Hardware requires a different approach to investing

Lauren Dermody, host of Hardware Pitch Night and cofounder of the informal fund

This is Part 3 of a three-part series on hardware as a distinct class of company. In this installment, we explore why investing in hardware requires different structures, timelines, and expectations than software-first venture capital. Most of the photos here are from a recent Hardware Pitch Night @ Studio 45 in San Francisco. 

If hardware founders are different, and hardware companies behave differently, then investing in hardware should look different too. This is where the current system starts to strain.

Modern venture capital was largely built to fund software: fast iteration, low marginal costs, early traction signals, and the ability to deploy large amounts of capital quickly once momentum is established. That model works extremely well, when applied to businesses that scale primarily through code. Hardware doesn’t. And when we try to force it into the same financial machinery, both founders and investors pay the price.

Venture capital is optimized for speed

Most venture funds are structured around a familiar set of constraints: ten-year fund lifecycles, pressure to show meaningful marks within two to four years, reserve strategies designed to double down on fast-scaling winners, and portfolio construction that assumes a small number of outsized outcomes will return the fund.

Software fits this model cleanly. Early signals show up quickly. Growth is legible. Marginal costs approach zero. A company can look obviously “venture-scale” long before it’s fully built.

Hardware rarely works that way. Early progress often looks unimpressive through traditional venture metrics. Revenue grows slowly. Margins start thin. Headcount increases before output does. The real value creation happens in places VCs aren’t used to tracking: manufacturing learning curves, yield improvements, supplier leverage, cost-downs, and operational reliability. These are decisive advantages, but they don’t show up clearly in the first few years.

By the time a hardware company looks obviously great, many funds are already out of patience, or out of structural flexibility. The result isn’t just missed opportunity — it’s systematic misalignment.

Lucrezia Cester, cofounder and CEO of Lighthearted AI

Check size matters more in hardware than in software

In software, an undersized check is often survivable, but in hardware, it can be fatal. Hardware companies face specific, non-negotiable capital inflection points: production tooling, initial manufacturing runs, certifications and regulatory approvals, inventory required to meet real demand. These aren’t optional experiments — you either fund them properly or you introduce risk that compounds quickly.

This is why small checks in the $250k–$500k range often underperform in hardware unless they’re paired with deep operator support. They’re enough to get started, but not enough to finish the hardest steps. On the other end of the spectrum, overly large checks too early can be just as damaging, encouraging overbuilding, premature scaling, or supply chain commitments the company isn’t ready to manage.

The best hardware investing tends to be deliberate and milestone-driven. Capital is sized to unlock specific constraints, not to maximize ownership velocity. It’s less about optionality and more about sequencing.

Nicolas Fraser, cofounder of Sustained Carbon

The follow-on problem no one talks about

One of the hardest, and least discussed, challenges in hardware investing is follow-on capital. Software companies that show early traction can often raise larger rounds quickly, even preemptively. Hardware companies, even when they’re executing well, face skepticism at every stage: Margins aren’t high enough yet, growth isn’t fast enough yet, the story isn’t clean enough yet.

This creates a dangerous gap. Hardware companies often need capital precisely when they’re proving the hardest things — manufacturability, reliability, unit economics — but before the business looks obviously venture-scale. Funds that aren’t reserved intentionally for hardware follow-ons either dilute founders too early or push them into constant fundraising cycles that distract from execution.

Some of the most promising hardware companies stall not because they failed technically, but because the capital stack around them was never designed to support the middle years.

Hardware outcomes don’t always fit the power law

Traditional VC math assumes that a small number of investments will return the fund. That can happen in hardware, but it’s not the only way value is created.

Many top-notch hardware companies produce strong, sustained cash flows, durable market positions, and meaningful exits in the $200M–$800M range. Others become long-lived private businesses with real profitability and strategic importance. These outcomes matter deeply to founders, employees, customers, and society, but they can look underwhelming through a software-optimized lens.

When funds only underwrite billion-dollar outcomes, they systematically miss these companies. Not because the businesses aren’t good, but because the model can’t recognize their success. Hardware investing rewards a broader definition of winning, one grounded in durability, not just scale.

What hardware-friendly fund structures look like

Investors who consistently do well in hardware tend to share a few structural traits:

• They run smaller or more flexible funds. 
• They deploy capital over longer time horizons. 
• They’re willing to concentrate ownership around operational inflection points rather than chase constant deal flow. 
• And they’re comfortable holding positions through slower early years without demanding artificial acceleration.

Just as importantly, they have LPs who understand what they’re underwriting. Patience isn’t a personality trait — it’s a structural agreement. This is why many of the best hardware investors come from operator backgrounds, family offices, or specialized funds rather than large, generalist venture platforms. Investors like Chrissy Meyer of Root, Zal Bilimoria of Refactor, and Anup Goel of Crosscourt. They’re not chasing speed. They’re underwriting execution.

Alex Snesarev, cofounder of AI Barmen

The cost of forcing software logic onto hardware

When hardware companies are evaluated using software expectations, founders are pushed toward bad decisions: premature scaling, underfunded manufacturing, overextended supply chains, and narrative-driven milestones that don’t align with operational reality. The companies that fail under these conditions often weren’t bad ideas, but they were mismatched to the capital behind them.

The larger cost is cultural. When founders see talented teams punished for moving at the speed hardware requires, fewer of them are willing to attempt physical products at all. Entire categories — including energy, manufacturing, housing, and healthcare infrastructure — become underexplored, not because they aren’t important, but because the funding model isn’t built for them.

A different opportunity set

Many of the most important problems we face are hardware problems that don’t lend themselves to fast demos or viral adoption. They require patient capital, disciplined execution, and founders willing to work in the physical world for a long time. The opportunity isn’t smaller — it’s just shaped differently.

Investors who adapt their structures, check sizes, and expectations to this reality won’t just find returns others miss. They’ll help enable progress in domains that actually move the needle for how people live, work, and survive. At least that’s our goal with informal fund. 

Want to see for yourself? We host monthly Hardware Pitch Nights at Studio 45 in San Francisco. Our next one is at the end of the month!

informal is a freelance collective for the most talented independent professionals in hardware and hardtech. Whether you’re looking for a single contractor, a full-time employee, or an entire team of professionals to work on everything from product development to go-to-market, informal has the perfect collection of people for the job.