99.5% of hardware companies don't know what VC is

Because of its very nature, sometimes, venture feels like an altered-perception universe when it comes to entrepreneurship: your business is spending money you haven't yet earned, you run at a loss until your product is good / cheap enough to command the right margins, only eventually you become bounded again by traditional business constraints (if you're able to keep people investing in you since your narrative about the business resonates with them).

This makes an awful lot of sense for companies that are building a product that nobody built before (cliche examples are: semiconductors for Fairchild, social networks for Facebook, sort-of-non-profit AI labs for OpenAI) where it is an absolutely necessary condition that the product be subsidized for years before customers start paying serious $ for it or a new business model is found. And obviously, there's a middle ground, where VC is useful to help the entrepreneur take some bets that it wouldn't be able to afford otherwise.

Companies like Bosch (1886) and Siemens (1847), however, exemplify a very different playbook which now feels like from a different planet. They both started as small workshops, and grew through retained earnings and industrial capital to $100B+ giants.

They both started hyper narrow:

• Mr. Bosch was just a great precision mechanic, the whole city of Stuttgart relied on him to review infrastructure projects and soon enough he invented a better way to enable automotive ignition
• von Siemens started a telegraph shop in Berlin, his version was more reliable than most competitors'. Through a Prussian military contract and built telegraph lines across Europe (Berlin to Frankfurt in 1849, London to Calcutta in the 1870s)

Both of them exploited tailwinds of an industrial renaissance of which Germany was front and center, trained hundreds of thousands of apprentices over generations and created prohibitive switching costs (Siemens is still the single most trusted company to system-integrate complex infrastructure around the world).

Flextronics and Foxconn, almost 100 years later, followed a similar playbook to reach enormous scale as contract manufacturers in the electronics space. Again: customer relationships, operational excellence and reinvestment.

As the broader venture ecosystem starts to get (re-)acquainted with financing hardware companies, this playbook seems to be forgotten - or at least in these circles. Multi-tens-of-million pre-seed funding rounds to run initial R&D, no roadmap to deployment and dangerously long customer feedback cycles are almost the norm in today HardwareStartupLand.

Naturally, when progress is hard to show with $ figures, narratives take the lead and funding rounds need to get ludicrously bigger to nurture market confidence.
Investors expectations push companies to go bigger, go wider, get out of the workshop and jump into mass producing stuff that doesn't yet quite work nor has already dominated a niche / gained customer confidence.

This, however is not representative of how the overwhelming majority of industrial businesses start. Wherever you live, I challenge you to go into the nearest industrial zone, pick a random company that makes $50M+ in revenue, knock at the main door, and ask the owner if he/she knows what venture capital is, or if they know "their latest valuation".

Usually, great hardware businesses that live far from the venture bubble have at least a few of these characteristics:

• exist in a geographical ecosystem that aggregates talent density of more-or-less skilled labor around a very specific industrial vertical (Pittsburgh for steel; Dalian, in South Korea, for shipbuilding; Toulouse, France for Aeronautics). Often these are unglamorous places with cheap real estate, good highway access
• as a consequence of the point above, are a source of civic pride for their community
• early customers have been a key source of funding. When starting out, they were doing something so well that customers participated in their growth, paid some of their R&D or helped in-kind with ramping up capacity
• other source of funding are regional banks, equipment leasing, local public grants
• are mostly family-owned or owned by local partners. The owners take a sizable salary, and reinvest the earnings. No exit plan whatsoever.
• revenue is lumpy but predictable. They know the replacement cycles of their customers
• obsessive about quality and uptime. Reputation is everything
• run apprenticeships / training programs. Skills take years to build, can't just hire from market
• for them, success = buying the building, second facility, passing it to kids, repeat
• they hold that "recipe knowledge": feed rates, temperatures, cure times that aren't in textbooks. Competitive advantage lives in the process, not the idea

I recently met a business making 20ish% gross margins by selling new-generation heat pumps (literally competitive to giants like Mitsubishi) to greenfield and brownfield real estate. The tech enables superior performance. Operates out of Minnesota with African specialized manufacturing partners. Founded by two veterans of systems engineering in industrial settings and PE. Started 3 years ago, will be at 8-figure revenue this year. They had their early regional rep network invest in convertible notes because those reps needed to them to succeed to go sell a great product.

There's a wealth of reasons why this is not for us as an early-stage fund. A lot of it is fund math, some of it is competition.

Yet, it's hard to convey how refreshing my conversations with them have been.