Fundraising · Angel investor

How do you raise money to build a hardware prototype?

Syed Bukhari FinTech SME & Digital Business Innovation Strategist @ Gartner

December 13th, 2014

From what I understand, most methods used to raise funds for a start-up require a working prototype.

Are there any ways to raise money to actually build the first prototype?

I'd prefer to avoid Kickstarter, etc because I don't want to tip off incumbents in my industry of a potential threat coming their way.
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Ashwini Anburajan Founder & CEO at Social Data Collective

December 13th, 2014

I couldn't afford to build my own prototype for what I wanted to do  - so I actually licensed a lower-cost version (desktop) and did a pilot based on that. With those results now I have a proof of concept that's allowed me to sign up paid pilots that can help finance the building of an actual prototype on mobile. 

Not sure what your idea or industry sector is but if there's any opportunity to prove your business concept through licensing a version of the tech first - I recommend that. 

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

December 13th, 2014

Robin, with all due respect, I have yet to see any investor read a business plan. They all know that nothing goes according to plan, and in fact, a rule I hear is double the expenses, cut in half the revenue, if you still get a decent multiple probably worth taking a look at. They look at a lot of other documents, talk with others in the industry, drill the founders, etc..plans, not really. This assumes the pitch is tight so as to display knowledge of the business, the industry, the competition, the risks, contingencies, and exit potential, not to mention airtight financials. 

Business plans are necessary to get to the financials, and for the founders to think through all the aspects of product, market, operations, strategy, etc. It is not, in my experience, for the benefit of the funding parties.

I would like to hear others' experiences with business plans, i.e., how many funding events are based on reading/passing an early stage/startup business plan?

Val Tsanev Founder at CityRaven

December 13th, 2014

At this point my suggestion is to use your own money, if that is not enough move to the next level which is 3 Fs - Fools, Family and Friends. Personally I never take money from family, money is a commodity and it is widely available, family members are not. If the 3Fs are not an option quite honestly I would not waste my time trying to raise funds from angel investors or even seed stage incubator programs. The current startup fundraising environment is such that although capital is widely available the threshold for what is fundable is really high because they are so many successful startups out there that your prototype/company will be benchmarked against. Generally speaking angel investors and early stage VCs invest in expansion and not production. My recommendation is before you go in front of any angel investor, or professional investor of any kind find funds through personal means credit cards, equity mortgage lines, etc. build the prototype and only then try to get in front of investors. If you can get some traction with that MVP and traction means sales would be ideal, but if you can't get sales at least get extensive customer discovery and show investor that your product is solving a problem that is prevalent with MANY people, nobody cares if you are solving a problem that you and let's say your father has, needs to be a problem that thousands if not millions of people have. To conclude if you need a lot of money to build a prototype, usually hardware products are much more capital intensive than software, and you can't and don't want to raise them through family, friends and fools I suggest you reconsider the whole project/product. 

Logan Kleier

December 13th, 2014

Syed, The feedback I've received from some angel investors is that they refuse to give money to build a prototype. They want to see that the entrepreneur has some financial skin in the game before investing their own money. I had one angel investor tell me: "I hear way too many ideas to just invest in an idea. I prefer to give these ideas away to people who will do something with them." I'm sure there are exceptions, but this seems like the general rule. Most investors will tell you that you should approach friends and family to get the money for the prototype if you don't have the money yourself. As for tipping off incumbents about a potential threat, my feeling is that it's pretty hard to get large companies/incumbents to pay attention to what you're doing as an early stage startup. Logan

Anonymous

December 13th, 2014

I this a physical product that changes peoples lives?

Is it hardware?

Is it a web site?

Is it a mobile app?

I have created many prototypes / MVP for software so if you can be a little more specific on what your looking for I may have better input.

In general, if its software, specifically a mobile app, there are a few people that would partner with you for a part of the company or deferred payment if you have a really unique idea with a good marketing plan, marketing plan is the most important part as there are tons of bad apps that are well marketed and successful as well as many good apps that go nowhere.


Robin Kent Founding Partner at D.SoMo

December 13th, 2014

Really Chris you want to keep this going?  If it makes you feel better executive summaries. However, I've not had an issue with in depth discussions on a business plan  and I've raised millions of dollars. Of course it might be that I've had something people wanted to know more about. 

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

December 13th, 2014

Robin, wow, no problem letting it die. I have seen the summary being drilled and financials being dissected, just have not seen business plans, at least for startups at the seed level of investment, scrutinized to the extent you have. Still would like to know what others have found...

Anonymous

December 16th, 2014

The best way is to create a specifation for Minimum Viable Product (MVP) and clearly define the market segment. For investors to have confidence, this would be the minimum information. Other bit of useful info would be 'letters of interest' from preospective customers. Real ones :)

Taylor Dondich Vice President of Engineering at MaxCDN

December 13th, 2014

I assume this is a hardware prototype?  If so, is there absolutely any potential way to fund a prototype on your own or with your co-founders?  Remember, any raising of money at this point will mean giving away more equityy than after you've gotten further in your product development.  Furthermore, if you raise after product development, you'll have shown you can see your vision to a point where investors feel a bit safer with funding (and you'll most likely have to give less equity to them!)

Now given that, let me talk a little bit about the vibe I get in your message.

The great thing about kickstarter is that it gets you quite a few things:

1) Funding for development of your product (if you successfully raise)
2) Buzz.  A successful kickstarter campaign will create community buzz around your target audience.
3) Validation.  A successful kickstarter campaign means you've succeeded in describing the value proposition and that there is indeed an audience for it.

Now, if you fear your competition getting wind of what you are doing then you've got a couple problems.  Either, 1) Your product is not disruptive enough in the marketplace or 2) Your product can potentially be easily replicated by your competitors.  In either case, you'll run into trouble further down the road once you make your product known.  Get rid of this fear by additional product definition that makes it truly unique against your competitors and do some more research to ensure a solid value proposition.  Then you shouldn't fear the idea of initially getting the message in front of people's faces (ala kickstarter or some other medium).

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

December 13th, 2014

I have been in, and on one project, still in this catch-22. Even with a prototype, trial customers signed, tons of primary consumer research covering "intent to buy" investors are still very hesitant to invest without proof of TRACTION, i.e., paying customers. It is a tough road, but my product is not in tech so the dynamics may be different. For example, we raised over $4M from HNWI for an entertainment-related product based on a concept, mainly due to the anticipated ROI. FF&F is the place to start, if no takers, then networking a very solid "angle" that addresses FUD will help enormously.

The other angle is to find a co-founder who has at least one, if not several, successful exits that the investors will find comfort in. You may have to give up a chunk of the equity but as the saying goes...a little bit of something is better than all of nothing....

Re Indiego, some things have higher funding success rates than others, as holds true for KS as well. There is a ton of research on this..do your homework and be prepared of it taking 4-6 months from the decision to do it to getting the funds, assuming it works...

Chris