Whatever your B2B offering is, keep in mind that unlike consumers, corporate clients seldom buy your products or services due to pricing. There are tons of other factors that come before pricing.
AI startups that depend on users giving them data have a classical chicken-egg problem that most platform startups. e.g., e-commerce, sharing economy, etc, are faced with.
The main problem for most pure-software AI/ML/DL startups is that: they do not have the input data, otherwise known as the training sets in AI/ML/DL jargons.
Staged financing, which is the nature of VC industry, whips the startup into hitting KPIs in different stages so as to be able to raise new money at higher valuation – huge incentives. Living in the fear of running out of cash as a startup also puts the entire team on a relentless driving mode.
One of the most intriguing behaviors is VCs talking about investment horizons that are beyond normal fund lives, e.g. 10~12 years. They talk about how they are willing to wait another 3 or 4 years before the team rolls out a really good deep tech product. They talk about real disruptions in energy generation, material sciences, etc, as opposed to yet another teenager social networking app. They talk about how the 10-year bet would either monopolize a market or perish.
So much is talking, especially that some of those VCs do not have backgrounds as entrepreneurs or even engineers in the said deep-tech fields.
As 2017 kicked off for the Hardware Club as usual with a grand firework at CES in Las Vegas and a following week in Bay Area, we've done some heat check with our private network. Here are some thoughts for the investment trends in hardwares for 2017.
I believe that this is not the case in FCFF & EV valuations, as there's no effect on how the FCFF is distributed if we exclude tax impacts. I would say that if the Terminal Values in your FCFF models account for huge part of your EVs, the models are still unreliable. This is the case of many LBO modelings where revenue growths are modeled only up to 5 years and also to be low single-digits.
In the case of high-growth startup modeling, it's important to project FCFFs up to 10 years or 20 years until the company hits maturity. If after doing all this a significant portion of the EV still comes from Terminal Values, then this model is just as unreliable as a 5-year LBO one, if not more.
Unlike the lean-startup world where pure-play VCs dominate almost all early-stage investments, we have seen quite some corporate investors stepping into early stage investments in the hardware field. Usual suspects are large manufacturing firms such as Foxconn or Flextronics, as well as some consumer electronics brands.
I believe that a more complete hardware investment eco-system will take form in the next 2 to 3 years. However, before that happens, a hardware founder should, like any founder, really think carefully over all funding options. A dollar is never just a dollar. There could be a lot of good things and bad things coming with it.
The evolution of founders' ownership through out the fundraising rounds is a function of capital efficiency.
The more efficient the founders could use the VC money in generating growth and turn operational-cash-flow positive as early as possible, the higher the capital efficiency and the larger the ownership of the founders. Vice versa.
Like many hot startup subjects, crowdfunding is an oft-misunderstood one. At the Hardware Club we have more than 20 startups that broke $1M on Kickstarter or Indiegogo. In our portfolio companies along we have 3. We consider ourselves knowing the art of crowdfunding better than most average investors.
However, I constantly run into hardware founders that have very distorted views on crowdfunding. This article is to share my opinions on this subject as an investor.
It's not uncommon that they send an emergency email to me 2 or 3 months later saying everything has unravelled and whether I could help.
Some entrepreneurs think that contracts with component suppliers, manufacturers and distributors would govern everything, which could not be further away from truth. When you work at a large corporate, you can rely on contracts. Your company has the resources and luxury to spend money and time to enforce the contracts, sometimes even by going to the court.
As an entrepreneur, sadly, you never have enough time and enough money.
The general feeling is that if you're working on B2C products, you don't have to interact with too many adults other than your investors or potentially your acquirers.
This is definitely not the case in the hardware space. The reason is very simple: to deliver a product to the consumers, the hardware entrepreneurs have to work with suppliers, manufacturers, distributors, stores, logistics partners, etc.
Locking oneself in a garage, even with a 240 IQ, won't get these things done.
Startups do not have volume, especially in early stages. For an EMS company to work with a startup, the EMS company has to take a long-term view. If the startup will just easily switch to the cheapest supplier, then why should the EMS firm even work with them from the beginning?
On the other hand, by working with the startups on industrialization, building testing programs and QA programs, the EMS firms know the startups won't easily switch. That allows them to take the long-term view and hammer out multi-year growth plans together with the startups.