The world we used to live in — the one that revolved around using cheap money to pump up ARR — is gone.
It came to a screeching halt with rising interest rates, and it’s not on its way back anytime soon. VCs responded as VCs do: by quickly shifting from a “growth-at-all-costs” mindset to focusing on instant profitability while funding metrics shifted from just revenue and growth to including costs as well.
Since the beginning of Q2, a spur of companies, including hardware companies, have come out of the gate and started raising money. The Silicon Valley Bank (and, more recently, Free Republic Bank) debacle has been relatively short-lived, but, given the multiple rollercoasters the industry has been on, one has got to wonder where the goal posts are nowadays.
There’s no debate that the SaaS game has changed, and yet a consensus on Series A funding metrics for these companies hasn’t emerged. However, it is not too difficult to guess that it would be roughly around double the revenue bar at the same or lower cost. It’s a challenging proposition, but a clear and tangible goal to strive for — and one that cannot be applied to hardware companies without revenue in their early stages.
So how can a hardware company raise a Series A amidst yet another “new normal” in this post-low-interest-rate era?
Commit to having deployable hardware
Most hardware companies barely get their product to function — and can only do so using their own engineers and technicians. Hardware in this situation is not deployable on any meaningful scale.
At the Series A stage, VCs want to know that they can pump money into a product that will start going into the market. This does not mean that the product needs to be pitch-perfect; it just means it has to be sufficiently mature to function in a more unconstrained environment outside of the startup lab.
At the Series A stage, VCs want to know that they can pump money into a product that will start going into the market.
Use your ratio of engineering support per hardware as a metric for whether your product is deployable in the way it needs to be. If you have one engineer for the hardware piece you are deploying (not to be confused with non-engineer technical support personnel for customers), you do not have a deployable product.
Now, at a one-to-four ratio, the unit economics become more reasonable. As a stretch goal, you should target to get the human out of the loop entirely, but everything eventually boils down to unit economics.
If you’re hitting 70+% gross margin at a reasonable price, then you can afford to have more support — but it is going to be exceptionally difficult to maintain as an early-stage company with an immature product.
Show tangible proof of high-quality demand
How to prepare a hardware startup for raising a Series A by Walter Thompson originally published on TechCrunch