The world we used to life – the one that involved using cheap money to pump up the ARR – is gone.
It came to an abrupt halt as interest rates rose, and it’s not on the way back anytime soon. VCs responded like VCs: quickly shifting from a “grow at all costs” mindset to a focus on immediate profitability, while funding metrics shifted from just revenue and growth to including costs.
Since the start of the second quarter, a variety of companies, including hardware companies, have stepped out and started raising money. The Silicon Valley Bank (and more recently Free Republic Bank) debacle was relatively short-lived, but given the many roller coaster rides the industry has experienced, one has to wonder where the goal posts are these days.
There is no debate that the SaaS game has changed, and yet no consensus has emerged on Series A funding metrics for these companies. However, it’s not too hard to guess that sales would roughly double at the same or lower cost. It’s a challenging endeavor, but a clear and tangible goal to strive for — and one that doesn’t apply to hardware companies that don’t generate revenue in the early stages.
So how does a hardware company secure Series A funding in the midst of yet another “new normal” in this post-low interest rate environment?
Make sure you have working hardware
Most hardware companies barely get their products to work – and can only do that with their own engineers and technicians. Hardware cannot be used to a reasonable extent in this situation.
In the Series A phase, VCs want to know that they can pump money into a product that is coming to market. That doesn’t mean the product has to be absolutely perfect; It just means that it needs to be mature enough to work in a more unrestricted environment outside of the startup lab.
In the Series A phase, VCs want to know that they can pump money into a product that is coming to market.
Use your technical support per hardware ratio as a measure of whether your product can be delivered the way it needs to be. If you have an engineer for the hardware you provide (not to be confused with non-engineering customer technical support staff), you don’t have a deployable product.
At a ratio of one to four, the unit economy now becomes more reasonable. As an overarching goal, you should aim to get humans completely out of the loop, but ultimately it all boils down to one-size-fits-all economics.
If you can achieve a gross margin of over 70% at a reasonable price, you can afford more support – but it will be extraordinarily difficult to sustain as a young company with an immature product.