Why raising money for Hardware startups is hard

Here’s my attempt to summarising the investment ecosystem for hardware startups (with my European bias, but it does seem to be a similar position in the US). It’s based on what I saw and heard at the Invest in Photonics (photonics is lasers, displays, LEDs, etc.) conference recently in France, plus my own experience as an angel investor in several Swiss hardware startups.

On the face of it, it’s all very contradictory. For example, in the same presentation at Invest in Photonics a US VC said:

  • Optics + IT will save more lives than doctors.
  • VCs won’t invest in the hard part (the optics).

The discussions, presentations & roundtables at the conference did provide some logic to this. VCs get a better return on investing money in software, so they focus on that. Hard stuff is just too hard for VCs to finance and to get a return comparable with software. If they do invest in hardware then it’s startups who are mostly just packaging up components and building a brand – eg. Occulus Rift, Nest, GoPro, etc. or, occasionally materials.

In addition to the lack of proven returns is another less-obvious issue: traditional VCs don’t have the network to do proper due diligence on most hardware startups. Doing DD involves getting actionable data on the market, how it is going to evolve, what the completion will look like and which tech is going to win out. Only industry insiders have this. A VC can’t act on the limited data that he can get hold of.

Even European success stories like Novaled’s recent exit (to Samsung) for 260M EUR hasn’t change the VCs’ lack of interest. The general consensus from speakers & panels (including Novaled’s outgoing CEO) is that it’s got even more difficult to finance hardware startups the last few years.

Most of the advice was pointing to this strategy for startups:

  1. raise initial funding from a combination of government grants & angels.
  2. be very capital efficient
  3. raise follow on from Corporate VCs and/or family offices.

Wellington Partners said they see all photonics fundraising post-series-A coming from family offices (what they call “unconventional sources”). But it’s not that simple – matching a family office to a deal can’t be done systematically – it has to be opportunistic networking on a case by case basis.

Corporate VCs also seem to be getting involved at a late stage and filing some of the void of traditional VCs (my guess is at this later stage they can do the due diligence that traditional VCs can’t). The general feeling is that getting a corporate VC onboard works well unless there’s a conflict over strategy between the startup and the corporate VC, therefore a corporate VC who operates independently of the mother ship should be best.

All this uncertainty in the investment ecosystem means that the initial investors have to expect that there is a high probability that they will have to lead the follow-on investing all the way until the startup reaches break even. And the new normal is the hardware CEO is always in full-time fundraising mode. Although for really exceptional startups it can be a lot easier than all this.

And finally: although financing hardware innovation is a bit pessimistic, the technology continues to advance. In the near future Airbus thinks we’ll see drones powered from laser beams on the ground and other fun stuff!

Tech Innovation in China

A quick report from the LIFT China conference & maker tour of Shanghai and Shenzen.

Anyone following high-tech innovation in Europe also needs to follow what happens in the US (mainly Silicon Valley) and Israel (mainly Tel-Aviv). We know things are happening in China but does it need to be on this watchlist? In September 2014 I headed to the LIFT China conference and LIFT’s tour of the maker/kickstarter ecosystem to better understand what’s happening there.

I’d been to Shanghai 6 years ago (when we were setting up manufacturing for Poken). It’s still the same city but I think since then it feels that there’s a lot more Chinese who have exposure to the west (speaking excellent English, easy to have in-depth discussions about China vs. the West, etc.). There’s also about 1M Westerners in China, many of these working in high-tech.

We had a tour of DFrobot in Shanghai. DFrobot sell robot kits (and related things) online, distributing worldwide. Because their cost base is lower than Europe and also because they are in such a big efficient manufacturing ecosystem, they can design & build products so much cheaper, they can just throw them out there (like this DIY spider bot http://www.dfrobot.com/index.php?route=product/product&path=37&product_id=913 for $6) and because it’s great value there’s a market. Whereas the Swiss approach would be to beautifully engineer something and then struggle to sell a few of them at $200 each.

I started to think that maybe in the same way that Silicon Valley has built an engine which sucks in data, capital and brains, China has built an engine which produces electronics.

When we moved on to Shenzen, we met some of the team from Seeed studio. Seeed in an electronics manufacturing operation which helps design and manufactures hardware products for many of the Kickstarter startups. Again, a very efficient organisation.

We were invited for a tour and discussion of Foxconn. Usually it’s impossible to get a tour of Foxconn, but now they have decided to reach out to the kickstarter/maker community. Foxconn say they want to be innovators, not just assemblers & copycats. They want to enable some of their 1 million employees to start prototyping ideas (as people would in a hacker space), and to also have makers bring ideas to them. They have set up a site where anyone can pitch ideas to them called work2blah.com. This site is in Chinese only because they are not ready to process world-wide applications.

Clearly Foxconn is in a dominant position for doing large scale high-tech manufacturing. When you see the scale of what they have, it seems possible that Foxconn and Shenzen could turn this manufacturing dominance into an engine which sucks in innovation and progressively more of the value chain (and finally rid themselves of their employee-exploitive past).

So maybe the US and China both have powerful engines which increase their dominance in tech, and Europe will be powerless to compete.

Thanks to the LIFT conferece and David Li  from the XinCheJian hacker space for organizing the tour.

Bilan & Le Réseau’s manifesto for Swiss startups

Bilan and Le Réseau have published a 10 point manifesto (in french) for the Swiss government to make some simple changes to improve the startup ecosystem:

  1. Allow private individuals to make tax free investments into startups. Tax would be paid if the investment is subsequently successful (sounds similar in principle to the UK EIS scheme)
  2. Improve the fiscal system for startups. Encourage R&D and the generation of revenue from IP
  3. Improve the system for share options. Granting options has been made easier, but the tax status on exercising options when startups are still loss making is currently unclear.
  4. Create a VC fund of funds. Get the pension funds to invest into local high-tech.
  5. Create a Swiss “second market”. Lower the barriers of entry for IPO or create a separate segment.
  6. Legislate for crowd-funding and the sharing economy.
  7. Create an “entrepreneur’s visa”. Like several other countries are doing/have done.
  8. Have a small business act. Improve the ability for SMEs to bit on public projects.
  9. Reform the CTI. Streamline the Commission for Technology & Innovation, and make it more accessible for startups who aren’t spinouts.
  10. Create a Swiss “DARPA”.  Use military spending to help create disruptive technologies.

It all seems pretty logical and would make a massive difference to the ecosystem. The petition can be signed here

Full disclosure: I am a passive member of Le Réseau.

How the Israeli government’s tech investments complement private money

Israel is on a bit of a roll with 2 recent near billion dollar exits (Waze and Viber). So it’s interesting to see some details in the FT about how the Israeli government supports innovation funding through the Office of the Chief Scientist (OCS). The OCS has similarities to the Commission for Technology and Innovation (CTI) here in Switzerland because they both offer state money to fund research/engineering which is very innovative.


The Office of the Chief Scientist is continually addressing market failure – areas of broad economic benefit that private investors do not serve – rather than cherry-picking opportunities venture capital companies might well have taken on by themselves.

Waze: it lent about $1m to the company, and got about $3m back; the Israeli tax authority also reclaimed about $230m on the sale to Google in taxes paid to transfer the company’s intellectual property overseas


Even Boston struggles to get some technology press

From Fortune magazine what’s really wrong with Boston tech says:

TechCrunch does not have a single Boston-based reporter. Neither does Re/Code, Pando. The Verge, nor VentureBeat. And the same goes for more mainstream business outlets like The Wall Street Journal, Bloomberg or Reuters. As for Fortune, I’m one of just two local reporters — and neither of us primarily cover technology.

If even the US’s second tech city is completely in the shadows of Silicon Valley/San Francisco, then there’s not much hope for Switzerland to get much of this international technology press.

European Startup Accelerators: the Hy! Demo day

Saturday Jan 18th 2014 was the first Hy! Demo day, gathering accelerators from around Europe. The format was each accelerator introducing themselves and showcasing their best 3 startups, each with a 3 minute pitch. The wacky Berlin location (disused swimming baths) was overwhelmed with 800 people showing up.

The Tech.eu blogger Robin Wauters kicked off the day with some research about the European accelerator ecosystem. He said:

Entrepreneurs don’t care where they are based. They will move to the best location.

Re: the debate about whether there are too many or too few accelerators: everyone has an opinion, but accelerators themselves say there should be more (but keep the quality high). It’s like saying “can there be too many angel investors?”

What makes a successful accelerator? The possible criteria for judging it are: exits, investment raised, follow on valuations, job creation, IP created…. Exits and valuations provide the strongest justification of a viable ecosystem, however, the ecosystem is still too young to have generated these figures. Even in the US, Y Combinator is an outlier.

Its the mentors who really make the difference. The rest (eg. office space, a bit of investment, etc.) are low barriers.

The culture of the city doesn’t matter. But start-ups should move to where’s best.

Back on the quality vs quantity question. Nobody can judge it. However, the more accelerators, the fewer great start-ups who fall through the net. Poaching does go on between accelerators.

The accelerators

(I ducked in and out of the presentations as there were other networking areas, so this list of accelerators present is incomplete)

Techstars talked about their experience in London: 1,500 applications for 10 places. David Cohen started Techstars (in the US) because being an angel is hard: drinking lots of coffee, reading lots of bad pitches, crossing your fingers…Creating an accelerator was a better solution.

Techstars thought that Europe would be different. It’s not: Techstars US start-ups raise on average $1.5m each – Techstars UK is similar.

Corporates are frightened. A corporate can take 90 days to organize a strategy meeting. In the same 90 days a start-up can go through an entire accelerator program and come out with a viable product. This is why Barclays has built a fintech accelerator in London (and committed to 6 programs over 3 years) – the corporates know that they themselves can’t innovate at this speed.

Adam Wiggins from 
Heroku talked aobut his experience at Ycombinator in 2006. He said “Ycombinator really took us up a level”.

Helsinki Startup Sauna. We are getting the brightest people in. We are 3 years old, no big exits yet. 
Finland had a big-corporate culture: now this has changed.

Y Combinator took 6 years before getting exits.

One of the main benefits of an accelerator is as a support group for entrepreneurs. If you realise you’re not going to make it then you can fold into a more successful startup.

Deutsche Telecom’ accelerator is called hub:raum and offers financing (100-300k equity),
Helping by promoting (mobile) apps on their network.

Startup sauna (Finland) runs a 5 week program, then silicon valley, then demo day. 
8 batches so far. 
Non-profit, takes no equity, for free, invests 10k + 30k government money

Axel Springer’s accelerator is a joint venture with plug & play from the US.

Pro7Sat1 accelerator offers EUR 25K, 3 months on campus. 1 wildcard for EUR 7M of TV advertising.
 All for 5% equity.

Not just mobile apps

Berlin hardware accelerator Hardware.co was present and one of the other accelerators had a robotic startup.

The relevance of all this to Switzerland

We shouldn’t try and hold on to every start-up – they should go to where makes sense. Many will come back, or at least ‘build bridges’.

We should have our own accelerators focused on what we do best: think medtech, micro-technology… and attract the best startups in these domains from all over Europe.

A great start-up pitch is not “here’s our idea”. Instead, it’s “we’ve cracked it: we have the best product, the right team and we’ve found our market”.

Comparing what I learnt from these 3 minute pitches vs. what I know about eg. the early stage startups at la Forge at PSE I don’t think Switzerland has a problem generating ideas which are good enough.

Obviously there’s still a discussion on accelerators vs. incubators or one-to-one coaching/mentoring. But its clear that there’s a lot of momentum towards accelerators: I’ve mentioned several corporates in this blog post who are taking it seriously and articles about this ‘revolution’ are appearing in the serious business press http://www.economist.com/news/special-report/21593592-biggest-professional-training-system-you-have-never-heard-getting-up-speed.

Thanks to Go Beyond for a free ticket.

The Angel Investor Ecosystem in Switzerland

As a Swiss-based Angel Investor I’m continually asked about this so this is my attempt at a coherent answer. It’s a bit biased towards the Swiss French part of Switzerland.

Where are the angels?

The main active Angel Networks in Switzerland are (alphabetically):

A3 angels (a3angels.ch) based at EPFL and focusing on EPFL spinouts. A3 has a strong tech focus.

Business Angels Switzerland (businessangels.ch) with an active group in Lausanne and a less active one in Zurich. BAS is a traditional Angel Network and most of it’s members are successful business people.

Go Beyond (go-beyond.biz) with groups in Geneva, Lausanne, and a couple of separate groups in Zurich (as well as groups internationally). There’s a mix of people. Go Beyond have done a lot of ground work to make Angel networks scale and open Angel investing to a wider group of people.

Start Angels (startangels.ch) based in Zurich.

Here’s a list www.biobac.ch/about-us_links.php with a few more.

Updated: B-to-V is based in Switzerland (St Gallen) and is both an angel Network and VC. They are actively sourcing deal-flow in Switzerland but most of their recent angel investments have been outside Switzerland.

Angel Networks are dedicated but they’re small

The total investment across all these networks is less than 10M CHF per year in Switzerland. Typically 200k to 500k CHF are invested per deal, but a couple of times per year it’s over 1M CHF. (2014 has already started strong so it could be a good year!).

What these figures show is that:

Most deals are done outside the Angel Networks

Looking at the EPFL spinouts (currently the biggest source of Swiss startups) there’s seems to be an equal number who have taken seed money from formal networks (Angel Networks, seed funds like Swisscom, Debiopharm, etc.) and those who have taken money from FFF (friends, family and fools) or an individual High Net Worth person who’s making a one-off investment. And the EPFL spinouts are generally the startups which are most attractive to Angel Networks.

AngelList has 3642 Investors in (or focused on) Switzerland angel.co/switzerland/investors (registration required) – most of these are outside the Angel Networks.

It’s hard to hunt out Angels who are not part of Angel Networks, but a lot of angel-style funding comes from them. They probably won’t advertise the fact they invest, and any startup who has found one will keep their investor to themselves rather than recommend other deals (in case they need him/her for a further investment).

FFF are Angels too

Because Switzerland is a rich country a lot of startups have access to FFF (Friends, Family & Fools) money for the first seed round.  These people wouldn’t call themselves Angels but they invest similar amounts to Angels and are behaving a lot like Angels.

Spinouts with IP from the tech universities can get up to 500k CHF or even more as grants & loans as their first financing – effectively replacing the need for an Angel financed seed A round.

Other “Angel-like” Investors

There are a couple of investment platforms who are crowd sourcing investors in Switzerland (eg. c-crowd, Investiere). This is a potential way to get investment or to connect to those elusive individual Angel investors because there are a lot of passive members.

There are several seed funds run by corporates. Swisscom ventures and Debiopharm are the most active.

Updated: And Red Alpine sits somewhere here – it’s an Entrepreneur run seed fund based in Zurich with a Swiss and International focus.

There are no Super Angels

There are several people investing in Swiss startups who are close to being Super Angels. But instead of building a big Angel portfolio, they limit themselves to one or two deals per year where they are very hands on. For example at an A3 Angels event in 2013, Martin Valesco said that he’s done a lot of Angel investing in the past but now he’s focused on co-founding startups. Serial entrepreneurs are increasingly trying this Personal Incubator model.

I suspect the following factors are stopping anyone building a big Angel portfolio:

  1. There are not enough exits and the valuations are not high enough. Eg. Venturekick has supported over 200 startups and only 3 have exited so far. Note. This is a Europe-wide problem: eg. Seedcamp has a similar ratio.
  2. Most startups don’t have the right DNA (lacking business, sales, network). It’s a lot of effort to sort this out. Unlike Silicon Valley, there isn’t a supply of business people with a track record of scaling startups.
  3. The very-high-tech startups are difficult to invest in. They tend to have a very specific product which is difficult to understand (unless you’re an expert in that sector) and it can take a lot of cash and time to get to being a viable business. And each exit is different. From an investor perspective, it’s difficult to get synergies and the investment cycles are too long.
  4. The tax situation is really unclear. In Switzerland if you are a private investor then you pay zero capital gains tax. If you’re classified as a professional investor for tax then you pay ~50% tax (income tax & social charges) on capital gains. In fact it’s even more complex than this and there are no clear rules from the tax authorities – you may have to wait years before you know. If you are trying to recycle money to the next investment this is exactly the situation you don’t want.

How Angels Networks invest

The Networks typically have a monthly meeting where 2 or 3 startups each give a short presentation (10 to 15 minutes) followed by questions and networking.

After the startups have left the Angels discuss the merits of each startup and whether they want to start due diligence (assessing the product, market, business & investment structure) with a view to making an investment. Most of the time they don’t proceed. If they do invest then the whole process typically takes 3 months, sometimes much longer – in fact I’d say the average at the moment is 6 months. It takes this long because:

  • Unless the deal gets put on super high priority, the Angel Network process relies on the monthly meeting to push the deal forward to the next step.
  • In the most cases startups have some work to do – eg. Their team needs strengthening, they need to understand their market better, they need to fix some legal/IP/shareholder issue.
  • Also it takes a while for investors to be comfortable with the founders – it’s a dating process.

Swiss wide there are about (my estimate) 15 to 20 startups financed by Angel Networks per year. The investment amounts vary between 300k and 1M CHF. In addition to this there are several more startups who had a single Angel invest who met the startup through a pitch at an Angel Network.

Angel networks can only cope with evaluating a handful of startups. If you are unlucky and they already have a bunch of startups that they’ve been looking at for a couple of months then the network will have no bandwidth to increase the list until they either close (sign) or drop one of their current deals.

What do Angel Networks invest in?

A broad range of technology: software/Internet, some hardware/microtechnology and occasionally medtech.  And mostly spinouts from ETZ and EPFL which have been “packaged up” by the CTI and others. By “packaged” I mean:

  • They have been given a lot of business coaching by the university tech transfer team, the CTI (government), and organisations like venturekick/ventureleaders
  • They’ve had a couple of 100k CHF of grants to progress the business (and in some cases launch the product)
  • The technology has already been properly evaluated (tech transfer and CTI) by good patent agents. “Freedom to operate” searches have also been done.

The concerns of the Angels are usually are on the go-to-market strategy and the capabilities of the team to deliver.

Swiss Angel Networks didn’t invest in Housetrip or GetYourGuide, but some individual Swiss Angels did. it’s difficult for networks to judge these super high potential startups and to move quick enough for them. The Angel Networks are mostly focused on slightly less risky startups who have solid technology.

How to approach Angel Networks

You need to fill out the formal application (details on each of the Network’s web site) otherwise you wont get into their process. This is still true if you have met a member of the Network and he/she will introduce you to the Network.

If you hang out at startup events you are likely to meet Angels who are members of the Networks and you should be able to get some valuable feedback about how to pitch your startup to the Angel Networks.

It’s difficult. Some startups have left Switzerland because they can’t find investors. Some startups come to Switzerland and find investors. There are no rules.