Venture leasing: The unsung hero for hardware startups struggling to raise capital

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Global financing in February 2023 fell 63% from the previous year, with only $18 billion in investments. For robotics startups, it didn’t get better: 2022 was the second worst year funding in the last five years, and the figures for 2023 go in the same direction.

This investor behavior in the face of uncertainty and austerity is justified, especially when hardware companies burn through cash faster than SaaS. So founders of robotics startups and other companies with lots of teams 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 debt loans and venture capital financing that works especially well for hardware startups: business leasing.

Hardware startups are better suited than software companies for this type of financing 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 landed a $10 million venture lease deal, I’ll describe the advantages of this type of deal for hardware companies and how to achieve a win-win deal when closing a round isn’t One option.

Why are venture lease agreements compatible with hardware startups?

Unlike some developers here and there in SaaS, hardware companies require intensive research and development (R&D), capital expenditures (CapEx), and labor to manufacture their products. Therefore, it is not surprising that the cash consumption rate of the latter is more than two and a half times superior to the previous one.

Hardware startups are constantly trying to avoid dilution by raising funds due to their capital-intensive operations. So venture leasing can be a relief for founders, giving them the money they need up front without committing their company’s capital.

Instead of taking a portion of a company’s stock or equity, venture leasing takes the company’s physical assets as a liability to secure the loan, making it easier for new companies to obtain the loan. It is also a lower risk investment and allows the company to keep 100% ownership.

These deals work like a car lease, in that the bank technically owns the car (the manufactured product) while the startup pays a monthly fee to maintain it and, in most cases, operate it however they want. Lenders are often more flexible with the terms of their agreements than other financiers.

Beyond avoiding dilution, leasing theoretically takes a company’s equipment from its capital assets, allowing for more efficient margins in terms of profitability.

The added bonus: reinforcement equipment as a service

With venture 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 lease payment for a fixed term, generally shorter than traditional financing.