Funding for Hardware Startups: How to Survive Outside the 'Valley'

Maybe your startup is like mine. Maybe you’re positioned in one of those cities that didn’t quite make the “top 10 cities to start a company” list, or maybe your idea doesn’t match-up to the latest “unicorn” profile. Maybe you’re not a sexy consumer-product in line for the Shark Tank or Kickstarter, and even worse, maybe your elevator pitch doesn’t start with “It’s an app for…”.

So where do companies like ours get funding these days?

Since we’ve raised over a quarter-million dollars in non-dilutive funding, I figure the best way to “guide” anybody is to start by sharing the journey of a hardware startup in NE Ohio:

Let’s work backwards and start with some cold. hard. facts:

  • Over 25 funding attempts (grants applications, business competitions, etc)
  • Probably over 1,500 hours of application/prep time
  • Successfully got funding from 4 of the 25 (I know…)
  • Resulting in ~ $225k in funding

Lesson #1: entrepreneurship is 1% inspiration and 99% insanity GRIT

So let’s talk about your game-plan. Here are a few venues I’d recommend trying for funding an early-stage hardware startup:

  1. Seed funds: This can include your local student venture fund (typically run through local universities), or other state funded programs (in NE Ohio, we have the GLIDE innovation fund). A word of caution: these types of local development funds often come in a few flavors (some tastier than others): grants (the tastiest), grants with required match (less tasty, but still not bad), and convertible notes (not so tasty, but only if you fail, and we all know NASA says that’s not an option). For us, we received one $25k grant through the innovation fund. Well, it only took me 4 or 5 attempts fund to actually win it….
    1. Lesson here? “no” in the funding-world actually means “try again” when you’re better than the other guy.
    2. Many of these local “free money”-type of funds are highly competitive, and yes, highly political. It’s good to get to know the decision makers and find it you’re headed-in to a highly competitive round or not.
    3. Make sure you cater your pitch to your audience – see what they’re looking for (jobs created? Do they want to retain you in a particular region? Do they want you to hire students?). There’s no sin in doctoring your pitch to meet the audiences-needs. In fact, that’s what any good grant-writing workshop worth its salt would tell you – give the people what they want!
  1. State Grants: I love these. The application process isn’t too bad compared to federal, the offices are small (so people return your calls), you’re close-enough to drive down and have a face-to face (really helpful) and there’s usually plenty of funding to go around and/or opportunities to partner with other institutions (they love that stuff).
    1. Grant-writing sound scary to you? Don’t sweat it: I wrote and won a $100k grant through the State of Ohio Technology Validation and Startup Fund on the first attempt while I was a full-time college-student).
    2. A word of caution: before you dump time into the application, make sure you company aligns with their funding-target applications (e.g. energy storage), and read the fine print. A condition of the grant we received was that we licensed a patent from a state-run University (not something everybody would do).
  1. Federal Grants: Some startups live and breathe SBIRs. But don’t be fooled – you have to have the right tech and the right time with the right team to make this happen. Qualifications of your PI are critical (they better be a recognized expert in their field), and you have to be in a government-funding ‘sweet spot’.
    1. These are time-killers. Unless you have a solid technical team, I wouldn’t bother – they won’t consider a bunch of guys in a garage for a NSF.
  1. University Partnerships: Often the ‘golden ticket’ to successfully obtaining #3 is to partner with a University. But beyond that, Universities hold a wealth of resources for you. Think about it: professors are grant-writing machines (they have to be to fund their own research). Even further, the government is getting smart (I know, right), and they recognize that while Universities are great at creating tech, they aren’t so great at commercializing it. This is your golden opportunity. If you can find a Uni. doing research in-or-around your area, partner with them and see if you can get written into a grant. You might get access to funding, professors, students, labs – who knows!
  1. Business Plan Competitions. Ok, so we have gotten a good amount of funding through these, but that’s only because we focused our time and effort on competitions in our field (Cleantech). Business plan competitions get highly competitive, and often aren’t worth the time and effort. Also keep in mind, the winners of these are different from the winners of grants (and the like) in that the judges will be judging you on your ability to effectively communicate your value proposition and how you make money with your tech more than the tech itself. So yes, that guy with the wimpy inflatable LED-light-thing and the ‘on point’ pitch beat your 10 years-of-research-5-patent-high-tech-embedded-nero-uber-quantum-thingy-nobody-understands because you stink at explaining why anybody should care (whew!). No leaning on your patents and papers as a crutch here – you had better be a rockstar on stage, or don’t waste your time.
  1. Strategic Industry Partners: You may have noticed I didn’t mention VC funding. That’s right – you wont’ see VC funding listed here. Why? I think a recently-published study from NEXTEnergy says it all:

“As an incubator that supports ‘hardware’ ventures, we have largely abandoned venture capital as a fund raising approach for our clients…”

Say whaaaat?!

Plain and simple – today is a rough time to get VC funding for hardware startups. But fear not, there is a golden opportunity just waiting for you, and the funny thing is that nobody is really talking about it. Industry partnerships. Let me explain:

In 2008, most small and medium-sized industrial companies laid-off their engineering staff. Most were left with what’s considered a “sustaining” engineering team. Now, time has passed and these same companies are running into issues of obsolescence and keeping-up with the competition. These companies need to do one of two things:

1) Seek-out a consulting company to engineer a next-gen product

2) Find an innovative startup with the technology solution they need, license it, commercialize it, and be on their merry way. #2 is where you need to step-up and take advantage.

Don’t believe me yet? My startup has seen this first-hand: most companies are too concerned with the next-quarter numbers to be able to setup a cutting-edge ‘skunk works’ team to do advanced R&D (ROI is too long for most…except Apple…props to them). We found a major OEM in this position and offered them a cutting-edge technology solution that they don’t have the means to invent in-house. We’re now working with this OEM, annnnnd they are paying us to develop our own product! So what can you get from an industry partnership?

  • Access to their engineers/sales/marketing/product managers/etc (the ultimate in VOC feedback)
  • Cold, hard, cash funding
  • Pilot Project and in-kind services
  • Supply chain
  • Early-stage POs (GOLDEN in the case you wanted to go to a VC after)
  • A future customer

So the secret’s out – how do you find said Industry partner? Good ol’ fashioned networking (conferences, etc) worked in our case.

If I had one final word of advice to all you hardware-startup out there, one little tidbit of knowledge that will help you to be successful, it would be this:

don’t marry your solution

fall in love with the problem

I’ll leave you with that. Happy-funding!