In “Red Flags vs Returns: What Makes a Successful Hardware Startup,” we are joined by Damon Bonser, co-founder and CEO of the British Design Fund, which champions early-stage product businesses with real-world impact.
Software has been catching people’s attention and dominating the headlines, but BDF stems from the belief that hardware is the backbone to our country’s success and future security. Damon Bonser banishes the misconception that “hardware is hard,” calling for investors to put aside their reluctance in investing capital into hardware businesses.
If a product startup has the right measures in place, why can’t they prosper? In this episode, we learn about what these measures are – the golden check list for assessing the potential of a startup, as well as the red flags to look out for.
You can listen to the episode on Spotify here.
Episode summary
Topics discussed🎙️
- Why British Design Fund (BDF) backs early-stage hardware and engineering-led businesses.
- The investment gap in UK hardware i.e. why many VCs avoid investing in hardware for reasons such as unfamiliarity, different exit profiles, longer timelines, capital intensity and fewer headline exits.
- How growing investor interest in climate and sustainability is driving renewed recognition that solving real-world problems requires physical products and manufacturing.
- What BDF and Damon Bonser look for in startups, including a demonstrable prototype, clear path to manufacturing, defendable IP and a positive purpose.
- The importance of IP as a deterrent, influencing competitor behaviour and reducing the risk of others stealing ideas.
- The red flags in early-stage companies; for example, single founders, part-time founders running other businesses, unrealistic revenue forecasting and weak governance practices.
- Advice for hardware founders from financial governance and cash flow discipline to focusing on hitting tangible milestones to attract investors.
Key takeaways💡
- Hardware is undervalued, but essential: While software has dominated venture capital, climate and industrial challenges increasingly require hardware solutions.
- Unfamiliarity, not just capital intensity, deters investors: Hardware suffers from fewer headline exits and a weaker capital recycling loop compared to SaaS.
- It doesn’t matter if IP is not a guarantee, it’s about deterrence: A strong patent position will put off other people trying to copy an invention, as they can see you will be strict with enforcement.
- Mission-driven, engineering-led founders stand out: BDF backs grounded, technically capable founders solving meaningful problems, meaning they don’t need to worry about marketing, as the product sells itself.
- Cash management is the biggest failure point: Revenue forecasts are rarely met; disciplined governance and runway management are essential.
- Don’t obsess over the next funding round: Focus on hitting commercial and operational milestones that naturally attract follow-on capital.
- Hardware’s sunk costs create defensibility: Upfront tooling, compliance and manufacturing costs can become barriers to entry for competitors.
Notable quotes🔊
- “Hardware is becoming less of a problem child than it used to be. People used to say ‘Hardware is hard’. I heard that all the time when I was coming up with the idea for BDF. Now, people recognise it’s tricky, but they also recognise that it’s got a really importance role to play.”
- “Over 80% of our companies hit revenue within 12 months of us investing. We really drill into them the importance of some of those metrics: get your IP filed, get some revenues in, let’s get manufacturing set up, and then we can help you with a follow-on round.”
- “You could crudely separate businesses into two camps: so you could say you’re either a vitamins business or a painkillers business. We like painkiller businesses. If I was an investor into consumer brands, I’d be investing mainly into vitamins businesses, and the skillset you need to be an investor there is really knowing how to market the product to consumers”
- “We have to have a strong degree of confidence that there is a patent coming through that can be put in place and defended.”
- “With hardware you have these sunk costs, some set up costs, some tooling costs, there is quite a lot of these upfront sunk costs, which people think makes a business unappealing to investors. It’s a unique feature of a hardware startup, but if you’re doing it sensibly and commercially, it’s another reason why people aren’t going to just become a competitor from the spare bedroom of their parents’ house. They’re not just going to start it overnight, because it is actually quite difficult.”
