How to Find Co-Founders and Investors For Your Hardware Startup

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Today I’m going to answer two important questions – should you bring on a co-founder or investor; and how do you find a co-founder or investors for your startup?

A lot of the things I’ll be discussing apply to both finding a co-founder and investors.

There are a lot of similarities between finding these two groups of people, but there are also some significant differences that we will cover as well.

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

 

Should you bootstrap or bring on investors?

I always recommend that you bootstrap your startup for as long as possible. There are a lot of advantages to this. For example, you will give away less equity in your company the farther you can get along without investors.

The ideal strategy is to bootstrap your company to the point of having a production quality prototype and having some significant customer interest.

I know the idea of someone giving you lots of money is really enticing. Who doesn’t want to have someone pay for everything you need?

A picture containing textDescription generated with very high confidence

I know it sounds like money can solve all your problems, but with a startup having money is very dangerous. It can cause you to lose sight of what you’re really doing and you get caught up in the idea of having all this money and building teams. It’s hard to not think you’ve succeeded if you raise a million dollars on a Kickstarter campaign.

Having money can be dangerous when it causes you to take shortcuts. You may think you don’t know need to do small production runs, and you go right into producing 10,000 units, thinking of how it reduces your per unit cost.

However you’re always better off taking lots of small steps.

What if those 10,000 units come back with a design problem, or with a feature people no longer want? Or maybe you realize it is crucial to add another feature to your product.

Now you are stuck with an inventory of 10,000 units to sell!

Whereas if you were running bootstrapped, and were forced to take small steps, you would have caught any design mistakes before ordering a large number of units.

Value is in the Execution

When searching for a cofounder or especially an investor, an important thing to remember is that you, as the original founder, are going to have to do a lot of upfront work before you can get anyone else interested in your product.

You’ve also got to bring some skills and progress to the table. If you don’t have any skills that look impressive to investors, then you need to prove yourself by making some significant progress before going after them.

This is even more critical when seeking investors because you’re asking for a huge financial investment from them. They will want to see that considerable work has already been done on your project.

This upfront work could be some initial development work and a realistic development plan. You also need some sort of proof that there is a market for your product.

Investors will be turned off by entrepreneurs with completely unrealistic plans on how they’re going to proceed. If you approach investors saying that you’re going to have $10 million in sales the first year, they are not going to be pleased. 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 gotten a large customer interested in your product/s.

Ultimately, and you’ll hear me say this quite a bit in different articles, the value is in the execution and not the idea.

Typically, the only people that think that the idea is more important than the execution are patent attorneys and entrepreneurs that don’t know the full process of bringing a product from concept to market.

Anyone can have an idea. No matter how good the idea is ultimately you have to show people that you know how to turn that idea into something real that makes a profit.

More importantly, investors are mainly interested in the founder(s). They know the founder team is one of the key criteria for a successful hardware startup.

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.

Ultimately, investors know that in the big picture you are going to be the biggest determining factor to the success of the startup.

When it comes to finding co-founders or investors, there are quite a few tips that I’m going to give you that are going to make this process a lot easier.

Don’t rush the process

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 because you do not want to take on a co-founder, and then a year or two later find out you don’t work well together and you don’t like each other.

A cofounder leaving a startup can be absolutely devastating, especially since you’ve surely given them equity in the company.

Don’t take 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.

Ultimately, any startup is incredibly risky and the odds are not in your favor. It can cause difficulties with your family and friends if you ask them to invest and then end up losing their money. Most people don’t fully understand the risks associated with startups.

Instead, focus on finding professional investors that aren’t friends and family. Avoid friends and family for anything except maybe really small amounts.

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.

Being professional

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

First, you have to do some up-front work. You can’t just contact people out of the blue, especially if you are only in the idea stage of your development process.

You need to show that you know how to execute. You can’t just reach out to people with a cold email, pitch your idea, and expect them to be interested. That’s not the way it works.

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

Cold-emailing sometimes works for marketing purposes. 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.

Also, when you do reach out to them at some point, 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 immediately shows that you’re not a professional marketer.

What you want to do is keep the email short. Start with something simple like, “Hey, Bob, I’ve got this great idea,” or “I’ve got this great product concept.” 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 keep the email to only a few sentences. Otherwise, I can almost promise you that you will be totally ignored.

Decision makers do not have time to read long, unsolicited emails. Keep this in mind. You need to keep emails super short. I know this is challenging for many because you have so much excitement and confidence in your product. But in the first email stick to only asking for permission to provide more information.

I can relate to this firsthand. I get a decent number of inquiries from entrepreneurs that will briefly tell me about their ideas. Sometimes they won’t even really tell me their idea, they just come right out and ask me to be their co-founder.

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

At the same time, I wish everyone who approaches me could read this blog first. You are not going to get anywhere with that type of approach. Investors or co-founders won’t want to commit to something like that based on one email with a quick product pitch.

Always be marketing and networking

From day one you need to think marketing and networking. You need to always be building your network and marketing yourself, your product, and your company.

You have to have connections and networking because that’s the only way you ever succeed with a startup,.

I’m an introvert, so this did not come easy for me. But that’s part of being a startup founder. You’re going to be taken outside your comfort zone a lot, and you’re going to have 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 a 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 hardware entrepreneurs. Talking with other like-minded people helps you grow your network and meet new people.

There are also programs like startupweekend.org geared towards meeting other startup entrepreneurs and creating networks. Cofounderslab.com is another website focused specifically on connecting 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 them. Get them interested in your product and then get an introduction to 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 beginning 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 plenty of articles and websites that talk 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.

Don’t forget to consider industry trade shows and conferences. Every industry has trade shows and conferences, and attending one is a great way to make connections.

You don’t necessarily need to have a booth at a trade show. Just attending is beneficial for networking, making new connections, and contemplating how you could do a booth in the future.

Leverage your existing accomplishments

Once you get one investor, other investors are much easier to obtain. No one wants to be first.

If you have a large customer that has expressed interest, that can also be used as leverage to excite co-founders and investors about your startup and your product.

My own example is with the product that I brought to market. It was a small consumer lighting product that illuminated any surface that it was attached to.

When I was first getting my product out there, about ten years ago, I reached out to Blockbuster Video. At the time they were a humongous corporation.

First, I sent their Vice President of Marketing a simple email telling him I have 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 something to be looked at briefly. The V.P. of Marketing ended up getting back to me. He liked the idea and I was able to get a meeting in Dallas to present to their head corporate buyer.

During the meeting with the buyer, they expressed interest in my product. Once I worked out a few problems with my prototype, I was able to get a Letter of Intent (LOI) expressing 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 was able to use Blockbuster’s interest to find a manufacturer that decided to invest in my product. It also helped me to bring on a team of independent sales representatives that were selling my product to retailers in several countries.

Find co-founders before investors

I would also recommend that you find 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. They know the difficulties and challenges of running a startup company, and they understand the many types of expertise it takes to succeed.

There’s a book called The Hardware Startup that I highly recommend. The book states that the ideal hardware startup team 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 that’s going 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

Finally, one last suggestion to improve your chances of getting funding.

It can be really helpful when seeking outside investments if you can add a recurring revenue model to your product. Recurring revenue is money that your customers pay you on an ongoing, continual basis.

For instance, can your hardware product include a software subscription? In addition to the revenue from selling the hardware product itself, can you also collect a monthly subscription fee?

A recurring revenue source can help a startup to grow at a solid, predictable pace by consistently adding new subscribers. You also don’t need to find new customers each month to earn revenue. Instead, you have an existing customer base that pays a monthly subscription.

Investors like to see startups that have at least some partial recurring revenue in their business model. For example, Bolt.io is an investor group that invests specifically in hardware startups, preferably with some recurring revenue in their business model.

Find a manufacturer to invest

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

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 that 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 would pay 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.

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, get it shipped to the retail stores, and to have those retailers pay me.

The quickest that any retailer will pay you is 30 days after they receive the order.

This standard is called net 30. Some retailers don’t pay for 60 days, and occasionally there are 90 days, but those cases are less common. There are actually auto parts chains that do 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 before I had to pay the manufacturer.

This is a tremendous cash flow advantage, especially since cash flow can be one of the biggest problems for hardware startups. Getting your manufacturer to give you better payment terms is like money in the bank. It is essentially a short term loan.

The same goes for your customers. You can negotiate with your customers that they pay you sooner. They may normally pay net 60 but try to talk them into paying you 30 days after they get the order.

From my experience I found your chances are better at getting supplier financing than customer financing. In most cases, especially with larger customers, 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.

With this type of financing, the lender considers the credit score of your customer, not your own company. If you can get a large customer with a great credit score, you will be able to get purchase order financing.

Invoice factoring

There’s also something called invoice factoring. After you’ve manufactured your product and shipped it, you will then 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. You’ll have a much lower interest rate with invoice factoring versus purchase order financing because the risk is lower for the lender.

With purchase order financing they’re giving 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.

Whereas invoice factoring is safer for the lender, because you’ve already shipped the product.

Conclusion

My advice is to bootstrap your startup for as long as possible. The further you get your product the more valuable your startup will become.

Once you make some initial progress then I would focus on finding co-founders so you can build out the ideal founder. If you aren’t very technical then definitely start by focusing your efforts on 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 successful startup.

Also, consider the other ways to fund your startup before you seek out equity investors. Manufacturer and supplier financing, along with purchase order financing and invoice factoring, are excellent ways to fund your startup without giving any equity away.

Keep building upon every one of your small successes, until eventually they all begin to snowball into big successes.

NOTE: If you're serious about developing a new electronic hardware product then download our free cheat sheets - 15 Steps to Develop Your Electronic Product and Summary of the Costs to Develop Your Electronic Product.

Leave a Reply 17 comments

Ed Reply

Great article as always! Would love to learn more about your LOI process with Blockbuster.

    John Teel Reply

    Thanks Ed! It was a non-binding LOI that simply stated they were interested in carrying the product once it eventually was available for sale. But having written interest from a big retailer was all it took for me to leverage that initial success.

Jinto Reply

Hi John,

All your blogs have very good information, thanks John.

Paul Reply

Hi John!
As always, an excellent and motivating article!
I loved the part where you explain how you got the mold maker to trust your product and offer you special manufacturing conditions, thanks to the interest generated in BlockBuster!
You are a crack!

    John Teel Reply

    Thanks Paul! Yeah, having the manufacturer give me special conditions was huge. Most people focus on equity investments but this type of investment is a better deal in the long run because you keep all of the equity.

Omari Lewis Reply

This article is right on time! A great source of info and motivation to continue bootstrapping until the right time.

    John Teel Reply

    Awesome, Omari! Thanks for the comment.

Sinoj S Reply

Nice article. Informative. The book The Hardware Startup is worth reading. It gives a good insight about the start-up ecosystem with practical strategies specifically for hardware (in contrast to software). Another co-founder connecting website that I saw – Founder2be. Thank you John!

    John Teel Reply

    Thank you Sinoj for your comment and for sharing this website!

Anil Lal Reply

Great article, thank goodness I’m following pretty closely to this path so far. Getting a workable prototype ready is critical!

    John Teel Reply

    Thanks Anil! Great to hear that you are following this path:)

Felix Reply

Another great article, thanks John!

    John Teel Reply

    Thanks Felix, glad you found it helpful!

Fraser Liscumb Reply

Good advise, retired but used all that and a few other innovative and collaborative thinking outside box that open a lot of doors starting in high school that allowed me to see or be part of change and understand how the real world work by understanding the problem that the experts had already failed and walked away saying it could not be done. One of the keys is knowing sometimes you can only win by failing.

Mike Reply

A maker, a hacker, and hustler walk into a bar… 🙂

Great article – thanks John.

    John Teel Reply

    Haha, yeah it does sound like the opening of a bad joke!

    Thanks for the comment Mike.

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