SKTA Innopartners blogpost by Ilgiz Akhmetshin, August 6
2014
It is
widely accepted that the hardware startup funding ecosystem is broken. There
are a lot of reasons why investors hesitate to invest in hardware (and even
more so in semiconductors):
·
High R&D expenses
·
Longer time-to-market
·
Expensive proof of concept
·
Potential manufacturing issues
·
Expensive to scale, etc.
Therefore,
most VCs won’t consider investing in semiconductor companies. Given
these reasons, even with the best material or the ultimate chip, fundraising
is very tricky, if not impossible. A typical semiconductor startup
requires about $5M of seed funding to validate the design and to get to
proof-of-concept on an FPGA and then an additional $20M to launch the
product. Although this number may vary from one startup to another, it
will always be order of magnitude more costly and take longer to reach
commercial viability than a software startup. Usually, entrepreneurs can
invest their own money or raise angel funding to get started. However,
to become venturable, a hardware startup requires much more. Here are a
few ways of raising additional money.
Venture
Capital
Although
there are a number of VCs who have recently invested in consumer hardware
(e.g. Menlo
Ventures, Highland Capital Partners, Samsung
Ventures America), extraordinarily
few will invest in the early stages. Early stage semiconductor companies may
not have much more than a concept and some gross calculations. Armed with only
this, it’s much too early to seek VC funding for a
traditional Series A round. To become “venturable”, they will have to find
$1M-$5M to get first prototypes or at least simulations run.
Crowdfunding
Recent
success of hardware startups on Kickstarter (Pebble – $10.3M; Form 1 – $3M), or Indiegogo (Ubuntu Edge – $7.4M; Scandau – $1.6M) prove crowdfunding can be a viable
source of startup funding that does not dilute founders’ equity. Moreover,
projects not only get funding, but also PR and a customer base. However,
crowdfunding is only viable for consumer electronics and devices. We
should keep in mind that Kickstarter’s and Indiegogo’s models work this
way:
1. Backers pre-order products or services from a startup
2. The startup uses this money to start manufacturing
3. Backers receive pre-ordered goods or services
This
works perfectly for consumer devices, but won’t work for any upstream hardware.
There is hardly any consumer who needs a single next-generation bluetooth chip
if it is not integrated somewhere. Other crowdfunding options include gust.com, angel.co and f6s.com. When
the JOBS Act takes effect, everyone may invest in startups via
crowdfunding platforms (today, it is limited only to accredited investors who
meet special accreditation requirements). Even though these platforms bring
more potential investors to the table, it is unlikely that b2b oriented
startups will be able to benefit from this opportunity. Consumers are not moved
to invest in “holy grail technology”, such as EUV light sources, for example, because they don’t understand the
device and the benefits to solving the lithography problem are too far removed.
Seed funds /
Accelerators / Incubators
There
are quite a few startup accelerators that focus on hardware. Some of them are
affiliated with major semiconductor or hardware manufacturers. This partnership
can be beneficial for startups in multiple aspects; strategic partners can
bring industry and technical expertise, seed funding and opportunities to scale
up (Read the original post to see a list of US based hardware accelerators).
