Talk to manufacturing founders about their fundraising journeys and they’ll tell you how hard it is to raise startup capital for a business that makes stuff. They’ll also tell you it can be done. They did it, and others can too.
But aspiring entrepreneurs and inventors need to understand the challenges and a few strategies for overcoming them. Because in a software-dominated world, there are not a lot of investors throwing capital at startups that would spend it on raw materials and equipment, establishing supply chains, training employees and leasing factory space.
For those who want to understand those strategies, there’s no better person to consult than Brandon Cornuke, vice president of strategy and startup services at MAGNET and adjunct professor of design and innovation at Weatherhead School of Management at Case Western Reserve University in Cleveland.
Cornuke, who has a book coming out on this very subject, has identified four questions that entrepreneurs must answer in order to attract funding via grants, angel investors, venture capital or other sources. While the questions apply to startups in any industry, as you’ll see they are especially important for manufacturing enterprises, given the uphill battle they face.
Four questions every manufacturing entrepreneur needs to answer.
Question #1: Are you solving a real problem?
You may think it’s a problem that your barbeque grill doesn’t get hot enough – and you may even convince yourself there’s a market for a device you could attach that would hold in the heat. But are others so troubled by their grill’s temperature range that they would be willing to pay for the device? And if so, are there enough of them to warrant making millions of those devices?
You’d be surprised at how often founders believe the problems plaguing them are worthy of creating a startup. As Cornuke told me, “I always ask founders how many people they’ve talked to. It’s amazing how often they say, ‘my wife loves the idea.’ I hear that all the time.”
The fact that manufacturing startups tend to play in a B2B space only ups the ante on the importance – and challenge – of getting the initial value proposition right. “For manufacturing startups, getting enough customer feedback is challenging,” says Andrew Lonsberry, CEO and co-founder of Path Robotics.
Whatever the size of the market, you have to test your idea by going out and talking to people making the products or performing the tasks you hope to improve. You should do surveys, conduct focus groups, observe potential customers using similar products – and rejigger your product context along the way.
“It’s never too early to start talking to customers or people you hope would be your customers,” says Onas Bolton, CEO and founder of Octet Scientific. “That’s the most valuable thing.”
Question #2: Does your product actually solve the problem?
It takes a lot of effort to get a manufacturing product to actually work: tooling, manufacturing partners, supply chains, logistics, retail partners, wholesalers. And if it doesn’t work at first – which is highly likely – it’s not easy to iterate. “In the digital world, you can recreate yourself overnight,” Cornuke says. “In a manufacturing context, by the time you realize your product doesn’t work, you’ve likely already burned through all your capital.”
This means it’s critical to build low-fidelity versions of your concept and pressure test them in real-world situations. Typically, this is done with prototypes – early versions of an idea that don’t cost as much as the final product. Most entrepreneurs know that they should develop prototypes, but how “perfect” that early version should be is often a bedeviling puzzle. As a guiding principle, prototypes should only be good enough to show that they can do the job. That might mean they need a lot of help along the way. They might not even survive to the next trial run. But the point is to learn as much as you can about the key aspects of the concept while spending as little time and money as possible. That might seem like the long road, but it’s the shortest path to a product that works.
The onerous iteration process may partly explain why many manufacturing startups turn to non-dilutive government R&D grants for funding. It’s also why collaborations – with nonprofit organizations like MAGNET, manufacturing partners, academic institutions, potential customers (who might test the product) and others – can play such a vital role.
Case in point: Don Scipione, CEO of Roll-A-Rack, has established a handful of partnerships that have helped him develop his solar panel racking startup. He’s working with a gutter and metal roofing manufacturer whose machinery can be readapted to suit Roll-A-Rack’s purposes and a wind tunnel company to compute uplift forces on solar panels when the wind blows. He’s also relying on NASA’s Glenn Research Center for confirmation of wind tunnel results, Case Western Reserve’s SDLE Research Center to evaluate weather corrosion issues and MAGNET for engineering design support. Together, he says these collaborations “are worth a million dollars.”
Question #3: Are you the right person to deliver this solution?
Read the books and magazine articles about entrepreneurs and you might start to think success requires the utter absence of self-doubt. But when you ask investors for more money, your track record will matter more than your iron will. So before you ask, some honest self-reflection is in order.
“You absolutely have to understand whether you have the right assets to bring this specific idea to life,” Cornuke says. “Not everyone is in the right position to bring a product to life just because they have the idea.”
Investors want to hear that you’ve got dozens of years’ experience in this industry, a prototype, a patent or partners and other assets that will set you up for success.
Leveraging professional networks can help here. Bolton, for instance, solidified his credibility by partnering with a respected academic who is an expert in his field. Others, like Aaron Slodov, co-founder and CEO of an emerging hard tech startup, believe that domain expertise is not necessary but stress the importance of building the right team.
“An individual contributor may be able to make the technology with their own bare hands,” he says. “But investors won’t stake their money unless they can de-risk at least two of three categories: execution, market and technical risk. Which means a solid team needs someone who can paint that billion-dollar narrative and show sufficient product-market fit.”
Question #4: Can you sell it?
At the end of the day, startups have to be laser-focused on sales if they want to attract investors. For manufacturing startups – whose products aren’t as easy to produce and test as, say, a new mobile app – that may mean getting creative.
Scipione, for example, has a “clever way of starting the customer process.” To help evaluate his solar panel racking product, he’s searching nationwide for up to 10 organizations who’d be willing to test it. The process is technically part of the R&D stage, but if it works well for the beta testers, Roll-A-Rack will likely have its first customers.
Lonsberry took a similar route – his industrial robotics company got started when a manufacturer he met doing consulting work put up $315,000 to produce one robot. That became the prototype that helped Path Robotics secure VC funding.
Both of these stories underscore the importance, particularly for manufacturing startups with longer timelines, of using try-and-buy initiatives, getting preorders and gathering extensive information from potential customers. What matters here is that money is actually changing hands. When customers financially commit to a project or put a down payment on a product, that’s worth infinitely more than a customer who says they “would” buy a product but then fails to reach for their checkbook.
One of the themes running through all these questions is the imperative to make the most of any financing. Whether it’s friends and family money, a prototype customer, a grant or your credit cards, if you don’t make every dollar count, you may never get enough additional capital to perfect the product and scale up a real manufacturing process.
This reality only heightens the importance of answering the four key questions, looking yourself in the mirror and getting organized from square one. And start selling – it’s never too early.