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

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Felipe Chavez Cortes is the CEO and co-founder of Kiwibota robotic food delivery startup.

Global Funding in February 2023 fell 63% compared to the previous year, with only 18 billion dollars of investments. For robotics startups, it hasn’t fared better: 2022 was the second worst year for funding in the last five years and the 2023 numbers point in the same direction.

This behavior by investors in the face of uncertainty and austerity is justified, especially when hardware companies burn cash faster than SaaS. So founders of robotics startups and other heavy-equipment companies are asking whether they’ll be able to close their next funding round or whether they’ll need to resort to acquisition.

But there’s a happy medium between expensive debt loans and VC financing that works especially well for hardware startups: venture leasing.

There’s a happy medium between expensive debt loans and VC financing that works especially well for hardware startups: venture 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 lease, I’ll discuss the benefits of this type of deal for hardware companies and how to get a win-win deal when closing a round isn’t an option.

Why are venture leasing deals compatible with hardware startups?

Unlike some 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. Hence, it is not surprising that the latter’s money consumption rate is higher than two and a half times higher than the previous one.

Hardware startups are constantly trying to avoid dilution when raising funds due to their capital-intensive operations. Therefore, venture leasing can be a relief for founders as it provides them with the money they need upfront without compromising their company’s equity.

Rather than 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 startups to obtain it. It is also a low-risk investment and allows the company to retain 100% ownership.

These deals work like a car lease, where the bank technically owns the car (the manufactured product) while the startup pays a monthly installment to maintain it and, in most cases, run it however they want. Lenders are often more flexible with the terms of the agreement than other lenders.

In addition to avoiding dilution, leasing theoretically subtracts a company’s equipment from its capital assets, allowing for more profitability-efficient margins.

The added benefit: the enhancement of 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, usually shorter than traditional financing.