Finding Co-Founders and Investors for Your Hardware Startup

Published on by John Teel

A lot of entrepreneurs want to find co-founders to bring on more expertise (and income) to their startup.

And, of course, every entrepreneur wants to know how to find investors!

There are a lot of similarities between finding investors or co-founders, and a lot of what I’ll discuss applies to finding either. But there are also some significant differences that I will discuss too.

Unfortunately, both are usually much harder to find than you initially may think. It typically requires that you make some significant progress yourself before you can entice others to invest their time or money in your vision.

NOTE: This is a long, very detailed article so here's a free PDF version of it for easy reading and future reference.

 

Bootstrapping versus Investors

I always recommend that you bootstrap your startup for as long as possible. There are a lot of advantages to this. You won’t need to give away as much equity in your company if you can make a lot of progress without outside investors.

An ideal strategy is to bootstrap your company until you have a production quality prototype and significant interest from customers and retailers.

The idea of someone giving you a lot of money can be enticing. Who wouldn’t want someone to pay for everything your startup needs?

It may seem like money can solve all your problems, but with a startup having money is very dangerous. No, that is not a typo.

For example, it would be hard to not feel like a huge success if you raised a million dollars on a Kickstarter campaign. But having money is dangerous if it causes you to take shortcuts.

Let’s say you skip doing any small production runs, and you go straight into producing 10,000 units. This is appealing because producing more units reduces your per unit cost. You’ve got the money so why not get this discount?

But, what if those 10,000 units come back with a design problem? What if these units have a feature that you realize people no longer want?

Or maybe you realize there is something crucial you need to add to your product. But now you are stuck with an inventory of 10,000 units.

Contrast this with someone running a bootstrapped startup, who can only afford small production runs in the beginning. With small runs, any design flaws will be noticed before you jump to manufacturing in large volumes.

No matter how much money you do or don’t have, you are always better off making progress in small, incremental steps. Save the giant leaps forward for astronauts!

Value is in the Execution

Before you can get anyone interested in investing in your product, you have to accomplish a lot of upfront work yourself. You will never get funding while you are just in the “idea” stage. You need to prove to investors that you can execute.

You, as the original founder, have also got to bring some skills to the table.

If you don’t have any previous skills that look impressive to investors, then you will have to prove yourself by making a significant amount of progress on your own.

This is even more critical if you are seeking investors instead of co-founders. You need to have completed any initial development work and you must have a realistic development plan. You will also need proof that there is a market for your product.

Investors are instantly turned off by entrepreneurs with completely unrealistic plans for how they are going to proceed.

If you approach investors saying that you’re going to have $10 million in sales the first year, they are going to laugh you out the door. You have to provide realistic projections or investors will run from your startup.

Investors will also have more confidence in your startup if you have already gotten a large customer interested in your product.

I say this all the time and it’s worth repeating here – the value is in the execution and not the idea.

The only people that think that a product idea is more important than the execution are patent attorneys and entrepreneurs who don’t yet understand everything it takes to bring a product from concept to market.

Anyone can have a product idea. You need to prove to potential investors that you know how to turn that idea into something real that makes a profit.

Investors are most interested in the founder(s). They know the founder team is one of the key criteria for a successful hardware startup.

But a great team with a bad idea is not going to be a success either. You need to have a good idea and the ability to execute.

Let’s look at a few tips to make the process of finding co-founders or investors a lot easier.

Take your time to do it right

First of all, when you’re looking for co-founders, don’t rush the process. You need to find someone that you actually like and can relate to and work well with.

Because honestly, you’re going to feel married to your co-founder. You’re going to be talking to and working with them every single day, for years.

So it’s really important to find someone that you like and you can work with.

You want to avoid a co-founder ever leaving your startup. If a cofounder leaves a startup it can be absolutely devastating, especially since you’ve surely given them equity in the company.

Beware of funding from friends and family

You’ll hear a lot of places recommend that your first source of outside funding be friends and family. I personally recommend against you don’t take money from friends or family.

This can be some of the easiest money to obtain, but it can create a lot of drama potentially down the road for you.

The truth is, every startup is incredibly risky and the odds are not in your favor. Most people don’t fully understand the risks associated with startups.

Consider what will happen if you lose your family member’s money?

Its better to focus on finding professional investors that aren’t friends and family.

Investors don’t typically just give you money, they’re going to be involved in making decisions. More valuable than the money is the expertise of investors who have managed other startup companies.

Tips when reaching out

I would like to talk a bit about how to reach out to influencers in the most professional and successful way.

I’ve already mentioned that you have to do a decent amount of up-front work before you seek investors. You can’t just reach out to people with a cold email, pitch your idea, and expect them to invest. That’s not the way it works.

In general, cold-emailing investors and co-founders doesn’t work.

In the past I’ve successfully used cold emailing to reach out to potential customers, but the level of commitment for a customer is significantly less than an investor or a co-founder.

When you do reach out to, be sure to keep your emails short. When you’re reaching out to someone (investors, co-founders, or marketers) do not write a lengthy first email describing your product, how great it is, and how everybody wants it.

That will immediately signal that you’re not an experienced professional. You want to keep the email short. Start with something simple like, “Hey, Bob, I’ve got this great product,”

Maybe give a little teaser, “Would you like to hear more?” And that’s it. If you have an image or flyer that quickly describes your product then you might consider including that as well.

The key is to limit your email to a few sentences. Otherwise, it will just be ignored. Decision makers don’t have time to read long, unsolicited emails. In the first email stick to only asking for permission to provide more information.

I can relate to this firsthand since I am approached by entrepreneurs asking me to be a co-founder.

Anytime I get an email from someone asking me to be a co-founder, I’m really honored that they have asked me. I know it’s a serious question for anyone who has a product idea. It really means a lot to me.

At the same time, I wish everyone who approaches me could read this article first. Investors or co-founders won’t want to commit to anything based only on one email with a quick product pitch.

Never stop networking and marketing

From day one you need to focus on marketing and networking. You must build your network and market yourself, your product, and your company.

You need to make connections and network because that’s the only way you will ever succeed with a startup.

I’m an introvert, so this did not come easy for me. But approaching people and networking is a big part of being a startup founder.

Expect to be taken outside your comfort zone, and be prepared to force yourself to do it. That’s what I had to do.

I forced myself to do trade shows, sales calls, and all the different marketing aspects that are required for a startup. Once I forced myself to build connections, it eventually became easy. I ended up actually enjoying the process.

You can also join hardware accelerator programs, where advisors help you through the early stages of getting a startup going. Or consider participating in various hacking and maker competitions.

This is one way to get people to notice you and your product. Competitions can be a beneficial way to meet potential investors and co-founders.

Join online groups on LinkedIn or Facebook. There are countless groups out there for entrepreneurs, and even specifically hardware entrepreneurs. Talking with other like-minded people helps you grow your network and meet new people.

Of course, I think the Hardware Academy happens to have the absolute best community for hardware entrepreneurs. Lots of happy members also agree:)

There are also in-person programs like startupweekend.org geared towards meeting and networking with other startup entrepreneurs. Cofounderslab.com is a website focused specifically on connecting with co-founders.

If there’s an investor that you’re interested in, don’t pitch them directly. First, find someone connected to you already, and pitch your product to them. Get them interested in your product, so they can introduce you the investor.

LinkedIn works really well for this because the platform allows you to find mutual connections between yourself and a potential investor or co-founder. Find a mutual connection and then ask them to introduce you to the potential investor.

LinkedIn is great for this too because they have a feature for requesting introductions.

From the very start of your company you should also be building an email list. I’m not going to go into this in much detail because there are many articles and websites talking about building an email list and online marketing.

Set up a website for your target market, collect visitors’ emails, and keep your contacts updated on your product, and what you’re developing or working on.

Constantly be marketing and networking to get new connections and market feedback. Industry trade shows and conferences are also great places to make industry connections.

You don’t necessarily need a booth at a trade show. But just attending trade shows is beneficial for networking and making new connections. You can also start contemplating the best way for you to host a booth at future trade shows.

Leverage your existing accomplishments

Once you get one investor, it will be easier to get others, because it’s more risky to be the first investor in something.

If you have a large customer that has expressed interest, use this to excite co-founders and investors about your startup and your product.

My own example is with the product that I brought to market.

When I was first getting my product out there (a miniature consumer lighting device) years ago, I reached out to Blockbuster Video. At the time they were a huge corporation.

First, I sent their Vice President of Marketing a simple email stating that I had a product that would be great for their customers. I asked if I could send him one of my flyers as a graphic attachment, and he agreed.

I kept it short and I only provided one visual to be looked at briefly. It worked. The V.P. of Marketing ended up responding. He liked the idea and I was able to get a meeting in Dallas to present my product to their head corporate buyer.

The meeting went well and they were interested in my product. Once I worked out a few problems with my prototype, I was able to get a Letter of Intent (LOI) from them. This expressed Blockbuster’s interest in carrying my product in their stores.

I then used Blockbuster’s interest in my product to get others excited. In fact, I used Blockbuster’s interest to find a manufacturer who was willing to invest in my product.

Blockbuster’s interest also helped me acquire a team of independent sales representatives who sold my product to retailers in several countries.

Find co-founders before investors

Another recommendation is to look for a co-founder or co-founders before you focus on finding investors.

Investors are much more likely to invest in a startup that has a team of co-founders, than in a one-person startup. Investors know the difficulties and challenges of running a startup company, and they understand the many types of expertise it takes to succeed.

The author of the book The Hardware Startup recommends that the ideal hardware startup team would consists of three people – a maker, a hacker, and a hustler.

You need someone to make the hardware, someone to do the software and someone to sell and market your product. If you can get that type of team in place you will be much more likely to gain outside investments.

Add recurring revenue

Adding recurring revenue to your business model is my last suggestion for improving your chances of getting funding.

It is very beneficial, when seeking outside investments, if your product includes some type of recurring revenue. Recurring revenue is money that your customers pay you on an ongoing, continual basis.

For example, are you able to add something like a software subscription to your hardware product? In addition to the revenue from selling the hardware product itself, you would also collect a monthly subscription fee.

A recurring revenue source like this really helps a startup grow at a steady and predictable pace by adding new subscribers on a regular basis.

You also won’t have to find new customers each month to earn revenue. Instead, your revenue is in part based on your existing customer base paying, say, a monthly subscription fee.

Keep in mind it is always much easier to sell something to your existing customers, than to acquire totally new customers.

Investors are more interested in startups that have at least some recurring revenue in their business model.

For example, the investor group Bolt.io invests specifically in hardware startups, preferably with some type of recurring revenue in the business model.

Find a manufacturer to invest

Finding a manufacturer who wants to invest in your product can be a huge boost to your cash flow.

Manufacturers can invest in your product in many ways – by improving your payment terms, amortizing your tooling costs, and even offering the services of their in house engineering team.

I started my own search for a manufacturer by making a list of manufacturers that were making products similar to mine. I reached out to them with a short email similar to the one I sent to Blockbuster Video.

A U.S. manufacturer with facilities in China ended up really liking my product. They liked that I had a prototype and that a large U.S. retailer was already interested.

At the time I was living in Alaska, and their plant manager flew there to meet with me. They ended up investing close to $100,000 in molds and manufacturing set-up costs. I also had access to their engineering department’s expertise with injection molded plastics.

I paid back their upfront investments by paying an extra dollar per unit for the first 100,000 units (called amortization). Ultimately, their investment was triggered by the success I had with Blockbuster.

Not only did my manufacturer amortize my manufacturing setup costs, but they also gave me really good payment terms. That was absolutely critical for cash flow.

Instead of having to pay the manufacturer before they would manufacture my order as is standard, they allowed me to pay them 90 days after the order had shipped. This gave me time to get the product shipped from China to retail stores, and to have those retailers pay me.

Keep in mind that the soonest any retailer will pay you is 30 days after they receive the order. This standard is called net 30.

But some retailers don’t pay for 60 days, and occasionally there are 90 day terms. Auto parts chains have ridiculous payment terms of one year, meaning you don’t get paid until a year after you sell them your product!

Having 90 days to pay back my manufacturer allowed me to get paid by my customers first. This is a tremendous cash flow advantage, especially considering that cash flow is one of the biggest problems for hardware startups.

Getting your manufacturer to give you better payment terms is acts essentially like a short term loan.

You can also try to negotiate for your customers to pay you sooner. Maybe you can talk them into paying you 30 days after they get the order, instead of 60.

In my experience it is much, much easier to get supplier financing than customer financing. In most cases, especially when selling to large retail stores, you have very little control over the payment structure.

Purchase order financing

If a big retailer gives you a purchase order to manufacture a significantly large order, then you may be able to get a type of financing called purchase order financing. This can help cover your costs while you wait for retailers to pay you.

With this type of financing, the lender doesn’t consider your credit score but rather looks at the credit score of your customer.

If you have a large customer with a great credit score, it should be fairly easy for you to get purchase order financing.

Invoice factoring

There is another funding option called invoice factoring. After you’ve manufactured your product and shipped it to a customer, you will send the customer an invoice for what they owe you.

You then have the ability to sell that invoice to an invoice factoring company that will pay you immediately. The interest rate is much lower with invoice factoring than with purchase order financing, because the risk is lower for the lender.

With purchase order financing they loan you the money before you have manufactured the product. The lending company has the risk that you may not be able to manufacture the product.

Invoice factoring is safer for the lender, because you’ve already shipped the product to the retailer.

Conclusion

Bootstrap your startup for as long as possible. The farther along you are with your product, the more valuable it will be.

Next, focus on building the ideal founder team. If you aren’t very technical then consider finding a technical co-founder. Likewise, if you’re technical but lack marketing and sales skills then find a co-founder with those skills.

This will not only increase your chances of getting professional investors, but more importantly, it will increase your odds of being a successful startup.

Don’t forget to consider other ways to fund your startup, like manufacturer and supplier financing, purchase order financing, and invoice factoring.

You should utilize these funding options before you seek out investors that will require giving away equity in your company.

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Dmitry Snegiryov
Dmitry Snegiryov

Another great article. Thanks, John!

 

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