Hardware startups have access to a funding mix that software companies rarely think about: grants, government programmes, development finance, climate funds, and non-dilutive capital from innovation agencies. Used well, this capital can dramatically reduce the equity dilution required to get a hardware product from prototype to production. Used poorly — or ignored entirely — it leaves money on the table and forces founders to raise more equity than they need to.

Getting the mix right is a finance problem, not just a fundraising problem. It requires understanding what each type of capital costs, what it can be used for, and how it interacts with your equity story.

The case for non-dilutive capital first

Grants and non-dilutive funding don't cost equity. That sounds obvious, but the implication is significant: every dollar of grant funding you secure before your equity raise is a dollar that doesn't dilute you. For hardware businesses with long R&D cycles and significant upfront capital requirements, this can mean the difference between raising a seed round at a reasonable valuation and raising a much larger round at a discount just to cover development costs.

Energy, climate tech, and advanced manufacturing businesses in particular have access to substantial grant and concessional loan programmes — from national innovation agencies, development finance institutions, and climate-focused funds. Many hardware founders we work with have not systematically mapped these opportunities, which means they're often fundraising harder than they need to.

What to watch for with grant funding

Grant capital is not free in the operational sense. Grants come with reporting requirements, eligible expenditure rules, audit obligations, and sometimes IP restrictions that can create friction if you're not set up to manage them. The administrative overhead of a poorly managed grant programme can consume more time than the capital is worth — which is why having clear financial infrastructure before you take on grant funding matters.

You also need to be careful about the interaction between grant funding and investor expectations. Some investors view heavy reliance on grants as a signal that the business can't stand on commercial revenue. Others — particularly impact investors and climate funds — see it as smart capital efficiency. Knowing your investor audience and framing your capital structure accordingly is part of the CFO's job during a raise.

Building the right capital stack

The best hardware capital stacks layer different types of funding to match each use of capital. Grants for R&D and prototype development. Equipment finance or asset-backed lending for manufacturing tooling. Equity for working capital, commercial scale-up, and growth. Revenue-based financing or venture debt as a bridge between equity rounds once commercial revenue is established.

Each layer has a different cost, a different set of conditions, and a different impact on your equity story. Mapping this explicitly — rather than defaulting to equity for everything — is one of the highest-value things a hardware founder can do with their finance function, and it's something most early-stage teams haven't done systematically.

The financial model implications

A capital stack with multiple funding types requires a more sophisticated financial model than a simple equity-funded business. You need to track grant drawdowns and eligible expenditure, model debt service on any loans, and present a clear picture of your fully-diluted cap table and effective cost of capital to equity investors. This isn't complicated if it's set up correctly — but it's easy to get into a tangle if you've been managing each funding source independently without a consolidated view.