Risky Leasing: The Unsung Hero of Hardware Startups Struggling to Raise Capital
Global funding in February 2023 fell 63% from the previous year, with only $18 billion in investments. For robotics startups, it hasn’t gotten better: 2022 was the second-worst year for funding in the past five years, and the numbers for 2023 point in the same direction.
This investor behavior in the face of uncertainty and austerity is justified, especially when hardware companies are burning through cash faster than SaaS. So the founders of robotics startups and other equipment-heavy companies are wondering if they’ll be able to close their next funding round or if they’ll have to resort to acquisition.
But there’s a middle ground between expensive borrowing and venture capital funding that works especially well for hardware startups: subprime leasing.
There’s a middle ground between expensive debt loans and venture capital funding that works especially well for hardware startups: subprime leasing.
Hardware startups are better suited than software companies for this type of funding because they have tangible assets, balancing the high-risk nature of the industry with a liability.
As the CEO of a robotics startup that recently secured a $10 million leasing deal, I’ll describe the benefits of this type of deal for hardware companies and how to strike a winning deal. -winning when closing a cycle is not an option.
Why are subprime leasing contracts compatible with hardware startups?
Unlike a few developers here and there in SaaS, hardware companies require intensive research and development (R&D), capital expenditure (CapEx), and manual labor to manufacture their products. It is therefore not surprising that the latter’s cash consumption rate is more than two and a half times higher than that of the former.
Hardware startups constantly try to avoid dilution when raising funds due to their capital-intensive operations. Therefore, subprime leasing can be a relief for founders because it gives them the cash they need up front without jeopardizing their company’s equity.
Rather than taking a share of a company’s stock or equity, subprime leasing views the company’s physical assets as liabilities to secure the loan, making it easier for startups to obtain it. . It is also a lower risk investment and allows the company to retain 100% of its ownership.
These deals work like car leasing, where the bank technically owns the car (the manufactured product) while the startup pays a monthly fee to keep it and, in most cases, operate it as it wishes. Lenders are often more flexible with the terms of their agreement than other lenders.
Beyond avoiding dilution, leasing theoretically takes a company’s equipment out of its fixed assets, allowing for more efficient margins in terms of profitability.
Plus: Boost Equipment as a Service
With subprime leasing, a startup can lease assets such as equipment, real estate, or even intellectual property from a specialized leasing company. They receive the assets in exchange for a monthly rent over a fixed term, usually shorter than traditional financing.