Raising Money for Your Invention

Raising money for your invention is an important step, and one that should not be taken lightly. Accepting money from outsiders often comes with strings attached. Therefore, it is important to

A) Decide the absolute lowest amount of money you can work with, and B) take not a penny more.

That said, there are several potential funding sources that are worth discussing. We will begin with the most glamorized (and also least understood) source: venture capital.

A venture capitalist is someone who invests large sums of money (usually $500,000-$2,000,000 at a time) into a business in exchange for a significant equity stake. In effect, they are "buying" a piece of the company. Venture capital often seems like a very attractive financing option because, entrepreneurs reason, "with all that money, how can we go wrong?" However, there is more to a venture capital investment than the dollar figures involved. Many of them are extremely controlling and insist upon inserting their own personnel into the company. Take this quote from a 2002 Wall Street Journal article, written by Barnaby Federer:

"If you ask a VC what value they add, and you get them after a few drinks, they'll say, 'We replace the CEO' ", he said. And that, he indicated, does not vary with the economic climate.

Clearly, this is something to be mindful of when seeking VC funding. Still, there are definitely situations where VC funding makes sense and is beneficial to use. If your invention is very capital-intensive, for example, there is often no other way. Many venture capitalists also have invaluable industry connections that will make your life easier. Still others (like Y Combinator) reject the typical controlling mindset and more or less let the founders man the controls. So how can you increase your chances of getting funding from them? In a word: cash flow. If you do not have cash flow from your business already, you want to demonstrate, as concretely as possible, how you will get it and get it soon. To a VC, cash flow is king: it separates dreamers from doers. Therefore, this is what you want to emphasize in your business plan. The more clearly you can illustrate how their investment will lead to significant profits, the more likely you are to get funding. You should also only target venture capitalists in your sector. No matter how great your pitch is, it won't get funding if the investor in question does not work in that field.

The following website is an excellent resource for anyone seeking venture capital. It explains what it truly takes to get funding, drawing on first-hand accounts from real founders who have already done it. Additionally, it is a splendid refutation of the many "layman's myths" people have about venture capital. This, in turn, will make you smarter about what venture capitalists look for and find important.

Another (less stressful) way to raise money for your invention is to get an angel investor on the team. An angel investor is a private individual who makes smaller investments (typically $150,000-$1.5 million) to new businesses. They are often a bridge between self-funded stage of the business to the point where your funding needs reach the level a venture capitalist would offer. In addition, angels also provide expertise and industry contacts to help you along. One major advantage of using angels over venture capitalists is angels, generally, take more of a hands-off posture. They will provide money and guidance, but for the most part let you run the business as you see fit.

If angel investors are something you would like to look into, there are directories of them available for free online. This one, from INC.com, is segmented by geographic locations so you can find angels in your own area.

The other way to raise money is as old as money itself: getting it from friends and family. While this is often the easiest method, it should not be done on a whim. You should only accept money from friends and relatives if they fully understand and accept the risks, as well as the rewards. New business ventures are far from a sure bet, and it would be dishonest to take money from people who think they are. It could also lead to lawsuits if the business tanks and the friend in question feels cheated. As long as these issues are addressed, however, friends and family are a terrific source of funding for new inventions. The best way to make it happen is to promise them a certain percentage of future profits. The more they give you, the higher the percentage. This way, they can feel that their investment has purchased a tangible claim on future returns.

Of course, which funding option you pursue depends largely on your needs. If you only need a few thousand dollars or so to get started, it would be foolish to seek venture capital funding. By the sake token, if you need to open a factory, there may be no other way. The best approach is to think long and hard about your financial needs and let that determine how you raise money.