1. FUNDING HARDWARE
STARTUPS
RRE VENTURES | FUNDING HARDWARE STARTUPS
Steve Schlafman
s@rre.com
RRE Ventures
February 27, 2015

2. ABOUT ME
RRE VENTURES | FUNDING HARDWARE STARTUPS
• Principal, RRE Ventures
• Raised in Boston, live in NYC
• Focus: Marketplaces, media, SAAS,
hardware
• Twitter: @schlaf
• Blog: Schlaf.me
• Hardware Investments: Understory
Weather (RRE), SmartThings (LV),
Dragon (LV), Romotive (LV)
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3. RRE VENTURES
• Established 1994
• Most active early stage firm in NYC for nearly two decades
• Multi-stage: Seed, Series A, Series B
• Current Fund Size: $280M
• Initial Investment: $250K - $8M
• SAAS, Fin Tech, Hardware, Marketplaces, Mobile Services, Media
• Support platform with unique access to Fortune 500
RRE VENTURES | FUNDING HARDWARE STARTUPS
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4. • Each investor views the world differently so this
is far from definitive
• I’m not a lawyer so consult with one before you
raise
• I couldn’t include every VC and seed fund
• This lesson is an adaptation from my class ‘How
to Raise Seed Capital’
DISCLAIMERS
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5. THE BASICS
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6. YOUR FUNDING OPTIONS
Debt / Credit Cards Family & Friends
Crowdfunding Your Customers
Grants
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Venture Capital
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VC is just one option. There are numerous sources so make sure you
evaluate the pros and cons of each.

7. HOW VC WORKS
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VC Firm
(General Partner)
VC Fund
(Limited Partnership)
Paid 2% fee + 20% of Profits
Limited Partners
(public pension funds, corporate pension funds, insurance
companies, high net-worth individuals, family offices, endowments,
foundations, fund-of-funds, sovereign wealth funds, etc.)
Investment 1
(Ownership %)
Investment 2
(Ownership %)
Investment 3
(Ownership %)
Fund Management
Ownership of Fund

8. WHAT IS SEED STAGE?
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Series A, B, C+
$2.5M - $10M+
Out of ScopeIn Scope
Institutional Seed
$500K - $2M+
Accelerator
$20K-$150K
Angel
$25K-$250K
The seed is the “setup” round(s) where a person or startup venture
approaches an angel or a VC firm for funding their product / idea.
Source: wikipedia

9. REASONS TO RAISE
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Your Company
+
VC Funding
=
1. Grow Faster 2. Expand Network 3. Timing
Raise to accelerate growth. VC will help you scale but it absolutely will
not validate your product and market.

10. RAISING VC CHANGES
EXPECTATIONS
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With VC FundingWithout VC Funding

11. IT TAKES MORE THAN SIX
YEARS TO EXIT
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10Source: http://www.cbinsights.com/blog/trends/venture-capital-exit-timeframe-tech

12. IT’S A ROLLER COASTER
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Back & Forth
Struggles Wins

13. HUGE EXITS ARE RARE
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Source: http://techcrunch.com/2012/04/09/facebook-to-acquire-instagram-for-1-billion/ 12

14. HERE’S THE PROOF
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13Source: http://info.crunchbase.com/2013/12/16
The average
successful US
startup has raised
$41M and exited at
$242M
The average
successfully acquired
US startup has
raised $29.4M and
sold for $155.5M
The average IPO-
bound startup raised
$162M before going
public

15. WHERE ARE WE?
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16. HARDWARE 1.0
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Before 2010 VCs and angels were reluctant to fund hardware companies
because risk was lurking around every corner.
Validating DemandCapital Intensive
Venture Capital
Long Dev Times Costly Distribution
Heavy Tech
High Volume Mfg

17. THE OLD PERCEPTION
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18. A NEW ERA IS HERE
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19. HARDWARE 2.0
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There has been an explosion of funded hardware companies because the
barriers and costs to develop and launch products have dropped.
CrowdfundingSoftware + Connectivity
Rapid Prototyping Easier Distribution
Open Source
Lean Manufacturing

20. THE NEW PERCEPTION
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21. HERE’S THE PROOF
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20Source(s): Wall Street Journal; CB Insights; Hizook.com
$0
$50
$100
$150
$200
$250
$300
$350
$400
2011 2012 2013 2014
Robotics Funding

22. NEW FRONTIERS
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Connected SMBs
Consumer Devices Wearables
VRConnected HomeSensors
Transportation UAVs
3D PrintingSpace Input Devices
Industrial Internet

23. HOW TO PREPARE
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24. BUILD & LEARN
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If technically feasible you should launch a minimum viable product (MVP)
before raising capital.
Benefits of launching
• Validate early hypotheses
• Social proof / traction
• Feedback from real customers
• Evidence team can ship
• Develop “bootstrapper” mentality
• Easier to raise capital
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“If you weren’t embarrassed by the first
version you launched too late.”
-Reid Hoffman

25. FIND A GOOD LAWYER
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Once you determine VC is the right funding option for your company
make sure you partner with an experienced law firm.

26. SEEK ADVICE
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Before you kick off the fundraising process, build an experienced advisory
board that can help with strategy, introductions and general advice.
InvestorsSuccessful Execs
Venture Capital
Professors Industry Experts
Founders
Influencers

27. Location Expertise / Focus Partner
Brand Support & Relationships Strategy & Stage
CHOOSING YOUR VC
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When selecting your investors there are a variety of factors that should go
into the decision making process beyond financial terms.

28. HARDWARE INVESTORS
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Sample of VCs that have funded hardware in the last two years.

29. STRUCTURE A PROCESS
RRE VENTURES | FUNDING HARDWARE STARTUPS
Create a spreadsheet or use a CRM like Streak.com for targeting and
tracking your VC conversations. Here’s an example you can use:
Firm / Angel
Weight
(1-5)
Stage Location Strategy Sector / Focus Relevant Companies Point of Contact Title Email Referral Last Contact Next Steps
Investment
Amt.
A16Z 1 Target SF A, B Marketplace, SAAS FiftyThree, Airware Chris Dixon Partner chris@email.com Steve Jobs 12/15/13 Follow up
NextView 1 Intro'd Bos Seed Mobile, SAAS Directr, Sunrise Rob Go Partner rob@email.com Tom Brady 12/12/13 Follow up
Lerer Ventures 2 Intro'd NYC Seed Media, Commerce RapGenius, Buzzfeed Eric Hippeau Partner ben@email.com Jane Jacobs 1/5/14 Schedule mtg
Floodgate 2 1st Pitch SF Seed Marketplace, SAAS Outbox, Chegg Mike Maples Partner mike@email.com Sally Ride 1/8/14 Send deck
Lightbank 3 Dilligence Chi Seed, A SMB, Local, Marketplace GroupOn Paul Lee Partner paul@email.com Mark Zuckerberg 1/15/12 References
SV Angel 4 Decision SF Seed Consumer Square, Airbnb David Lee Partner david@email.com Bill Campbell 1/16/14 Call on Wed
Founder Collective 5 Commit Bos Seed Marketplace, SAAS CustomMade, IFTTT Eric Paley Partner eric@email.com Jason Calcanis 1/20/14 Finalize terms $250,000
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30. SET ROUND SIZE
RRE VENTURES | FUNDING HARDWARE STARTUPS
Estimating the amount of capital you’ll need requires more art than
science. Here are some tips to keep in mind during your quest.
1. Runway: Raise enough capital to give yourself 12-18 months. Keep in
mind it will likely take 3-6 months to raise your next round.
2. Dilution: Every time you raise a round, try to sell no more than 10-
25% of the company.
3. $ Target: Set a modest raise amount. It’s always better to nail your
target, say you’re “oversubscribed” and then increase the size of
round depending on investor interest and terms / dilution.
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31. KNOW YOUR BRAND
RRE VENTURES | FUNDING HARDWARE STARTUPS
Your brand equals the sum total of positive and negative interactions that
partners, customers and employees have with your company.
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“In this ever-changing society,
the most powerful and
enduring brands are built from
the heart. They are real and
sustainable. Their foundations
are strong because they’re
built with the strength of the
human spirit, not an ad
campaign.”
-Howard Schultz, Starbucks

32. CRAFT YOUR STORY
RRE VENTURES | FUNDING HARDWARE STARTUPS
The “story” behind your company and product is often one of the most
important things an investor will want to know. Don’t underestimate it.
“It’s not what you do, it’s why you do it.”
-Simon Sinek
• What was the impetus for starting
the company?
• Why are you obsessed with
solving this problem?
• How did the founders meet and
decide to partner?
• Why are you willing to sacrifice
years of your life to work on this?
• What is your cause, your belief?
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33. BUILD PITCH DECK
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34. BUILD PITCH DECK
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35. WHERE TO FIND MONEY
Events & Classes AngelList
Venture Capital
Your Network Accelerators
Twitter + Blogs
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Founder Intros
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Angels and VCs are generally ‘networked’ so it shouldn’t be too hard to
find them if you look in the right places and hustle.

36. KEEP IN MIND
Industry Expertise Find Risk Takers
Follow Exits Patience
Stay Close to Home
RRE VENTURES | FUNDING HARDWARE STARTUPS
Set Fair Terms
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There are a variety of strategies you can take to increase your odds of
finding suitable investors.

37. THE PITCH
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38. YOUR OBJECTIVE: FOMO*
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37*Fear of missing out
Your goal throughout the process should be to create excitement,
demand and scarcity for your round. Investors often move in packs.

39. FIRST IMPRESSION IS KEY
RRE VENTURES | FUNDING HARDWARE STARTUPS
Most VCs usually form an opinion of the founder and opportunity within
first 10 minutes of a pitch. Early stage investors generally look for:
Traction You + Team
Social Proof Product
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40. GETTING TO YES
RRE VENTURES | FUNDING HARDWARE STARTUPS
1. Get “Warm” Intro 2. Review Product 3. First Meeting
4. Diligence4. Partner Meeting5. Term Sheet / Close
80% 60%
15%< 1%
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Every investor / firm has a different process. Some make a decision in
30 minutes while others take months of diligence. Here’s my process:
30%

41. WHAT I LOOK FOR
Complementary Team Story & Purpose
Differentiated Product Prototype
Interesting Market
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When evaluating early stage hardware investments there are a number
of things that I look for and place value on.
Feel for Design

42. WHAT I LOOK FOR (CON’T)
‘Action Not Analysis’ Business Model
Venture Capital
Data Driven Hustle / Hacking
Real Problem
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Here are some additional things that I look for and place value on when
meeting with seed stage companies.
Customer Obsession

43. QUESTIONS TO ASK
RRE VENTURES | FUNDING HARDWARE STARTUPS
1. What are the next steps in the process?
2. What concerns do you have?
3. How much time do you typically spend with your
companies?
4. Can you walk me through your decision making process?
5. How do you think you can help our company?
6. Do you lead and / or follow?
7. What’s your typical check size?
8. How does your firm think about follow on investments?
9. Is there any additional information you’d like to see?
10. Which investors do you enjoy working with?
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During the process make sure you carve out enough time to learn about
the firm, its process and how they think about your opportunity.

44. THINGS TO AVOID
RRE VENTURES | FUNDING HARDWARE STARTUPS
As I mentioned earlier every investor is different but there are some
general things to avoid throughout the process.
• Product demos that don’t work
• Derivative product and positioning
• Long answers filled w/ buzzwords
• Trying to have all the answers
• Long pitch decks
• Don’t have clear raise amount
• Asking for investor intros after one passes
• Overemphasizing PR and press
• No product team in place
• Pitching different partners in firm after a pass
• Bringing non-founders to 1st meeting
• Too many emails / follow ups
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45. AFTER THE PITCH
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46. YOUR ACTION ITEMS
Debrief w/ Team Send VC Requests Review Pitch Notes
Note Questions / Issues Edit Pitch Deck Update VC Pipeline
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Immediately following each pitch session there are some best practices
you can implement which should help you throughout the process.

47. Terms
DECISION TO CLOSE
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Once you have a signed term sheet in place, there are a number of final
steps you will need to complete before getting back to work.
Negotiate
Term Sheet
Build Investor
Syndicate
Review
Docs
Sign &
Wire
Legal
Diligence
Usually four to twelve weeks

48. SEED FUNDING VEHICLES
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When a startup raises money, one of three financing instruments are used
and which one is always specified in the term sheet.
Preferred Equity SAFEConvertible Debt

49. Monthly Email Update* Strategy Sessions
Network w/ Portfolio Real-time Crisis Mgmt Share Hiring Plan
POST INVESTMENT
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So you closed your round and have cash in the bank. Now what? Here are
some way to engage with and get value from your investors:
*Include what’s going well / not well, key metrics, hiring update, financing update, roadmap, help wanted
Specific Intros

50. RESOURCES
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51. SUGGESTED BOOKS
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Before you start the fundraising process, reading these books will help
prepare you for dealing w/ VCs and launching your company.

52. SUGGESTED VC BLOGS
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• Chris Dixon, A16Z: cdixon.org
• Roger Ehrenberg, IA Ventures: informationarbitrage.com
• Brad Feld, Foundry Group: feld.com
• First Round Review: firstround.com/review
• Paul Graham, Y Combinator: paulgraham.com
• Semil Shah, Angel: semilshah.com
• David Skok, Matrix: forentrepreneurs.com
• Mark Suster, Upfront: bothsidesofthetable.com
• Tom Tunguz, Redpoint: tomtunguz.com
• Hunter Walk, Homebrew: hunterwalk.com
• Fred Wilson, Union Square Ventures: avc.com
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53. INVESTORS ON TWITTER
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As noted earlier Twitter is a good place to engage with VCs and share
ideas openly. Here are some of the most active.
Marc Andreessen
@pmarca
Chris Sacca
@sacca
Chris Dixon
@dixon
Josh Ellman
@joshelman
Vinod Khosla
@vkhosla
Naval Ravikant
@naval
Kevin Rose
@kevinrose
Howard Lindzon
@howardlindzon
Brad Feld
@bfeld
Jeremy Liew
@jeremysliew
David Lee
@davidlee
Mark Suster
@msuster
Dave McClure
@davemcclure
Fred Destin
@fdestin
Keith Rabois
@rabois

54. IN SUMMARY
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Raising any amount of capital is never easy. You’ll hear “no” more than
you’ll hear “yes.” For many of you it will be a long but rewarding process.
• VC is just one financing option to consider
• Raise to accelerate growth
• Investors come in difference sizes and flavors
• Prepare, work your ass off and hustle
• Take advantage of resources on the web
• The real work begins after you close your round

55. ONE FINAL THOUGHT
RRE VENTURES | FUNDING HARDWARE STARTUPS
“The magic in business isn’t raising
money but making money.”
-Mark Cuban
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56. GOOD LUCK!
RRE VENTURES | FUNDING HARDWARE STARTUPS
Steve Schlafman (@schlaf)
s@rre.com
RRE Ventures
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