Perhaps you’ve heard the term “cash is king,” or the mantra “debt doesn’t kill a business, cash flow kills a business.” They are both correct. In the early stages of your business, cash is the most precious asset you’ve got. There are innumerable ways to burn through it and countless service providers that nibble away at it. How does a hardware entrepreneur prioritize spending and keep his or her efforts focused on the right things?
1. Milestones. Focus on key milestones that enable your business to get to the next level. “Next level” may mean secure a customer commitment, a government contract or grant, or equity financing. What is the first milestone you need to hit, and how much money do you need to get there?
2. Feasibility is nice, but prototype is better. In hardware, customers react to something they can touch and feel. A slide deck just doesn’t make the same impression. An early stage touch-and-feel prototype that shows form and fit can make a big difference, even if it doesn’t have all the functionality of your final product. Including some key functions would be even better. Make use of 3D printing services and ask yourself what it would take to show just the bare bones of the functionality you want to offer. Then assess how much money it would take to get there.
Work with outside partners. Choose partners wisely. Be very clear about what you will and will not pay for at this early juncture. Leverage reputable firms accustomed to early stage companies for custom electronics, mechanical design, software, and firmware. All this helps you move quickly. Be sure to spell out, clearly, that you own all design work in the contracts. Chances are, you’ll have to act as the program manager and coordinate everything.
4. Think virtual. Can you prototype your hardware without building up a lot of business infrastructure? The buzzwords are “virtual company” and “lean start-up.” To investors, that means their money will go toward product development rather than administrative costs. This will only take you so far, but when you’re spending those first tens of thousands of dollars, it can be a good choice.
Learning to run a capital-efficient company begins with stretching your cash far enough to get a prototype that launches you to the next level. Hopefully that discipline will never leave you--even if you do raise a lot of money later.