Investing in the Future Part 2 of 3: 5 Tips for Hardware Manufacturers to Overcome Challenges to Raising Capital

In my last post, I talked about the challenges of raising capital for a hardware startup and WHY you need courageous investors. This time, I dig a little deeper to tell you about HOW I found them, along with some tips on emulating Essentium’s success in your next venture. 

For this article, the second in a series of three, I’ll focus on my personal experiences raising capital for a hardware and materials manufacturing company. I’m sure it’s quite different from seeking VC funding for a virtual product, and it comes with its own set of unique challenges. The bottom line: if you are that determined, that positive, that your product is scalable and can deliver an outsized return on investment, then you need to be willing to look for non-traditional sources of funding. Here are five tips:

Tip #1: Enter your product or technology in university innovation and business plan competitions. Essentium was founded by a group of engineers, grad students and Ph.Ds, so we were very familiar with university level research projects. By entering such competitions, we won a little seed money to fund some research, but it wasn’t enough to do any real scaling in and of itself. However, the real win there was the practice at pitching, building scalable models, networking, exposure to other startups’ ideas and talent, learning how and why we arrived at the same competitions, and the buzz we generated among potential external champions and future partners. This can prove invaluable as you move forward.

Tip #2: Seek out high net worth individuals who are not part of the classic VC community. In part one of this series, I mentioned that raising capital for a hardware startup is hard. In many cases—ours was one of them—the reason is that many established conglomerates have optimized their supply chains and automated their manufacturing processes to such an extent that there is no financial incentive to invest in a better way—unless the product or advancement is so compelling that enthusiasm for it cannot be denied. Through networking, we found a courageous individual who believed in the viability of our technology, had the freedom to invest, and helped to get us off the ground.

Tip #3: Be prepared to adjust your expectations for how much equity you need to sell in exchange for funding the company. As an entrepreneur seeking funding for a hardware manufacturing company, you may want to find courageous investors while still maintaining a substantial ownership stake, but don’t let this obstacle shut down your progress. If you’re an entrepreneur like me, then it’s not all about the money. Sure, you want to be compensated someday, but you’re doing this because you believe in something bigger than yourself and, ideally, you’re so bothered by the state of play in your space that you are intrinsically bent to fix it. You are either personally familiar with the pain you’re working to solve or you know your potential users and their pain very closely. In my case, I worked for five years as a design and manufacturing engineer before going back to grad school as a non-traditional student, so I was intimately familiar with the cost- and time-pressures facing manufacturing entities. As I went on through grad school I became more and more intent to devote a chunk of my life to help address these challenges. This required building a startup company and raising money. Manufacturing companies are expensive to build, and your number one priority must be to ensure the company is always well capitalized, but the only asset you have to sell in the early days is your equity. Always make sure you have the right perspective on the type and percentage of equity you own, what you’re willing to part with in the next funding round, and be willing to hold these concepts with an open hand so you can pivot as necessary and be able to plan for the unexpected.

Tip #4: Get the word out about your accomplishments. Publish or perish is an apt slogan in academia but its application also applies to startups. Don’t be afraid to get your name out there. Talk online about technology through articles, brag a bit about big contract wins and customer success stories. File patents and let the world know about your latest breakthroughs through press releases, social posts, and new product announcements. Eventually, you’ll catch the attention of someone who can help you scale. For us, our first big break was BASF.

After years of toiling away in relative anonymity, we “suddenly” were noticed by an industry giant (not a Silicon Valley VC fund). And not because they saw the value in what we were doing (though they did), but because we got there first and screamed it from the rooftops. We began to partner with BASF, leveraging their strengths in raw material sourcing and global materials distribution with our strengths in filament research and development, and later, high-speed extrusion technology. This resulted in discussions with BASF’s internal corporate venture capital group, culminating with a substantial investment in Essentium and an agreement to co-develop solutions. This in turn led to greater visibility and a subsequent corporate VC investment from another European company, Materialise.

Because these introductions and connections grew out of complementary business objectives, we found really great partners in the unlikeliest of places. As a result, our goals are aligned and we have much more symbiotic relationships with our investors than we might otherwise have with a purely financial venture partner.

Tip #5: Patient capital is a very important aspect for hardware manufacturers. Finally, hardware companies have different time horizons than software-based ventures. An entrepreneur building an app may have a three to four year plan to grow and potentially sell the company, whereas a hardware company needs to look further down the road, perhaps a decade, before reaching the same milestones. Make sure investors know your timelines for payback to head off financial stress through requests for early ROI.

Again, my forte is in building hardware companies, specifically in the additive manufacturing technology and filament production space. In part three of this series, we’ll take a closer look at what’s next, and where the money is going in 3D printing.

Essentium, Inc. provides industrial 3D printing solutions that are disrupting traditional manufacturing processes by bringing product strength and production speed together, at scale, with an open ecosystem and material set. Essentium manufactures and delivers innovative industrial 3D printers and materials enabling the world’s top manufacturers to bridge the gap between 3D printing and machining to embrace the future of additive manufacturing.