is it time to shift the investment thesis to support longer return windows?
Well, hello 2023! Software has been the darling of the investment community for over a decade. Private equity-backed venture capital and lenders realize that many software startups or even large corporate enterprises are either not profitable or cannot continue sustaining their growth as profits increase. In fact, less than one-third of software companies achieve the Rule of 40 – the principle that a software company’s combined growth rate and profit margin should exceed 40%. The question remains: do we continue backing software as a service-based model, or do we lead a cultural shift to recalibrate the investment community’s thesis, and support hardware in tandem with software and material science breakthroughs? Isn’t it appealing to explore deep tech or frontier technologies that help us redefine and shape a future we all want to be part of – from energy security to the dependable transference of strategic information?
Venture capital functions at the behest of private equity lenders-- there hasn’t been this amount of money left on the sidelines for a long time. At some point, these funds will need to be distributed to help continue growth and stimulate global markets and the economy at large. But hardware is crucial. Innovative hardware will power the future, and will serve as the basis for software delivery of solutions. There are a couple of challenges that the industry needs to address directly:
The first is that the window to make a return on investment must preferably be within eighteen months. Hardware by itself is hardly capable of moving an idea from the back of a napkin to a prototype to a field trial in less than eighteen months.
The second challenge is that startups and early-stage companies focused on delivering market-ready hardware-based solutions need a minimum of $2 to $5 million to produce an effective prototype. Validating its potential fit in the market is a separate task.
Startups focused on software require a much smaller initial investment, a fraction of what it would take for a new hardware company to become viable. Many national security and technology venture capitalists are embracing new government programs to support longer investment windows. All while our banking institutions and lending providers wait on the sidelines to activate innovation's power fully.
As a strategic communications agency, we cannot guarantee investment. What we can offer is the ability to provide the communication strategies and messaging that best articulate the value of your technology development—communication that reinforces the need for technology-based solutions to help spur economic activity and sustain growth. Good communication is essential to securing reliable and safe supply chains to support manufacturing, and in turn combating the ill effects of climate change.
Our holistic offerings enable Gallant to support innovative companies as employers, community partners, and suppliers of choice.
Please reach out to us, and let us help put you on the right track.