Working Capital: A Tough Challenge for Hardware Tech Startups

Updated on April 16, 2020
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Access to working capital is a challenge for any business. It is a particularly big hurdle for hardware tech companies, especially startups.

That was one of the reasons Greg Fisher, a Berkeley, California-based entrepreneur and CEO of Berkeley Sourcing Group, started Hardware Massive, a network and online platform for hardware tech companies.

Hardware Massive, which launched in early 2016, has 2,200 active members and reaches about 30,000 companies globally. The organization held a major conference, Hardware Con, in San Leandro, California, on March 24th and 25th.

BlueVine recently talked to Fisher to learn more about the working capital challenges faced by many hardware tech companies:

BlueVine: What’s the objective of Hardware Massive?

Fisher: To empower hardware startups to succeed through education, networking, and access to resources. We have local events to create real relationships through face-to-face meetings, and then provide the online platform to connect hardware startups to global resources. What we found doing development and manufacturing for these startups is that many of them are not successful because they didn’t raise enough money. They didn’t have an executable business plan. They didn’t have a scalable product. We realized this big gap in the market.

Manufacturing products has only been done by big companies for a long time. There are reasons for that. It takes a lot of money. You have to have expertise in about 30 different disciplines: packaging design, tooling design, electrical engineering, marketing.

The startup community did not really understand that. It’s a little bit of a black box on how the process works. We saw the same mistakes being made again and again. So we wanted to create an opportunity for startups to get together and learn from each other, thought leaders, and other experts in the space.

BlueVine: What would you say are the top cash flow or working capital issues members of Hardware Massive face?

Fisher: With hardware startups, you have very intensive upfront costs from initial design through to producing your first order. If you’re working with an engineering firm, you’ll need industrial design, mechanical design, and maybe electrical engineering. This gets you through a few iterative prototyping processes, and at that point, all you have is a proof of concept.

But you’re still a ways away from making money. So then you get to manufacturing. There you have design for manufacturing, tooling costs, and you have to reach the minimum order to make the manufacturing process efficient and cost-effective. You also have all the marketing and general management costs. So surviving to the point of making some sales and receiving the money to cover these initial costs and then grow is a huge challenge.

The common problem we see is startups underestimate the cash requirement and flow to get through their first production runs. They often don’t realize that their margins needed to be better than they were. So they tend to over-promise to their buyers.

Then when they need to make the sale, they usually cut down their price point a little bit. That leaves them a little bit tighter, and then they don’t realize how long the payment terms are with retailers, so they have to carry the cash money down. They’ve got all their cash tied up with production, which is often delayed for troubleshooting. Then the product usually travels for a month to their warehouse before getting to their customers, and all that time they really struggle to keep their business afloat.

Another thing startups don’t realize is that if they’re very successful, they actually have a more difficult cash flow problem because they have more money tied up in inventory. They need to be scaling to larger orders that are placed about five months before they can receive payment. So, if you’re successful when you launch, you can actually have a more difficult cash flow problem.

You also don’t have the time during that period to raise money. If you’re in the middle of production trying to ship things out, it’s very hard to take the time out of that to go raise a round of investment. I see BlueVine being a great solution here. If you can have an automated and efficient way of quickly getting that money and stopping the gap, it’s a win-win all around.

The other issue would just be underestimating the value or the cash flow requirement overall. If you don’t understand the cost of tooling or design for manufacturing or import duties or any of the other thousand costs that come up, as many hardware startups don’t, then you may think you have enough money to get over the hump when you really don’t.

If you haven’t reached a point where you can convincingly raise more money to stay afloat before the money you need comes in, then you’re likely going out of business. They say cash flow is the killer for 95% of startups. That is probably more true in hardware startups.

BlueVine: How do hardware startups usually try to address working capital challenges?

Fisher: One is bootstrapping. The folks that bootstrap often keep their day jobs. They just scrimp and save at every step to cover costs. This can only work for certain types of products that don’t have the large tooling costs or burdensome minimum orders. They need to work with factories and the supply chain. So this is their own money fundamentally to keep them afloat.

Reydavid Julio

Reydavid Julio is BlueVine’s vice president of commercial finance. As the son of entrepreneurs in Los Angeles, he had a front row seat to the struggles of small business owners. Before joining BlueVine, he helped hundreds of small businesses with their financing needs in stints with Bank of America, Wells Fargo and California Bank and Trust. He enjoys playing drums and golf.
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