Venture leasing: The unsung hero for 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 didn't get any better: 2022 was the second worst year for funding in the past five years, and 2023 numbers are heading in the same direction.

This behavior from investors in the face of uncertainty and austerity is justified, especially when hardware companies burn cash faster than SaaS does. So, founders of robotics startups and other equipment-heavy businesses are left wondering whether they'll be able to close their next funding round or if they'll have to resort to acquisition.

But there's a happy medium between costly debt loans and VC funding that works particularly well for hardware startups: venture leasing.

Hardware startups are better suited than software companies for this kind 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 got a $10 million venture leasing deal, I'll outline the advantages of this type of agreement for hardware companies and how to land a win-win deal when closing a round isn't an option.

Why are venture leasing deals compatible with hardware startups?

As opposed to a few developers here and there in SaaS, hardware companies require intensive Research and Development (R&D), capital expenditures (CapEx), and manual labor to manufacture their products. So, it's no surprise that the latter's cash burn rate is more than two and a half times higher than the former.

Hardware startups are constantly trying to avoid dilution when raising funds due to their capital-heavy operations. Therefore, venture leasing can be a relief for founders as it gives them the money they need up-front without compromising their company's equity.

Rather than taking a piece of a company's shares or equity, venture leasing takes the business' physical assets as a liability to secure the loan--making it easier for startups to obtain it. It's also a lower-risk investment and allows the company to keep 100% of their 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 keep it and, in most cases, operate it however they want. Lenders are often more flexible with their agreement terms than other funders.

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 plus: Boosting 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 return for a monthly lease payment over a fixed term, typically shorter than traditional financing.