Preparing to pitch VCs as a climate hardware startup
Hardware startups can be capital-intensive in the early stages, so it’s essential as a founder to build the diverse capital stack you need to see your product through to commercialization. In some cases, venture capital is part of that journey, but with a longer product development phase, hardware companies tend to grow at a much slower pace than their software counterparts, so pitching VCs comes with its own unique set of challenges.
Mona Alsubaei is a Partner at Transition, a firm that invests in Seed and Series A founders across climate. We sat down with her to discuss common VC considerations when investing in hardware startups and tips for founders who are pursuing VC funding as part of their capitalization strategy
Understand the different risks involved and avoid stacked risks
Deep tech climate startups inherently grapple with binary risks: their technology either proves viable or it doesn't. Unlike more iterative industries (and software), where gradual enhancements or pivots can steer a product to market success, deep tech innovations often face multiple make-or-break technological milestones.
Investors might be concerned about the uncertain development timelines and budgets and would prefer to engage once their capital can go towards scaling a working solution, and not towards uncertain technical development. Any work founders can do to address the core tech uncertainties early on, not only instills confidence among investors but also helps founders conserve more ownership (especially important as some deep-tech companies require more capital down the line). If you need capital to get to the “working prototype” stage, look towards grant funding from public or private sources; for some inspiration, check out our piece on SBIR funding.
Because hardware and deep tech involve technical binary risks, founders should try to avoid stacking additional risks (such as regulatory, market, and perception). The best hardware and deep-tech startups are building products where the market appeal is obvious (if you build it, customers will come), but the problem has remained unsolved because of the lack of a technological solution, and not because of other barriers.
Velocity of R&D is key
Unlike software, hardware companies face greater obstacles when it comes to pivoting and iterating, largely due to the resource-intensive and time-consuming aspects of their product development. As a result, it's crucial for founders to proactively mitigate bottlenecks (and build the right product from the start). This can be achieved by:
- Incorporating simulation and analysis software and rapid prototyping and testing tools for efficient product development
- Continuously engaging with target customer segments at multiple phases of the product's lifecycle
- Targeting earlier lower-barrier entry points for commercial deployment (co-siting, modular units).
These steps help founders to demonstrate progress externally. It gives investors some assurance that there are not any major unforeseen surprises in the near future.
Grants are your friend!
Grants offer invaluable financial breathing room, enabling founders to concentrate on essential research and development without the need to give up equity. This is especially important in high-risk, capital-intensive sectors where significant resources are required to transition from concept to prototype, or from lab to market. Last but not least, obtaining a grant can serve as third-party validation of a startup's technological approach and market viability, boosting its credibility with prospective investors and partners.
Most of these grants are provided by public agencies; you can learn about the grant landscape for climate in our overview piece here.. Additionally, an increasing number of private organizations and NGOs, such as The Nature Conservancy, 776 Foundation, Breakthrough, BHP offer fellowships and non-dilutive grants to fulfill their sustainability objectives or foster innovation within their sectors.
Note, these grants can differ significantly in funding amounts, terms, and application effort required. Therefore, founders should do their research before applying. Check out our various pieces on the grant process like this and this to get started.
Storytelling matters…a lot
While software startups can often lean on measurable financial and commercial traction to woo investors, some hardware and deep tech companies don't have that luxury at the early stages.
Adding another layer of complexity, hardware startups frequently involve specialized technologies and are commonly founded by highly technical experts, often with advanced degrees and academic backgrounds. Unlike in software, these companies often have to transform complex science and engineering into marketable products, and communicating this journey can be particularly difficult.
Given these two factors—the lack of early-stage traction and the complex nature of the technology—it becomes especially important for hardware startups to build a compelling story and narrative. Founders need not only to distill complex, specialized technology into straightforward, jargon-free language but also to build a narrative that resonates with customers (and investors) and reflects an understanding of the market and product beyond just the underlying technology.
If you don’t have much background in telling these kinds of stories to diverse audiences, you can hire a coach to upskill you, but practice is ultimately key. Line up a few pitches you’re comfortable writing off, get feedback from other founders, and work with founder-friendly VCs who’re open to helping you refine your narrative. If you’re still struggling, bring on a cofounder who’s confident handling this “commercial” side of the company, while you focus on the technical.
Tie your fundraising to key milestones
The timing of fundraising has a more nuanced impact on valuations for hardware startups compared to software companies. In software, valuations often correlate more directly with key performance indicators like recurring revenue or user growth, allowing for a more predictable, linear increase in a company’s worth.
In contrast, hardware and deep tech valuations are non-linear; once the company reaches critical milestones, its valuation behaves more like a step function, with significant jumps. Each significant achievement—such as reaching a notable Technology Readiness Level (TRL), a functioning end-to-end solution, a solid commercialization plan with some initial traction like Letters of Intent (LOIs), Purchase Orders (POs), or pilot projects—can substantially elevate the company's valuation.
As a hardware founder, if you have the luxury to time your fundraising to coincide with these key milestones, and it can serve as a powerful catalyst in your conversations with investors, and lead to more favorable terms.
Mona is an investment partner at Transition. Before Transition, she worked at Union Square Ventures. Mainly on the USV’s climate fund. Her work included thesis development, sourcing, due diligence, and supporting companies such as Lithos Carbon, Molten Industries, Remora, Anthro Energy and more.
Professionally, Mona’s background is a mixture of economics, investing, and international policy. Before USV, she worked at CrossBoundary. She started her career at the United Nations and studied economics. Mona is from Saudi Arabia. She lived and worked in over eight countries. She is a self proclaimed perpetual nomad. To connect with Mona, you can find her on LinkedIn and Twitter.