tech-company, funding, investmentConsider a B2B hardware startups that require significant capital investment to produce a prototype, with product retail value in the 6 figures e.g. plant machinery. Obviously, traction is nearly impossible to prove to an investor. How does one raise funding for such companies? Assume that enough technical expertise and industrial experience is present in the founding team, and the business is potentially disruptive.
In general, who should be the target for your funding? Angels, VCs etc. The problem with such a startup is that you cannot develop an MVP without finance. All the general advice about raising money, get traction etc., seems to be not applicable in this case. How did similar companies raise funding in the past?
You are correct to believe that most VCs and Angels will not be interesting in investing large capital in a risky startup with no traction, no matter how potentially disruptive it is. I wouldn’t be looking to them for funding (but then again if you find the right person with experience in that specific industry, who likes you, likes the product, has connections to make it work… then maybe they would invest)
However, there are a few options. Many of these depend on what country you are in and their focus on finding startups and R&D.
Option 1:
You can look to your government for R&D funding to build a prototype. Of course you will have to deal with all the government bureaucracy (forms, waiting for responses, constant reports etc.) but it can be a good option for initial R&D funding.
Option 2:
You could also look to get money from industry leaders. Sometimes large companies in certain sectors will have VC firms in their organization that will fund early stage companies with the hopes of being on the ground floor of the new “disruptive” product.
I hope this is in some way helpful. Best of luck finding what you are looking for.
Investors at that stage tend to invest more in the team than in the idea. They understand that the idea may change over time, almost expected to change over time as the entrepreneur gains more experience/market knowledge. The founding team needs to have the expertise as well as the will to succeed.
The best way to get into a VC or angel’s attention is to get an intro. Investors are bombarded with startups trying to pitch them and they can only see so many a year. Leads from a referral has a much higher chance of success than a random email from an entrepreneur.
If the stage is still super early, your best bet will be angels, micro-VCs, and accelarators. They all tend to be the first money invested into a company. They will be willing to taking much more risk compared to a later stage VC. Once you have a bit of traction/a MVP, you can raise a Series A from early stage VCs. Once you get to Series C, you will have to start going to later stage VCs.
If you can show a lot of thought and time has been put into thinking about your idea/problem, it will be easier to pitch VCs. They tend to ask very difficult questions, but if you’ve thought the idea over enough, you will probably have an answer for every question they might ask.
Do what Google and Facebook did- give shares to other companies’ executives who then use company funds to invest in their own investment. Its illegal, but don’t knock it!
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