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This interview is part of a series featuring the presenters who participated in this year's Core77 Conference, "Now What? Launching & Growing Your Creative Business", a one-day event aimed to equip attendees with tangible skills and toolkits to help produce and promote their products or services.

Alexis Houssou, co-founder of the venture firm Hardware Club, worked with his business partner to upend the typical structure of venture capital firm. They didn't just want to fund successful hardware companies—they wanted to start a community for these startups looking for others to talk to about the daily challenges of trying to fund a successful tech startup. But that still doesn't mean Hardware Club isn't aiming for big returns—their website touts the words, "we want to be the catalysts of the Hardware Revolution and build the Apple(s) of tomorrow."

In our talk with Houssou, we hear a little bit more about what compelled him to start a venture capital firm focused on community, as well as some real talk about what it takes a company to receive venture capital and grow a highly profitable business.

I wanted to start off just hearing how you came to start Hardware Club, the background behind that and why you wanted to get into investing in consumer hardware.

I guess I started by launching a company when I was 20. Back when I was in school, no one really wanted to start startups. I started a company that was doing contextual advertising for web video ads; that's when the first generation of web video content was taking off and the idea was that we would analyze content and videos and be able to show ads that were actually contextual.

It didn't work for many reasons. I think we made a lot of mistakes and learned a lot through the process. I realized after that, that I was probably too young— I wanted to start another company, but I wanted to get some real-life experience first. I was also passionate about economics, so I wanted to try working on that side. I got a job in investment banking for a few years, worked with very big clients on how to manage their assets, how to hedge their funds, stuff like that. After a few years, I wanted to go back to startups. And I always kind of kept investing in companies and helping friends start their companies as well. So my [Hardware Club] co-founder and I both left our jobs and were like, "we're gonna put a bit of our money together and start investing in companies, but being really hands-on".

The first step of building this was creating a community, so we started in Europe. The first thing we did was organize dinners, and we would bring 5, 6, 7, 8, 10 of the best hardware entrepreneurs together. What's funny is that everywhere we would go, we would realize that there were usually very good companies in the city but they were not talking to each other. After that first step, we started a mini-conference series where we go try to bring the same entrepreneurs, try to create the same kind of vibe as the events but bring together more people, so it was going from 10 people dinners to 200 people gatherings.

Step three was building resources for startups that would join the community. For that, we went to the biggest manufacturing firm in the world. When we started investing in companies, we decided we would be very selective and only select 5% of companies. 

And so the last step of that was adding the funds last year, which is $50 million dollars and the idea was that with this money we'd be able to invest in companies. We would not invest in all companies that are part of the Hardware Club community, but that it would be a way to invest in some of them at the early stage.

So what's the common thread between the companies that catch your eye and what are your criteria when it comes to picking companies to invest in?

There are usually three things— the first thing we look at is teams. People. I think what matters the most is that you believe in the people behind the product. The first thing we want to understand is, does the company's team have the skill set to realize that first prototype into an actual product that's going to be manufacturable? And do they have the skills to grow on a large scale? Usually, we like teams where people on the team come from different backgrounds: there's a business person, there's a technical guy, there's a designer. It's always kind of interesting to find that those people who are the brand owners in the company, who have different stories, who have worked in different environments, they're all going to bring a unique vision to consumer companies. 

The second thing we look at is technology and products. There are a lot of people who build stuff that is not necessarily useful because they think they've found something that could be interesting, but they did not think of what the customer pains would be early on, and so they build solutions to problems that don't exist or that are not so strong. So we're really interested in people who are laser-focused on customer pains and building products that can really solve them. And usually it's not just a product, it's a set of solutions, it's a service. We're more interested in how to enable solutions so you would use hardware as the part of the solution, not just as the "I'm gonna push products and I'm gonna sell them" model. 

Another thing we're interested in is defensive solutions. There's probably going to be a Chinese company at some point doing something similar, so how you make sure that they don't just kill you because they're going to be able to do something cheaper.

The Cowboy ebike, a company backed by Hardware Club

The last thing we look at is market size. You could have a great team, you could have a great product, but if there are only around tens of thousands of people in the world who are able to buy a product, that's only going to be a few hundred dollars; then you know that it's going to be too small for it to grow long-term.

And can you illuminate for me process for companies interested in getting funding? What kind of materials are they presenting to you? 

They usually come with a 10-15 slide deck, so we usually encourage people to go to our website and apply so we can approve their deck. We have a quick rating system— I would look to see if there's something missing, for example, from the application, we feel that it's not a good fit because it's not a hardware company or they're not full time, things like that. 

We really focus on what we think are the most interesting companies. Probably out of all the applications we review, 25% of them we're going to have a call with. So we'd have a rather short first call, 28-30 minutes, trying to understand what they built, if they have the experience to build what they want to build. And the next step would usually be to have an in-person meeting. Again, we're in a people business again and we need to understand what people are building, their backgrounds, and that's why we try to meet with people. 

After that, usually we talk again at the same team meeting that we have every week, and if we like them then we would invite them to join the club. To give you an idea, I think out of 100 companies that apply, we onboard seven and we invest in less than one.

Wow. But I'm sure there's a good number of companies you invest in that either don't do as well or fail, and then others that are wildly successful. I'm wondering what the difference between those different companies are that you've noticed over time.

I think it goes back to what I was saying—it's really the people. One thing that I really look at is, what are people's backgrounds? Where did they start? You can meet someone that has an amazing economic background, they went to Harvard…but one thing that I think is interesting to look at is where the origin came from. Whether their parents were wealthy; what's their kind of general background? You could almost draw a line between where they were generally and where they are today. We have one founder, for example, that has a very complete story. He's Nigerian, came to the UK when he was 11. Things were really complicated. He ended up in a university in the UK called The Bristol Robotics Lab and ended up creating his company, first doing those workshops for kids to familiarize them with robotics and technology, and used the money and grants that he got through that to build this company. He was at the university, realized that there were some rooms available that no one was using, so he went to the university administrators to see if they could actually open a small incubator and give him money for that. He managed to make that happen. All of the story of the company has been that; you can say he's got a kind of drive, and that's impressive. 

What is the common trait of the companies that are successful? Obviously, teams. You also need some luck. You need the market to bring it in this direction. Usually, you're making a bet that the market is going to accept this solution. Again, there's only a very small percentage of companies that make big returns on a fund like us, so it's usually out of 50 companies if you have a portfolio, there are only 3 or 5 companies that really make it big, so with that we can return the fund. We invest in very risky businesses, so it's more high risk, high return. When we look at businesses, we don't look at it like, "oh, there's a chance they fail." It's not a problem. If there's a chance they make it big, it's fine. We're not interested in businesses that have a high chance of becoming a medium, large business. We want big, big, big potential profits.

Since you started Hardware Club, how the world of VC is changing? I think there's been a lot of discussion about VC funds in the past not being able to understand the perspective of women, minority or LGBTQ entrepreneurs. Also how do you keep an open mind about companies where maybe you're not the key demographic for that product?

Well, for the first question, I don't think anyone was talking about diversity a few years back because everyone would assume society would change, like more diversity long term in society would allow more diverse people to get funded over time. That it was more going to solve itself.

I think what's changed over the past few years is that venture capitalists realized that they actually have power to change things and make diversity happen, or that if they were not taking diversity into account when they were making investment decisions, then there'll always be this reproduction process. The same type of people would get funded, and we would end up with not enough diversity.

The second thing is that I think everyone realized that the more diversity there was, the better the company was. More diverse teams build better businesses than non-diverse teams.

That's a good transition to your second point—you're totally right. I think sometimes we see products for women, things that usually my experience of those products would not be good enough to make an investment decision, right? I haven't experienced that issue, so it's hard for me to see if the solution that they are building makes sense or not. The way we try to solve that is by having a very diverse team—that's something I'm really happy about is that our team is really diverse. We have companies we're investing in from different continents, so having cultural perspectives from people in different continents is crucial. I have a partner who's Taiwanese—he was raised there, got his undergrad there. I have another partner who is French American. I myself, my father came from Africa, so I think that the fact that we have people coming from different backgrounds enables us to sometimes rely on other people's experiences or use that kind of diversity that we have in the team to be able to understand problems that one person may not have, but another person does.

I guess that's also why it's really important to understand at the VC level. Also, I think the more diversity varies in the team, the more diverse the teams we are going to invest in as well because there's kind of natural drive to invest in the people who have similar backgrounds. 

Okay. So my last question would be if you could kind of boil it down to two or three of the most important things to consider. Like if you want to start a company with VC funding, what should people do to stand out?

I think there should be some time spent early on thinking, "do I want to do this or what?" Do you want to get in this game? Because as I said, venture capital has its pros and it has its cons. I suppose for some people, if you're a designer, you want the freedom over what you do. Going into this process is not necessarily going to be exactly like that ... at some point, you're going to have investors who are going to lend their voice. 

A memorable slide from Houssou's talk about financing at the Core77 Conference 

You also want to surround yourself with the best people you know. It's an industry where, again, if you take a hundred companies, there's only one that's going to grow extremely, extremely big, that's going be hundreds of millions of dollars of potential value. If you really, really need to have the best people around you, you cannot just settle for people you know. It's about adding some people that you can really work with. One of the main reasons why companies fail is because at some point, people take sides. They don't agree on the vision and part of the team wants to leave...it's really trying to understand how you can work with people. Bringing the best people around you and making sure that you can work with those people.

Then it's really thinking about the market and focusing early on who the customer is instead of over designing products. It's really about what the issue is in this market. For example. I could design a very nice table and sell to companies. If I wanna do something in that space, what is the issue that people have? Then the market may be ... how do you create a table that allows people to better communicate? We sometimes see companies spend too much time on building parts, not having spent enough time trying to understand the customer. Making too many assumptions—like, "if I build this, everyone's gonna want it."

Lastly, you want to build something that you're passionate about. It's so hard. There are going to be so many setbacks. Every overnight success is usually a company that almost died five times. That ran out of money. When you have those one-on-one discussions with entrepreneurs, even solid companies, they always tell you about those times where they almost felt like it was not gonna work. It was gonna be too hard.

What I mean by that is that you're gonna have to be extremely, extremely determined. The only way you are gonna be determined to that point is if you are working on something that you're passionate about. 

Watch more from the 2018 Core77 Conference:

Carly Ayres and Pedro Sanches of HAWRAF

Joseph Guerra and Sina Sohrab of Visibility Studio