Deeptech Hardware Metrics for Investors: Credible Unit Economics, Yield, and Gross Margin

Understanding the Deeptech Hardware Metrics Investors Look For

Translating a complex hardware innovation into a financial narrative that resonates with investors is a common stumbling block for deeptech founders. Your focus is understandably on the technological breakthrough, but for investors, the path to profitability is paramount. The core challenge is not about presenting perfect, audited financials from day one. Instead, it is about building a credible, data-informed story of how your unit economics will improve over time. An investor needs to believe in your operational plan as much as your technical vision.

This means answering three fundamental questions with clarity and confidence:

1. What does it cost to make one functional unit today?
2. What is your specific, actionable plan to decrease that cost as you scale?
3. How do these cost improvements create a profitable, venture-scale business?

This article provides a framework for building that narrative. We will focus on the deeptech hardware metrics investors look for, from pre-seed through Series B, and show you how to model them credibly to secure the funding you need to grow.

Section 1: Deconstructing Your "Nth Unit" Cost as a Baseline

Before you can forecast the future, you need an honest and detailed baseline of your current costs. For any hardware startup, this analysis centers on your Cost of Goods Sold (COGS), which represents the direct costs incurred to produce one unit of your product. At the early stage, investors are less concerned with a 200-line item spreadsheet and more interested in your fundamental understanding of the major cost drivers that will shape your company’s future.

Using a Top-Down BOM for Strategic Conversations

A powerful tool for this is the "Top-Down BOM" approach. Instead of getting lost in the detail of every resistor and screw, you should focus on the top three to five most expensive or critical components in your Bill of Materials (BOM). These high-cost items likely represent 80% or more of your total material cost and are therefore the most significant levers for future optimization and negotiation.

The reality for most pre-seed startups is more pragmatic: a detailed analysis of your top costs is far more strategic in investor conversations than an exhaustive, and likely inaccurate, full BOM. It demonstrates you know where to focus your engineering and supply chain efforts to achieve the most significant impact on your unit economics.

Factoring in Manufacturing Yield for a Realistic COGS

However, the BOM is only part of the story. The other critical variable in your early-stage hardware unit economics is manufacturing yield. Yield is the percentage of units that pass quality control without needing costly rework or being scrapped entirely. Assuming a 99% yield from day one is a common mistake and a red flag for experienced investors. It signals a lack of awareness about the realities of early-stage production.

A far more credible approach is to acknowledge a lower starting yield, perhaps 75% or 85%, and present a clear plan to improve it over time. This demonstrates operational awareness and foresight. Your initial unit cost calculation should therefore be presented clearly:

Unit COGS = (BOM Cost / Manufacturing Yield) + Assembly Labor & Logistics

For example, consider a pre-seed robotics company building its first 100 units. Their top-down BOM, consisting of a motor, a sensor array, and a chassis, costs $800. Their manual assembly process, which is typical for early production runs, has a yield of 80%. This means one out of every five units fails final inspection. This immediately increases the effective material cost per good, saleable unit to $1,000 ($800 / 0.80). Add another $150 for assembly labor and shipping, and your starting COGS for one unit is $1,150. This figure, grounded in reality, is the credible starting point for your entire unit economics narrative.

Section 2: Building Believable Improvement Curves for Scale

Demonstrating that you understand your starting costs is the first step. The second, and more crucial, part is proving you have a tangible plan to reduce them. This is where you build investor confidence in your strategy for achieving manufacturing efficiency for deeptech. Your cost-down story relies on two primary improvement curves: reducing your BOM cost and increasing your manufacturing yield.

Lever 1: BOM Cost Optimization and DFM

BOM cost optimization typically comes from two main activities: securing volume pricing and re-engineering the product. As your production volume increases, you gain purchasing power with suppliers. This concept is often modeled using Wright's Law, a well-established principle in manufacturing. As a guiding principle, Wright's Law states that for every doubling of cumulative production, costs will fall by a consistent percentage.

This law provides a logical and defensible framework for forecasting cost reductions without needing firm quotes for 10,000 units. You can credibly model a 15-20% cost reduction for each doubling of volume, a pattern that is well-understood by experienced hardware investors. The second lever, re-engineering for Design for Manufacturing (DFM), involves modifying your product to use cheaper components, reduce part count, or simplify assembly, further driving down costs.

Lever 2: A Stepped Approach to Yield Improvement

Yield improvement, however, is rarely a smooth, linear progression. What founders find actually works is to model it as a series of distinct steps, with each step-up tied to a specific operational milestone or capital investment. Assuming your yield will magically increase with volume is not believable; tying it to concrete actions is. This demonstrates a grasp of key deeptech manufacturing KPIs.

An illustrative stepped yield improvement plan might look like this:

• Units 1-100 (Prototype Phase): Assembly and testing are performed manually by the core engineering team. Processes are still being refined. Projected Yield: 75%
• Units 101-1,000 (Pilot Run): The company introduces a custom assembly jig to reduce human error and implements a standardized, documented testing protocol. Projected Yield: 90%
• Units 1,001+ (Scale Production): Production is moved to a contract manufacturer with automated assembly lines and sophisticated in-line quality control systems. Projected Yield: 98%

This approach transforms an abstract forecast into a credible operational plan. You are not just promising improvement; you are showing the specific, fundable actions you will take to achieve it. This is one of the most important hardware startup metrics for demonstrating scalability to investors.

Section 3: Charting a Credible Path to Target Gross Margin

Combining your baseline COGS with your planned improvement curves allows you to chart a clear path toward your target gross margin. Gross margin, calculated as (Price - COGS) / Price, is a critical indicator of long-term profitability and scalability. For venture-backed hardware companies, the target is clear: investors typically want to see a believable path to 60%+ gross margins.

While this may seem high, a strong gross margin is necessary to cover significant operating expenses like R&D, sales, marketing, and G&A, while still generating a venture-level return. This target is also grounded in market data; analysis of public hardware companies often shows gross margins in the 45-65% range. Your financial model must show how you will reach or exceed this benchmark.

An Example Scenario: Modeling Your Path to Profitability

The most effective tool for communicating this journey is a simple scenario model showing your hardware unit economics at key production volumes. This becomes the central visual anchor for your financial story, demonstrating how BOM cost optimization and yield improvements translate directly into gross margin expansion. It models a believable path to target gross margins, addressing a primary investor concern.

Consider this scenario model for our robotics company, assuming a stable Average Selling Price (ASP) of $2,500.

100 Units (Seed Stage)

• BOM Cost per Unit: $800
• Manufacturing Yield: 80%
• Effective Material Cost: $1,000 ($800 / 0.80)
• Assembly & Logistics: $150
• Total COGS per Unit: $1,150
• ASP per Unit: $2,500
• Gross Margin: 54%

1,000 Units (Series A Stage)

• BOM Cost per Unit: $640 (20% reduction via volume)
• Manufacturing Yield: 90% (Jig implemented)
• Effective Material Cost: $711 ($640 / 0.90)
• Assembly & Logistics: $100 (Efficiency gains)
• Total COGS per Unit: $811
• ASP per Unit: $2,500
• Gross Margin: 68%

10,000 Units (Series B Stage)

• BOM Cost per Unit: $512 (20% reduction via volume)
• Manufacturing Yield: 98% (Contract Manufacturer)
• Effective Material Cost: $522 ($512 / 0.98)
• Assembly & Logistics: $75 (Scale logistics)
• Total COGS per Unit: $597
• ASP per Unit: $2,500
• Gross Margin: 76%

This progression tells a powerful story. It shows that even with a respectable 54% margin on day one, the company has a clear, milestone-driven plan to exceed the 60% venture threshold. Each number is defensible because it is based on the specific operational levers discussed previously. This is the unit economics narrative investors need to see.

Building Your Investor-Ready Financial Narrative

For founders navigating investor conversations in the UK or the US, the principles of building a credible financial forecast for deeptech hardware are universal. While your formal accounting in a system like Xero or QuickBooks will follow local standards such as US GAAP or FRS 102, the operational model that convinces investors is built on these foundational concepts.

First, prioritize a credible, data-informed narrative over perfect, line-item precision at the early stage. Your goal is to demonstrate that you understand the key drivers of your business and have a tangible plan to manage them. A top-down BOM and a realistic starting yield are your strongest opening arguments for showing this understanding.

Second, ensure your improvement curves are tied to specific, fundable operational milestones. Do not just claim costs will go down. Explain precisely how you will achieve it, whether through volume discounts based on Wright's Law, product re-engineering via DFM, or by implementing a new assembly process that boosts yield. This operational plan is as important as the financial numbers themselves. For more on go-to-market metrics, see our guide on Magic Number sales efficiency.

Finally, own every assumption in your model. Be prepared to discuss your top three cost components, justify your current yield, and explain the first operational change you will make to improve it. You should also understand how your production cycle impacts cash flow, which you can review in our guide on the Cash Conversion Cycle Impact on Valuation. This command of the details, combined with a clear long-term vision for gross margin improvement, is one of the most critical deeptech hardware metrics investors look for. You can find more resources at the Metrics in Fundraising & Valuation hub.

Frequently Asked Questions

Q: How can I forecast BOM costs without firm quotes from suppliers for large volumes?
A: Use Wright's Law as a credible framework. Start with your current component costs and apply a consistent cost reduction (typically 15-20%) for every cumulative doubling of production volume. This is a standard, defensible methodology that experienced hardware investors recognize and accept as a realistic projection for early-stage planning.

Q: What is a realistic starting manufacturing yield for a complex deeptech product?
A: A realistic starting yield depends on complexity but is rarely above 90%. For a pre-seed company with manual assembly, a yield of 75-85% is a credible and honest baseline. Claiming 99% from the start is a red flag. The key is to show you understand your starting point and have a clear, milestone-based plan for improvement.

Q: My initial gross margin is negative. Is that an immediate deal-breaker for investors?
A: Not necessarily, especially at the earliest stages. A negative initial margin is acceptable if you can present a convincing and rapid path to positive, and eventually 60%+, gross margins. Your model must clearly show how specific improvements in BOM cost and manufacturing yield will quickly make the unit economics attractive as you scale.

Q: Should I include R&D expenses in my COGS calculation?
A: Generally, no. Under both US GAAP and FRS 102, R&D is considered an operating expense (OpEx), not COGS. COGS should only include the direct costs of producing a saleable unit, such as materials, direct assembly labor, and logistics. Confusing these two can undermine your credibility and suggest a misunderstanding of core financial principles.