough market research to demonstrate your understanding of the market climate and clearly state your short-term and long-term goals. Then, outline your financial plans, including budgets and spending projections, along with trackable milestones and details for scaling the company. This approach will help potential investors understand your business and its potential.
Developing a prototype
Creating a prototype shows what the product can do and its viability. Investors are more likely to be on board when they can see and test a working model. To develop a prototype, you and your team must complete the first three steps of the New Product Introduction (NPI) process. This starts with ideation and writing a product definition, followed by feasibility determination, and then development. Perfecting your prototype requires thorough testing and may require several rounds of adjustments.
This demonstrates that the hardware works and that the company can turn an idea into reality. Alpha and beta testing identify design issues and improvements, helping investors recognize the product’s market potential. Because hardware startups often require more capital and carry higher risks than software startups, a successful prototype significantly boosts investor confidence.
Assembling a resilient team
Having a strong team is equally important. Key roles include a Project Manager for timelines, a Product Manager for strategy and market viability, Sales and Finance for pricing, Engineering Leads for design, a VP of Engineering for approvals, Contract Manufacturers for production timelines, and Customer Success Managers for customer feedback. A team that works well together and has clear leadership signals to investors that the company is capable of bringing the product to market successfully.
How to identify the best funding sources
Securing funding for your hardware startup often begins with bootstrapping—using personal savings and reinvesting early revenues. This approach gives you full control over business decisions without external influence. However, it comes with limited resources, which can slow down growth.
As our CEO, Michael Corr, shared at a Hardware Meetup in LA focused on fundraising, in the early years of Duro, every dollar was carefully managed. While bootstrapping can keep your company afloat initially, it may not provide enough capital to seize bigger opportunities. During this time, you might need to rely on support from friends and family and be prepared for 12 to 18 months without a paycheck.
As your business grows, transitioning to external funding becomes necessary. Finding angel investors and venture capitalists focused on hard tech is key. Although investors do not typically understand the hardware industry and are willing to take risks, there are specialist funds that focus on hardware startups, such as Eclipse, HCVC, Lux Capital, HAX, Conduit Venture Labs, Bonfire Ventures, and Riot Ventures.
To attract them, focus on networking, building relationships, and crafting a pitch that aligns with their interests. Consider newer financing options like a SAFE (Simple Agreement for Future Equity), which offers a simpler alternative to traditional equity or debt financing.
Manufacturing Hub identifies some of the best funding avenues, from grants from the Department of Energy (DOE) to the tech-scouting units of big corporations. Although finding the right investors can sometimes feel neverending, persistence and a targeted pitch can help secure the funding you need for the next phase of your company’s development.
Crafting and delivering your pitch
A pitch deck is a short presentation that entrepreneurs use to show potential investors or clients what their business is all about. It covers the main details, like what the business does, its goals, and how it plans to succeed. The purpose of a pitch deck is to grab attention and start a conversation, making it an important tool for getting funding or partnerships. When writing a pitch deck, hardware startups should focus on proving that their product is ready for the market and scalable, especially since VCs are placing a premium on profitability over growth.
Problem statement + solution + market opportunity
Begin with a problem statement that clearly communicates the issue your hardware addresses and the scale of that problem. Follow this with a solution overview showing how your product solves that pain point and can be expanded in the future. Prove that there’s a market opportunity for your product by presenting data on market size, growth potential, and relevant trends. This will help them see how your company plans to generate revenue. Then, provide detailed financial projections and a clear plan for using the funds.
Show, don’t tell
Storytelling plays a big role in making your pitch resonate with investors, who expect tangible proof of customer demand and market validation. Rather than relying on pilots or letters of intent, hardware startups need to be able to present solid commitments from customers with brand recognition, ideally through long-term contracts that validate the product’s value in real-world applications.
Your company’s story should appeal to investors and convey your personal dedication and commitment to solving the problem your product addresses. Investors are often drawn to founders deeply passionate about their mission beyond just business interests.
If possible, incorporate customer testimonials or case studies to provide concrete evidence of your product’s impact (e.g., “This customer gave this glowing report about our product”). This will make your pitch more persuasive and grounded.
How to handle questions and feedback
Practice your pitch until you can confidently deliver it, but remain ready to adjust your presentation based on the audience and their feedback. Different investors may focus on different aspects of your pitch, and being able to pivot to address their concerns can improve your chances of winning them over.
View every question as an opportunity to clarify your vision and demonstrate your expertise. Rather than being defensive, embrace feedback as a chance to refine your approach and show that you’re passionate about your product and also adaptable and strategic in your thinking.
When prepping for investor questions, be ready to answer two common questions:
- “Why should I buy and use your connected device when I already have an app or a functional, non-connected solution?”
- “How is your product 10x better than the existing options?”
Demonstrate how your product solves a problem and keep your solution simple. Whittle down your pitch to just the core goals and purpose. Avoid technical jargon and use visuals to keep it memorable.
Tips and tricks for hardware CEOs
Starting a hardware company is challenging and demands persistence, market insight, and a strong network. Duro’s Co-founders, Michael Corr and Kellan O’Connor faced early sacrifices in a market that overlooked hardware. Their belief in software tools for hardware development eventually attracted investors, turning challenges into opportunities and leading to Duro’s success. Duro raised a total of. $11.5M. in funding over 2 rounds, including our latest funding round, announced on April 24, 2024, we obtained $7.5 million in seed funding led by Primary Ventures.
Be prepared for the long haul
Starting a hardware company is not for the faint of heart and requires resilience and adaptability. Co-founders often operate without a paycheck, bootstrapping and making sacrifices to bring their vision to life. Similarly, you’ll need to be prepared for the ups and downs. Remember to stay committed even when the path forward seems uncertain.
Know your market backwards and forwards
Defining the problem your product is solving is a top priority when searching for potential investors. When Duro’s Co-founders first approached venture capitalists, many didn’t see the potential in hardware, often dismissing it as a small market. However, Michael and Kellan remained glued to their belief that software for hardware was an engineering necessity. They spent years in the market, bootstrapping their business, honing their expertise in their respective fields, and ultimately solidifying their conviction.
Their perseverance paid off as the market eventually recognized the need for agile, software-centric tools in hardware development. When the COVID-19 pandemic disrupted global supply chains and digitization became a top priority, Duro gained traction as it allowed hardware companies to get greater visibility into lead times and availability for components. By positioning the company at the intersection of these trends, Michael and Kellan were able to capitalize on the shifting market requirements.
Seek the right investors & build a supportive network
Finding investors who truly understand and are passionate about your market niche will help you get long-term funding. Securing funding in an industry where hardware is often misunderstood or overlooked can be difficult. However, focus on building relationships with those investors who have a genuine interest in hardware and are willing to take risks in this space.
Nurturing these relationships, as well as with a small but engaged community of venture capitalists and super angels, can provide the necessary funding and the guidance and connections that are needed to work through the obstacles in the hardware industry.
Why It’s a great time to start a hardware business
The hardware industry is experiencing off-the-charts growth, with IoT expected to generate over $24.1 billion in revenue by 2030. Robotics, too, is seeing a surge, with the global market projected to reach $65.59 billion by 2028. And in Q1 of 2024, 100 new VC funds were established, raising a total of $9.3 billion.
These advancements are not just trends—they are creating concrete opportunities for startups that can deliver innovative, market-ready products. As the Fourth Industrial Revolution (4IR) continues integrating physical and digital technologies, the demand for smart hardware solutions is increasing, making now an ideal time to enter the market.
What’s next for the hardware industry?
Automation and AI are making manufacturing more efficient, which creates big opportunities for hardware startups working in these areas. As the Fourth Industrial Revolution moves forward, the growing investment in hardware startups shows that the industry is ready for major changes.
Today’s hardware entrepreneurs who align their products with current IoT, automation, and robotics trends are well-positioned to secure the capital needed to scale their businesses.
As hardware continues to drive technological progress, the time to act is now. By drafting a solid business plan, developing a compelling prototype, assembling a strong team, and mastering your market niche, you’ll be ready to impress investors and increase your chances of securing the funding necessary to turn your vision into reality.
