How to Get Investors and Co-Founders for Your Hardware Startup
Finding investors and/or co-founders for your startup is never easy, but in this article you will discover what it takes to get them interested in your project.
A lot of entrepreneurs want to find co-founders that can bring expertise, and money, to their startup. Every entrepreneur also wants to know how to find investors.
There are a lot of similarities between finding investors and co-founders, and a lot of what I’ll discuss applies to finding either. But there are also some significant differences that I will also talk about.
Regardless, you typically need to have made a significant amount of progress on your own before you can entice others to invest their time or money in your vision.
Bootstrapping versus Investors
I always recommend that you bootstrap your startup for as long as possible. There are a lot of advantages to this.
For one, 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 seem enticing. Who wouldn’t want someone to pay for everything your startup needs?
It may seem like money can solve all your problems, but having lots of money as a startup is actually quite dangerous. No, that is not a typo, because having money is dangerous if it causes you to take shortcuts.
You would feel like a huge success if you raised a million dollars on a Kickstarter campaign, right? But what if having this funding causes you to skip doing small production runs, and you go straight into producing 10,000 units.
This is appealing because producing more units reduces your per unit cost. If you’ve got the money, why not get this discount as soon as possible so you can make more profit per unit?
But, what if those 10,000 units come back with a design problem?
Or what if it has an expensive feature that you recently discovered people no longer want?
Or maybe you realize there is something crucial that you need to add to your product?
But, you are stuck with an inventory of 10,000 units, which prevents you from making the necessary changes quickly.
Contrast this with someone running a bootstrapped startup, who can only afford small production runs in the beginning. With small runs, you can catch any design flaws 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 and scaling too fast is a recipe for failure.
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. Instead, you need to prove to investors that you can execute.
You, as the original founder, also need to bring your own skills to the table. If you don’t have any skills that look impressive to investors, then you need to prove your worth by making a significant amount of progress on your own.
Before seeking investment, you need to complete any initial development work on your hardware product, and you must have a realistic development plan. You also need proof that there is an actual market for your product.
Keep in mind that 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 in 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. An idea alone has no value. The idea is the easy part.
Instead, you need to prove to potential investors that you know how to turn that idea into something real that can eventually make a profit.
Investors are usually going to be more interested in a startup’s founder(s) than the idea itself. They know that the team is one of the key criteria for a successful hardware startup, because the execution on the idea is what really counts.
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 specific tips that 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.
Choose your co-founders carefully, because you never want to have a co-founder leave your startup. If a co-founder 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 this.
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. Have you considered what will happen if you lose your family member’s money?
Most people don’t fully understand the risks associated with startups, so avoid getting people you care about personally involved. Its better to focus on finding professional investors that aren’t friends and family.
More valuable than the money is the expertise of investors who have managed other startup companies.
Investors don’t typically just give you money, they’re going to want to be involved in making decisions. You won’t get this type of professional involvement from random family members or friends.
Tips When Reaching Out
I’ve already mentioned that you have to do a decent amount of up-front work before you seek investors or co-founders.
You can’t just reach out to people with a cold email, pitch your idea, and expect them to invest their money or time. 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 for 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 for pet owners.”
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, first of all, I’m really honored that they have asked me. I know it’s a serious question for anyone who has a product idea, and it really means a lot to me.
At the same time, I wish everyone who approaches me would 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 a rather extreme 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, and I ended up actually enjoying the process.
Another tip is to 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, the Hardware Academy is one of the best communities specifically for hardware entrepreneurs and engineers.
Depending on where you live, there are also in-person programs like TechStars Startup Weekend geared towards meeting and networking with other startup entrepreneurs.
Also, cofounderslab.com is a website focused specifically on connecting with co-founders.
If there’s an investor or co-founder 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 then introduce you 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 for an introduction by them. LinkedIn even has a feature for requesting these introductions.
Constantly be marketing and networking to get new connections and potential customer feedback. Industry trade shows and conferences are also great places to make industry connections.
You don’t necessarily need to have your own booth at a trade show. Just attending trade shows is beneficial for networking and making new connections.
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, with retail stores in every community.
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 an email attachment, and he agreed.
I kept it short and I only provided one visual to be looked at briefly. It worked. He liked the idea and I was able to get a meeting at their headquarters in Dallas to present my product to their lead 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 their interest to find a manufacturer who was willing to invest over $100k in my product.
Blockbuster’s interest also helped me acquire a team of independent sales representatives who sold my product to other 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 authors of the book The Hardware Startup recommend 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 funded.
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
Don’t forget to pursue manufacturers as potential investors. Finding a manufacturer who wants to invest in your product can be a huge boost to your cash flow, usually without giving up any equity in your startup.
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 factory 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 prior success I had with Blockbuster.
Not only did my manufacturer amortize my manufacturing setup costs, but they also gave me excellent payment terms. This 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.
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 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 easier to get supplier financing than customer financing. In most cases, especially when selling to large retail stores, you have very little control over their already established payment structure.
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.
Other content you may like:
- Lesson 5: The Strategic Way to Develop and Sell Your New Electronic Hardware Product
- How To Effectively Use Outsourcing to Power Your Hardware Startup
- Lesson 3: The Strategic Way to Develop and Sell Your New Electronic Hardware Product
- The Importance of Early Marketing, Selling, and Networking for Hardware Startups
- Lesson 2: The Strategic Way to Develop and Sell Your New Electronic Hardware Product
Just when I think you have covered every possible relevant subject along comes another article like this which means I have to immediately stop what I am doing and read. Thanks yet again John. Yes, always be marketing and networking.
Thanks Paul, and I always appreciate your comments. There is definitely many more topics to cover:)