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Good news for hardware startups: VCs like Sequoia, Andreessen are hunting for them on crowdfunding platforms

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Software may be cool, but what’s getting hot is hardware. Wearable technology, from fitness monitors to Google Glass, is in. The Internet of Things, from smart watches to intelligent shoes connected to the internet, is fuelling the trend.

Virtual reality headset maker Oculus, which got acquired by Facebook for US$2 billion this year, medical wearables startup Misfit, smart bulb maker Lifx, home security provider Canary… the list of hardware startups raising big money is getting longer.

In India too, while billion-dollar exits may still be a pipe dream, we are seeing hardware startups raise upwards of US$100,000 – Fin, which makes a ring for your thumb that acts as a numeric keypad and gesture interface, and Gecko, which makes a bluetooth device to make your smartphone smarter, are recent examples.

All these companies, from Oculus to Gecko, have one thing in common. They all began life on crowdfunding platforms, and there’s a good reason for that.

Hardware startups find it harder to raise venture capital than their software mates. Their lead time to market, from prototype to manufacture, is longer , costlier, and riskier – all of which are red signals for VCs. But, when one door is closed, another opens up.

It turns out that hardware startups do rather well on crowdfunding platforms, probably because the crowds are attracted more to real objects than esoteric concepts. Still, to get seeded is one thing; to get to the next level requires bigger funds.

And that’s where we have the good news. VCs may be reluctant to put seed money into hardware startups, but they’re happy to back the ones that get going on crowdfunded platforms. In fact, the thousands of consumer-oriented hardware startups raising money on crowdfunding platforms like Indiegogo and Kickstarter are proving to be a good source of dealflow for VCs.

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See: 10 angel investors in India who bet on young tech startups

From crowdfunding to VC funding: One out of 10 make the cut

A report released today by venture capital analysis firm CB Insights says that the momentum started to build up last year: One out of every 10 hardware startups that raised US$100,000 or more on Kickstarter and Indiegogo went on to get funding from VCs.

VC funding of 23 hardware startups on these two leading crowdfunding platforms crossed US$200 million in 2013, and that was nearly six times as much as in the previous year. The momentum has carried into this year, with 19 deals already made in the first seven months.

The star of 2013 was Oculus VR, which raised US$75 million series B funding in December from VC investors that included Andreessen Horowitz. Its acquisition months later by Facebook marked the biggest windfall for a crowdfunded project to date. Misfit Wearables, Formlabs, and SmartThings were the other high-scoring hardware projects. This year’s shiner is Lifx, the smart bulb maker which raised US$12 million in series A funding led by Sequoia Capital, followed by Canary, a home security product, that raised US$10 million from Khosla Ventures and others.

list of hardware startups

Silicon Valley dominates the hardware startup scene. More than half the projects raising over US$100,000 on the two main crowdfunding platforms are from California, says the report.

The CB Insights analysis puts Kickstarter way ahead of Indiegogo as a crowdfunding platform. Out of the 443 hardware projects that raised over US$100,000 on these two platforms, as many as 365, or 82 percent, were on Kickstarter. VC backing showed a similar trend, with 35 out of the 42 VC-backed ones having gone to Kickstarter for crowdfunding. Of the top 10 crowdfunded hardware startups that also got VC funding, seven were Kickstarter projects – Formlabs, SmartThings, Pebble, Ouya, Lifx, Peloton, and Loop. From Indiegogo, there were three among the most well-funded startups – Misfit, Scanadu, and Canary.

CB insights hardware chart1

The interesting thing is how crowdfunding and venture capital have become complementary to each other when it comes to hardware projects. It’s no longer a question of either going the crowdfunded way or getting VC backing: it’s both. First it gets crowdfunded, then VC-backed.

Editing by Steven Millward

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