Funding for Hardware Startups: Different Stages of the Funding Process

There is more to funding for hardware startups than Kickstarter and IPOs. Depending on the stage of your idea, there are a number of different types of funding available, and there are different reasons to find that funding at each given stage.

The good news? This means you don’t need to wait until your product is completed to find funding, and nor is it out of the question to get more funding as you find you need it later in your growth.

Here are some of the different stages of the funding process for hardware startups…

startup funding 1Prototyping Phase

As the name suggests, pre-seed capital is capital that your business raises in the very early stages – while your idea is still just a ‘seed’. If you have a working prototype then that’s great, but even if you don’t yet, you can still start looking for investment at this point.

Pre-seed capital covers the first stages, and can come from three sources:

  • Primary Sources – Friends and Family.
  • Business Angels – Former startup founders now looking to invest into new ideas.
  • Accelerators – Programs designed to provide mentorship and capital to the startup companies that need them. Tandem is one example that offers up to 200K capital, as compared with HAX, a hardware accelerator that offers up to 10K. As you can see, the amounts can vary quite drastically.

Read more about securing pre-seed capital here.

Of course, some businesses will skip the pre-seed funding phases and will instead opt for bootstrapping. This comes from the expression ‘to pull yourself up by your own bootstraps’ and basically means that you’re funding yourself by using side projects for separate revenue streams, dipping into your own finances and gradually scaling your operations. If you plan your business model carefully, you don’t need funding from an external source.

Startup funding processIndustrialization Phase

What comes after pre-seed capital? That would be seed capital. Here you can expect to earn around $50-$500K (this article is discussing convertible debt) depending on your business, and a bit of luck.

Seed capital is the money needed to turn an idea into a business and this is the funding stage that we tend to hear about most often as startups.

This can come from crowdfunding or from syndicate investing. In syndicate investing, business angels create syndicate deals with each other – meaning you gain investment from multiple sources. A popular example here, is Angel Co The investors with the most established track records will be the ones that lead the investment. Of course, these investors will be buying shares in your business, so if you can go the Crowdfunding route this will often be more appealing for new startups if retaining complete control over your company at this point is a goal.

startup funding 3Growth Phase (Series A, B, C Funding)

Once you’re passed the initial launch, you’ll be entering into your growth phase. At this point, you will have a good idea of your product, your market, and your projections. This allows you to potentially bag some more impressive investors and you’ll need that cash in order to improve distribution, to increase your marketing, or perhaps to work on your next product.

While still creating the product you’ll enter into series A funding. From there, at the growth stage you have series B and then series C funding. Series A rounds tend to raise anything from $1-10 million and will often involve giving away 15-30% of the company in return. Series A funding is a little riskier for investors compared with series B, as the company will still be somewhat younger and less proven. Series B meanwhile is about scaling. Companies will bring in more money at this stage in exchange for a larger slice of the pie.

Finally, companies reach series C funding once they’re fully mature. With an expanding user base and a tried and tested business model, larger funds will come rolling in and an acquisition may even be on the cards if that’s your exit strategy. Funding rounds will range from tens to hundreds of millions of dollars.

The next stage after this point will then often be either an acquisition or an IPO (Initial Public Offering) at which point most would consider that a hardware startup has become a successful hardware business.

Conclusion

A hardware startup will typically gain funding in 3 stages. Pre-seed capital before it is ‘running,’ seed capital which enables one to start a functioning company, and further funding in rounds to build the business into a consistent and reputable company. Today though there are more stages, paths and options than ever before when it comes to finding funding especially for Hardware Startups. The whole process is almost unrecognizable, and undoubtedly, will continue to morph as we move towards our ‘sharing economy’ and see other changes facilitated by the web including equity based crowdfunding. 

See our past article on Crowdfunding News: How Title III of the Jobs Act Affects Crowdfunding

If you have any experience with funding for your startup then we’d love to hear about it. Do you have any tips on funding for hardware startups for our community? Share your stories in the comments below and we’ll see you down there! Don’t forget to subscribe to our newsletter, for more news from the hardware industry.

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