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Comment by adastra22 | Hacker News Reader

> YC isn’t to blame here.

YC is absolutely to blame here. Their standard term deal sheets are unnecessarily greedy and massively distort the cap table for hardware startups that have to raise a lot of money before a Series A.

Their docs are predicated on startups being able to raise a small-valuation Series A right out of the program, which is only true of startups that require low capitalization.

For instance, I'm out fundraising for a molecular nanotechnology startup right now. I will not be doing YC because it would be a shite deal for both me and my existing investors.

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Let me preface this by saying that on the whole I agree with you.

However hardware startups that have to raise a lot of money before a Series A are... considerably riskier, no? If you're an established name in hardware or a hardware-adjacent field then you'll typically have less of an issue getting access to capital. You can strike some pretty amazing deals with vendors if the stars align.

But otherwise there's a considerable chance that you end up out of your depth, out of runway while pre-production units sit on a loading dock in China.

Pretty much everyone prefers investing in startups that require low capitalization at this point. Everyone has been bitten by this point. We've learned.

Not to say it isn't possible but I'm not going to unbalance my portfolio towards hardware startups unless that's somehow my play.

"hardware startups that have to raise a lot of money before a Series A are... considerably riskier, no?"

Why riskier? They have more of a moat don't they? The large capitalization needed suggests they will face less competition. It's more difficult for competitors to gather the necessary capital to compete against them?

What I've written here was the conventional wisdom for most of 200 years. Much of the Industrial Revolution played out when merely concentrating together capital was seen as an engine of growth. Rockefeller did not need to sell innovative gasoline, he only needed to use cash flow to buy up monopoly positions, one small region at a time, until he had the cash flow to buy up monopoly positions nationwide. Economies-of-scale meant that merely concentrating together capital was a path to greater profitability.

The last 25 years were an aberration, during which time big companies could be built with small initial investments. But over the course of centuries, the opposite was more common.

Is the moat that good for HW? The more commodified your product is, the more you risk losing to undifferentiated foreign competitors who have lower input costs.

And hardware marches on while you are trying to get your widget manufactured and shipped.

I was at a hardware startup in 2013/14. We had our own board design that was very similar to the RaspberryPi + Arduino that we'd prototyped with (we ended up using a iMX233 and an AT Mega 328). While we were debugging a manufacturing fault (out of spec led controllers), Expressif released the SDK for their at the time practically unknown ESP8862 - which meant 90% of our functionality could now be done with a BOM of around $15 instead of the $90 or so ours was costing us.

Our "moat" had been concreted over while we were pulling our hair out trying to ship in time for xmas. (And the business died in arguments, recriminations, fingerpointing, and a lack of ability to find investment to pay for a 2nd production run. And I needed up with another piece of paper saying I had a percentage or two of ownership in something now worth zero dollars...)

I was doing firmware in IoT/M2M for an engineering services company back then and it was the tail end of "slap a radio on [common product]" projects for that company. I saw a few projects end with the arguments and fingerpointing with inevitable laser focus on what the SOW actually said and it always sucked to end that way.

> But over the course of centuries, the opposite was more common.

I believe capital investor like parents invest in the shorter term.

As a startup founder, all growth startup founders need to be a bit delusional — I don't mean that in a bad way. The few hardware startup founders I've met have either been very dialed into their trajectory with a clear deriskable exit plan, or extra delusional. It's fun talking to folks like that, but from an investor perspective I can see why your risk evaluation skills need to be dialed.

I’m glad you took it this direction because it gets to the reason I brought up the other article. It’s not an accident that China dominates in so many technological areas. It is the result of a deliberate plan. The CCP specifically targets areas of investment. The US does this too, but usually in a less direct way (politics mean you have to keep constituencies happy which means farmers keep getting subsidies). The idea that the market is “free” is a myth.

So if we want companies to invest in certain high capex industries, we need to de-risk those investments. Change the cost-benefit calculation so that companies will invest in industries we need to grow domestically. CHIPS and Science kind of did this, but we need to keep doing it.

Risk can be factored in to the terms of the deal. But there is no situation where it makes sense to offer the very first investors of an idea-stage company full, unlimited and indefinite dilution protection.

It used to be common and expected that early investors be given pro rata participation rights, so that they could maintain their ownership stake by participating in future rounds. YC’s new post-money SAFE terms effectively gift them equity in every future unpriced financing round. So if you need to do another convertible note round (which any hardware startup would), they effectively participate without having to give you a cent.

This is unheard of and ludicrous. But they get away with it because most software startups immediately raise a priced round on demo day anyway, so it’s a moot point for them. For hardware startups, this can become a poison pill.

Isn't YC's standard deal $125k for 7% and then $375k uncapped? Help me understand what's distortive about that?

José Ancer has the best explanation out there: https://siliconhillslawyer.com/2019/05/01/startups-shouldnt-...

You're out of your mind if you think the YC pre-seed terms are unnecessarily greedy. Where in the world can you get half a million with nothing but an idea to show for it and only have to give up 7%+uncapped?

If you've already got investors, why are you looking at YC at all? YC funding is a product, you can't just go and say "ah this product has got features I don't need, so it's a terrible deal".

> Where in the world can you get half a million with nothing but an idea to show for it

In Silicon Valley. You can actually get a lot more than 500K.

> and only have to give up 7%+uncapped?

It is actually 7% for 125K and 325K uncapped, but at the best possible terms offered to other seed investors. So it might end up becoming ~10% for 500K, which is a lot of dilution.

YC created a path for 20-year-olds with no work experience to raise money for a company (and sometimes become billionaires). That requires low capital investment because the founders are completely unproven.

Hardware startups are run by people with work experience in hardware and a career track record, because you need more credibility to justify the higher investment required.

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