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Ask HN: How do the pitch for a hardware company differ from a software company?
4 points by yalogin 41 days ago | hide | past | web | favorite | 5 comments
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?

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.

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?

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/

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.

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?

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