Product Startup Podcast Episode 175: Raise Hardware Funding From Angels

00:00:00 Kevin Mako: Hello, product innovators. Today we learned how hardware startups fund their invention ideas through angel investment from a longtime hardware angel investor himself.

00:00:07 Narrator: You're listening to the product startup podcast, a show to learn from top leaders in product development, prototyping, manufacturing, product selling, and everything in between.

00:00:15 Narrator: Hosted by Kevin Mako, the leading expert on product development for physical product startups, sponsored

00:00:20 Narrator: by PTC's two best in class 3D CAD product development software solutions Onshape and Creo, and produced by Mako Design + Invent, the original firm providing world-class

00:00:28 Narrator: consumer product development services tailored specifically to startups, small manufacturers, and inventors.

00:00:34 Kevin Mako: Welcome back, everyone. Today I'm very excited to introduce Larry Richenstein to the show. Larry has been in the hardware sales, development, investment world for over 40 years.

00:00:42 Kevin Mako: He's an angel investor in the New York Angels Network and is currently the CEO of We Power Technologies, his latest hardware venture. Today, Larry is going to share some valuable

00:00:50 Kevin Mako: knowledge from vendors, startups, and small manufacturers on what angel investing is, what stages of development you need to get your product in in order to pitch to a professional

00:00:57 Kevin Mako: angel investor and how to do a good pitch once you're in the door. Now on to the episode.

00:01:03 Kevin Mako: Hey, Larry, welcome to the show. Thanks, Kevin. Good to be here. We're excited today to have you on to talk about angel investing,

00:01:09 Kevin Mako: particularly around investing in hardware startups. What do inventors and hardware startups and hardware innovators need to know

00:01:16 Kevin Mako: about taking their product from the development stage through to and including launching the product and then scaling as a hardware startup? What is angel investing?

00:01:25 Kevin Mako: And how does that actually apply to a potential fundraising journey for a hardware startup?

00:01:30 Larry Richenstein: Before we get into any of that, Larry, just give us a bit of a history of how you got to where you are today. My background is a lawyer. I never practiced.

00:01:38 Larry Richenstein: So don't hold it against me. I was in law school at night and worked for my father's electronics company during the day when I was just out of college.

00:01:45 Larry Richenstein: We were in general electronics at that time. And then actually as I graduated law school, we went into the phone business.

00:01:52 Larry Richenstein: The consumer phone business that just started around 1979. And we got into that. That was quite a ride getting into the ported telephone. phone business and then cordless.

00:02:02 Larry Richenstein: From there, I left my family's business, started my own company, went into some consumer products also started with corded telephones and went into karaoke. I was the

00:02:11 Larry Richenstein: first guy to bring a karaoke machine into retail. Those dual cassette units you used to see in the 90s, that was us.

00:02:19 Larry Richenstein: I tried to launch a electric guitar that anyone could play called the key. That was my greatest financial failure.

00:02:26 Larry Richenstein: It was also a great education on how not to product or how to create a product with hardware software and some very complicated mechanisms.

00:02:36 Larry Richenstein: So I learned a lot there, lost my company, which was Lone Star at that point, and started another one called Unwired.

00:02:44 Larry Richenstein: And that company, we started going into headphones for the consumer market. And I quickly saw that there was a market in cars.

00:02:52 Larry Richenstein: And we became the world's largest supplier of automotive headphones and transmitters in rear seat entertainment systems, both at the OE level with the market.

00:03:00 Larry Richenstein: the major automakers as well as all the major brands. When I sold that company, we had 82% of the world market. Wow. So it was strong.

00:03:09 Larry Richenstein: After that, I was looking for new products, couldn't find it, and decided to start investing in other people's companies and became an angel investor.

00:03:17 Larry Richenstein: You asked what an angel investor is. Usually it's an independent, although we can join angel groups like I did, which is the New York Angels.

00:03:25 Larry Richenstein: It's been a great group for me. And I learned a lot about angel investing and was able to share in the due diligence required to make investments.

00:03:33 Larry Richenstein: So it was really a good thing for me. As an angel investor, I started looking at startups that needed financing. And that's what angel investors do.

00:03:42 Larry Richenstein: We're angels because we come in when it's hard to get financing and give companies that usually the earlier stages of financing.

00:03:52 Larry Richenstein: Later on, you get into the VC rounds. Of course, there are VC's venture capital. companies that do angel investing, again, implying earlier stage,

00:04:01 Larry Richenstein: but the really seed round funding often comes from angel investors or VCs that

00:04:08 Kevin Mako: have really put themselves in that position. Much appreciated for the description. Let's go into it, especially as it relates to hardware,

00:04:16 Kevin Mako: because there's a lot of misconceptions about how a hardware product gets invested in and at what stage that happens and so on.

00:04:23 Kevin Mako: You and I know, because we've been in the industry a long time, and you a lot longer than I have, that nobody invests in an idea. The idea is they're out there

00:04:30 Kevin Mako: and lots of people have them. And an idea is valuable. It is amazing. But it all comes down to the execution. So it's key to have that balance of both a good idea and

00:04:40 Kevin Mako: good execution. Now, talk about

00:04:42 Larry Richenstein: what that execution means pertaining to the physical consumer product hardware world. Well, from the standpoint of hardware, and you can compare it to

00:04:52 Larry Richenstein: software, you need a couple good coders sitting in a room and computers and they can write all the code you want. Now, when you

00:04:58 Larry Richenstein: start talking about products, now you start looking at outside designs. You need inside printed circuit boards. You need to figure out feature sets.

00:05:07 Larry Richenstein: What do you want the product to look like? What market are you going after? It's really more complicated because you can't go in and change the code in 10 minutes.

00:05:17 Larry Richenstein: Hey, I don't like this feature. Let's change it. No, you already put a button in the mold. it's there. That button has to have some function.

00:05:24 Larry Richenstein: Otherwise, you're going to throw the tool away, you know, and those are, as anyone in any kind of product knows, molds and tools are the most expensive part.

00:05:33 Larry Richenstein: Measure twice, cut once.

00:05:35 Larry Richenstein: So it's really a situation where you have this great idea, terrific. Now go out and start looking at how are you going to bring that product to fruition.

00:05:43 Kevin Mako: There's a lot to do. Obviously, if you're successful at it, it can be very lucrative. Absolutely. Now let's talk a bit about what that actually means.

00:05:51 Kevin Mako: You talk about doing actual planning and design, and a lot of effort has to go into a hardware product because it's a physical thing. And there's many different variables to that.

00:06:00 Kevin Mako: At what point do you, as an angel investment network, start looking seriously at a hardware product? What's kind of like the earliest stage?

00:06:08 Larry Richenstein: And then where's kind of the optimum stage of that angel investment round? We do get people applying with ideas and they're not going very far. They're not going anywhere with it.

00:06:18 Larry Richenstein: People who come in with prototypes or mockups have a little better chance. But really what we'd like to see, even in the seed stage,

00:06:28 Larry Richenstein: is a working prototype. And of course, that's much harder than a mockup. So when we look at this, we have to look at, okay, so you've got this design.

00:06:37 Larry Richenstein: Is it working? Do you have a board? Let's see the breadboard doesn't work. Show me the breadboard working. You got to me show me something to give me

00:06:44 Kevin Mako: the confidence that you're actually going to be able to take this product from A to Z. That's very powerful.

00:06:50 Kevin Mako: and especially looking at like what level that occurs and the fact that I think this is a really big

00:06:54 Kevin Mako: lesson just in general about financing for hardware at all, the further that you push it into

00:06:59 Kevin Mako: development, the higher the probability of an investor because the more validation that you're proving to the investor, the less risk that the investor is going to obtain.

00:07:07 Kevin Mako: Another thing that you mentioned is that you want to understand that this thing can be executed on. We talked about that

00:07:13 Kevin Mako: earlier, right? The idea versus the execution, how important the execution is. The further that you go along

00:07:17 Kevin Mako: the development path, the better ironed out, the clear the path is to production. Production is the holy grail of hardware.

00:07:24 Kevin Mako: If you're not producing, you're not making money. Product is what is sold to make money. And therefore, an investor's number one priority is wanting to make sure that

00:07:33 Kevin Mako: you have a sellable product that can be manufactured. That thus is profit. So as a hardware

00:07:38 Kevin Mako: startup, a lot of the time you get lost in the weeds of your features or the idea or some

00:07:42 Kevin Mako: even mechanical engineering innovation that you found along the way, all these things are great.

00:07:47 Kevin Mako: As you mentioned, Larry, it's the complete package with hardware that really becomes valuable

00:07:52 Larry Richenstein: so that you can prove to investors that you have the execution to make a real product business out of your product idea. You're absolutely right.

00:08:00 Larry Richenstein: It is the derisking of the investment. So the more I see as far as the likelihood of

00:08:06 Kevin Mako: this product coming to fruition, the more comfort I have in making an investment. What other tips and tricks do you have for hardware investors in terms of pitching their

00:08:16 Kevin Mako: product to angel networks.

00:08:18 Larry Richenstein: First of all, how do they find out about these groups? And second of all, how do they actually make a pitch and what makes a good pitch? What I think is first and foremost is

00:08:26 Larry Richenstein: finding angels willing to invest in hardware. So there's lots of ways to search this on Google.

00:08:32 Larry Richenstein: I know that companies I've worked with have found ways to go online and find the best VCs and angel investors in hardware.

00:08:41 Larry Richenstein: We are a more limited lot than people who invest in software. But they're out there. You can find us.

00:08:48 Larry Richenstein: The key is, of course, to come in with a pitch that makes us feel that you have a strong likelihood of succeeding.

00:08:57 Larry Richenstein: One of the other things is today, you know, hardware's changed. In the old days, hardware was kind of freestanding in their products. Today, there's a software element.

00:09:05 Larry Richenstein: This is something that I think a lot of investors are looking for that software element to the hardware. Is there a subscription service you can put on

00:09:14 Larry Richenstein: this thing. Are there updates that you're going to charge for? Is there a better feature set available where you can turn it on afterwards, kind of the Tesla model?

00:09:24 Larry Richenstein: You know, there's a lot of different ways to look at it, but the key is to make this something that's really

00:09:30 Kevin Mako: a value to the ultimate customer and that the investor can see that. I like you mentioned that software, hardware integration,

00:09:38 Kevin Mako: as you know, many years ago, very few angels were out there that actually invested in hardware.

00:09:43 Kevin Mako: And as hardware started to get more integrated with software, they started making exceptions to the rules.

00:09:47 Kevin Mako: And then it got to a point where hardware has its own investors and its own angels that really focused just on that, or at least that's a large portion of their portfolio.

00:09:55 Kevin Mako: So I really love your first piece of advice is try and find investors that show a clear path of hardware investments.

00:10:01 Kevin Mako: If it doesn't explicitly say it on their website, just go look at their portfolio and see

00:10:05 Kevin Mako: if any of the companies that they've funded have either a strong hardware component, an all hardware component, or at least it's in the sphere, that they might be interested.

00:10:13 Kevin Mako: it because there's no point in going to investors who have no interest in the type of product or the industry they're in or anything else.

00:10:19 Kevin Mako: And that's just a little bit of due diligence. And it doesn't take a lot of time to figure that out, especially if you're looking at all of the

00:10:24 Kevin Mako: North Americas, especially, there's a ton of groups like the one that you belong to in New York that facilitate this process.

00:10:31 Kevin Mako: So you can find those groups and see whether or not they have a hardware angle to them. If you're unsure, I mean, at the end of the day, you can always just

00:10:37 Kevin Mako: ask the administrator or just send an email in or check it out. But at some point, make sure that you're pitching to the right people, otherwise you're wasting both people's time.

00:10:44 Kevin Mako: And from there, make sure you've got a successful pitch. Show them that validated product. Show them that you've got a good working model.

00:10:50 Kevin Mako: You've got a clear path to or maybe already have set up at least a manufacturing plan, maybe even with real manufacturers. Show them that you're ready to go.

00:10:58 Kevin Mako: Maybe you've even got interest, letters of intent or pre-sales, potentially through crowdfunding or other avenues.

00:11:03 Kevin Mako: Everything that you do to stack on to your product exponentially increases the pitch from your pitch versus your competitors pitch.

00:11:13 Larry Richenstein: And know that all these angels and VCs have a lot of people coming to them, no matter how great your product is, it is competitive.

00:11:20 Larry Richenstein: You know, crowdfunding is an interesting thing because it was never available to me when I started my first startups. We all had to go to the same guy at Minneapolis called Target,

00:11:29 Larry Richenstein: or we went down to Bentonville to Walmart, Detroit 3Kmart, but you needed those customers.

00:11:35 Larry Richenstein: Today, the world has changed, so you don't have to build for the masses. only. You can build niche products.

00:11:43 Larry Richenstein: And because of the way the internet is today, you can find those niche customers who are looking, and they can find you equally important. When I used to have to

00:11:52 Larry Richenstein: think about a product and I wanted to put some cool feature in, I would get a comment, well,

00:11:57 Larry Richenstein: how are you going to explain it in a box when someone's looking at the box in three seconds as they're walking down the aisle at Target? And that was the constraining factor.

00:12:04 Larry Richenstein: That's not a constraining factor anymore. If you've got a really cool product and you can explain why it's cool and why it's different

00:12:11 Larry Richenstein: than everyone else's, well, there's a market out there for that and you just have to be able

00:12:15 Kevin Mako: to explain it. And I think that's really important trying to differentiate your product from the other ones out there. You touched on something really amazing there and that's the

00:12:24 Kevin Mako: concept of niche product industries because historically, if you look at Fortune 500 product

00:12:29 Kevin Mako: development, if they don't hit $50 million in lifetime sales for the product, it's a dead product.

00:12:35 Kevin Mako: Now, you as a hardware startup, if you hit $5 million in lifetime sales, you're ecstatic.

00:12:39 Kevin Mako: Not saying you can't grow from there, but the reality is you've hit an incredible benchmark.

00:12:43 Kevin Mako: Now, because of the shrinking of the world marketplace, it gives you access to those handful of people in each country that absolutely need that first version of your product.

00:12:53 Kevin Mako: You've solved that core pain point and you can get geographic expansion via the web to be able to hit those types of customers that are very hyper-targeted.

00:13:02 Kevin Mako: And although it might not be a multi-hundred million dollar product that the Fortune 500 has to achieve, for you as a hardware startup, it's extremely powerful.

00:13:11 Kevin Mako: So that is an amazing tool these days to focus down your product, especially if you're looking at your first version, if your first version is a more simplified,

00:13:19 Kevin Mako: stripped down version, so it was cheaper to engineer, less defects, allows you to enter into the

00:13:24 Kevin Mako: market, don't be afraid that you're not capturing the mass market that you intend to down the road because now you're proving the market.

00:13:30 Kevin Mako: And subsequently, especially if you're doing crowdfunding or early sales, you're going to get very serious and very important feedback, which you can then evolve over time.

00:13:39 Kevin Mako: You know, you mentioned the software angle too. Well, we talk a lot on the show about added manufacturing and agile product development and hardware and that sort of stuff.

00:13:46 Kevin Mako: It's actually increasing the ability for hardware startups to do a little

00:13:49 Larry Richenstein: bit more like the software companies in terms of evolving the product over time, as opposed to trying to be everything to everybody up front in your first version.

00:13:57 Larry Richenstein: Yeah, I agree. And I think that I call that the while we're at it, let's put this in. Or while we're at it, wouldn't it be clear with that? And whenever

00:14:05 Larry Richenstein: you do that, you should try and have a rule in the room, like, wait a minute, are we really going to do this? Do we really need this?

00:14:11 Larry Richenstein: And as you say, there's an MVP, you know, your minimally viable product that people always talk about. And that's usually sufficient to get the market started. Now,

00:14:21 Larry Richenstein: you know, again, a crowdfunding campaign is a great way to go. As a matter of fact, I see it as a way to avoid outside investors.

00:14:29 Larry Richenstein: I have a startup now and I don't have outside investors. There's a reason to bring in outside investors, but there's also good reasons if you can avoid it to not have any

00:14:38 Larry Richenstein: investors. Then then you're running the show the way you want it. And if you do that, crowdfunding can be a really viable way of getting the money that you need.

00:14:48 Larry Richenstein: You see if there's a market, people are buying it, and then you got to get your act together and deliver it. But ultimately, if you can do that,

00:14:55 Kevin Mako: that's a great way to get some money into the company and possibly avoid having to, as I call it, break the egg and open up the company to outside investors.

00:15:03 Kevin Mako: That's a great final note to wrap up the investment conversation, because one of the big things about investment is that the earlier

00:15:10 Kevin Mako: you get investors, the more equity that they're going to take. It's actually the most expensive money

00:15:14 Kevin Mako: you will ever achieve, especially if you haven't yet got sales and you're in that prototype phase,

00:15:19 Kevin Mako: you are going to effectively get the worst deal of your lifetime on that particular round of financing.

00:15:25 Kevin Mako: So the further that you is an individual, let's call it with friends and family, that sort of thing,

00:15:29 Kevin Mako: can push it into a marketable product or possibly even into the market, as we talked about,

00:15:34 Kevin Mako: even just a short run production, maybe only 50 or 100 units, something to prove and validate the market to start getting bigger orders, you are increasing the valuation

00:15:42 Kevin Mako: of that company exponentially. So if you can avoid an earlier investment round and push it further, that will pay massive dividends

00:15:49 Kevin Mako: down the road, not only to your own pocket, but if you're going to raise, let's assume,

00:15:53 Kevin Mako: three rounds, you're much better to start at your $5 million valuation round than start at your $500,000 valuation round.

00:15:59 Kevin Mako: Imagine just simply how much more cash is going to be infused into the company and how much less equity you're going to have to give up on that pathway.

00:16:05 Kevin Mako: So I really appreciate that you brought that up as looking at, you know, not just crowdfunding, but what are other avenues that you can do, try and expedite the product to market?

00:16:13 Kevin Mako: as opposed to maybe prematurely forcing your way into a round. A, it's going to be difficult to raise if you're too premature, as we talked about earlier.

00:16:21 Kevin Mako: You really have to get to certain thresholds. B, you're going to be giving up a lot of equity.

00:16:25 Kevin Mako: So think of those two things as you're deciding whether or not it's even the right time to raise that funding round.

00:16:30 Kevin Mako: Last thing I want to touch on before I let you go here, Larry, you mentioned the company that you're

00:16:34 Larry Richenstein: working on now. You've worked on dozens of hardware startups. You've done many startups yourself. Very cool technology that you're working on now with Wii Power.

00:16:41 Larry Richenstein: Give us a bit of a rundown of what's going on there. Thank you. Yeah, I actually started this as an investment.

00:16:47 Larry Richenstein: About six years ago, I met an inventor who had this great technology, what I call it, deep tech, where we could in IoT and other applications,

00:16:56 Larry Richenstein: eliminate the need for batteries by using the pushing of a button to generate enough electricity, good application just to get a feel for it.

00:17:04 Larry Richenstein: It's like picture a garage door opener. You've got those wafer batteries. If we put our device in a remote control for your garage door opener, every time you push

00:17:11 Larry Richenstein: the button, that pushing of the button and that movement would generate enough electricity to send the signal to the garage. You would never need

00:17:19 Larry Richenstein: a battery. You could work like that for 30 years and never need a battery. I mean, that's pretty

00:17:24 Larry Richenstein: awesome. So when I saw this technology, I went crazy and I tried to invest in the business. They were almost bankrupt and in real trouble.

00:17:32 Larry Richenstein: And I got to push back because I said to them they were bankrupt. I need to get a bigger piece of the business if I'm going to put money in.

00:17:39 Larry Richenstein: And he told me, go home, little boy, okay, but I love the technology. Fast forward a year and a half, and I get a call. Are you still interested in the technology?

00:17:49 Larry Richenstein: I said, yeah, but, you know, the inventor's difficult to work with. And he doesn't know it anymore. It's in bankruptcy.

00:17:55 Larry Richenstein: So I bought all the technology out of bankruptcy almost four years ago. And I thought I had engineered product ready to go.

00:18:02 Larry Richenstein: I had seen these things working and it looked pretty cool and it was ready to go. Well, I realized that I had no engineering involved there.

00:18:10 Larry Richenstein: physicist to it invented, didn't know anything about engineering. So when I brought a real engineer in to go over this, he basically said, you have great ideas

00:18:19 Larry Richenstein: and you have no crop. So we had to completely start from scratch and rebuild each of the two items. And now we have a third product,

00:18:27 Larry Richenstein: energy harvesting generators that we've got. So that was great. Then someone said to me,

00:18:32 Larry Richenstein: well, you know, you've got these motors, but how do you get this chip set to take that energy? So I had to re-engineer everything.

00:18:39 Larry Richenstein: Then we had to go out and hire people to do a completely new printed circuit board that would generate, take the power off the generator, process

00:18:49 Larry Richenstein: it, and put it into capacitors ready so that we could be platform agnostic and anyone could connect their sensors and transmitters chips to that device.

00:18:59 Larry Richenstein: Almost four years later, here we are, we have it. We introduced it at CES. We're talking to product developers now about,

00:19:07 Kevin Mako: integrating our technology, our energy harvesting generators into their products. So it's a challenging, but big opportunity.

00:19:16 Kevin Mako: Larry, that's amazing. I mean, you're basically taking that little bit of human energy, right, and harnessing just a tiny

00:19:22 Kevin Mako: amount of energy, but you only need a little bit to send a very basic low power signal. Right. So you're using that very short interaction of human power to power the device.

00:19:31 Kevin Mako: Now, I know there's a lot of hardware startups, innovators, product designers, product managers listening to the show.

00:19:37 Larry Richenstein: So think about it for your technology. Larry's low-powered human, basically battery-less technology might be something that could work

00:19:44 Larry Richenstein: with the product you're working on right now. Absolutely. Check it out. It's wepower Technologies.com.

00:19:50 Kevin Mako: And the technology is called gems, GEM as in Mary and

00:19:54 Larry Richenstein: as Nancy S. So gems.com will get you there also.

00:19:58 Kevin Mako: Larry, thanks so much for your words of wisdom on angel investing and everything that's going on. Much appreciated for having you on the show today. Pleasure, Kevin.

00:20:04 Kevin Mako: Thanks for having me. Take care.

00:20:06 Narrator: Thanks for tuning in to this episode of the Product Startup Podcast. If you found some value in the show, please do us a huge favor and leave us a quick five-star review.

00:20:14 Narrator: If you have any questions, guest suggestions, or anything else, feel free to reach out to us any time at our email, podcast at MakoDesign.com. That's podcast at MakoDesign.com.

00:20:23 Narrator: This show is hosted by Kevin Mako, North America's leading expert on product development for physical product startups. Huge thanks to our sponsors, PTC,

00:20:31 Narrator: and their two best-in-class 3D CAD product development software solutions, Onshape in Creo and Mako Design + Invent.

00:20:38 Narrator: The original firm providing world-class consumer product development services tailored specifically to startups, small manufacturers, and inventors.

00:20:45 Narrator: Thanks for joining and see you next time.