
Ask HN: How do the pitch for a hardware company differ from a software company? - yalogin
Am hoping to tap into some minds who have done it or seen it before. If I am pitching a hardware startup and asking for funding, what do investors look for and how does it differ from a similar pitch for a software company?
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mchannon
As someone who's raised for a hardware firm, but not gone big, a few ideas to
consider:

•Investors invest in the team first, product second. If you're bright and
clever, you'll have a lot harder time raising money than if you're connected
and pedigreed (What, no Ph.D. from Stanford? Don't tell me that doesn't make a
difference. Pass!) Theranos didn't get funded by being bright and clever. If
you don't have the pedigree, acquire it with stock options (really hard to do
right) or be satisfied with having it be 10X harder to raise money.

•A solid core of investors like software to the point of irrationality. They
got rich in software, they feel comfortable with software, and they think
software scales far better than hardware (often true). Expect more doors
slammed in your face for this reason.

•Hardware doesn't have much use without a software component, so without
looking like you're reaching, try casting your hardware product as a software
product first and foremost, with some hardware IP added on which you will
label as "open source hardware" for somebody else to mass-manufacture for you
at their own risk.

•Nothing succeeds like success. You need to have traction in the market, which
is way harder to "fake it until you make it" with hardware than with software
(you can get "users" by giving software away, but I can't think of a hardware
startup that did the same since CueCat, and that failed miserably). Investors
will give you a kidney if you don't need them. If you're at the idea stage,
you'll be as welcomed as a methhead at the Oscars.

~~~
yalogin
Thanks a lot. That is very helpful.

Do I need to have contacts or connections in china for manufacturing or is it
ok to not have them?

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ecesena
I have a related question. YC has a rule of thumb of $15K per engineer times
18 months [1]. Any "rule of thumb" for how much to add for manufacturing?

Say, in their example, a software startup asks for $1.35M for a team of 5.
What would be an equivalent ask for a hardware startup that includes
manufacturing?

[1] [https://blog.ycombinator.com/how-to-raise-a-seed-
round/](https://blog.ycombinator.com/how-to-raise-a-seed-round/)

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cimmanom
Margin (the difference between what you sell a good or service for and the
cost to you to provide that good or service) is a much more important concept
for hardware.

With software, most of the costs go into building it. Getting more customers
brings in more money but doesn’t cost you more (ignoring marketing and
customer service etc costs). Even if you have hosting costs, those are
typically vanishingly small compared to developer salaries invested in
building it. So as your customer base grows, the cost of what you’re selling
to each new customer tends towards zero.

Hardware has a fixed cost for every unit sold, which is usually a large
percentage of the price at which you sell to the customer. Every new unit you
sell costs you additional money to produce. Yes, there can be economies of
scale; but ultimately every unit costs something. And marketing/customer
service costs are on top of that.

That means margins are lower, so it takes more money invested to make the same
amount of profit.

What’s more, risk is higher with hardware compared to software (at least the
way most software is distributed these days).

If the first version of your software is something nobody will buy, you can
iterate, and it still might get customers with some changes, so that the
initial investment in it isn’t a waste.

If the first version of your hardware won’t sell at all, you typically can’t
convert those units you’ve already paid for into the second version that
people will pay for. You’ve sunk not just R&D costs like you do with both
hardware and software but also production costs.

Finally, a lot of software lends itself better to a subscription model than
hardware does. And consumers are more familiar and comfortable with that model
for software than hardware (though it’s conceivable that that could change,
subscription models for hardware are a really raw deal for customers.) When
you buy a dishwasher, you expect to have to pay for water and electricity to
operate it on an ongoing basis; but not to also have to keep paying the
manufacturer.

The subscription model magnified the scalability of a product because it
allows you to keep making money off the product without spending more on it.
For physical products purchased frequently, that means higher costs/lower
margins on an ongoing basis. For physical products purchased infrequently,
that means no recurring income from the initial investment.

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yalogin
Thanks! That helps a lot and is along the lines of my thought as well. Do I
need to have manufacturing contacts also lined up?

