RAISING MONEY
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EARLY STAGE FUNDING
Nearly all inventors need extra funding to bring their product to market. But where do you find this funding? Who can invest? Are there other ways to get financial help besides through investments? There are lots of ways to find money to develop and launch your product.
Funding from Individuals
Finding individuals to invest in the early stages of your product development is usually the easiest and best way to get your project started. Below are the most common forms of individual investing.
Self-Funding
Self-funding can be money from checking or savings accounts, credit cards, personal loans, or the sale of personal property or stocks.
Family and Friends
Investments from friends and family are often the easiest investments to get for starting your product development. But don’t take advantage of their trust by asking too much. Bringing a product to market is a high risk venture and you don’t want your friends or family to lose too much money, and potentially ruin your relationship with them, so don’t ask for more that 10% of their investment money. It is better to ask for a little bit of money from many people, than a lot from one person.
Industry Insider Investments
Getting investments from industry insiders are the best investments you can get because once people invest, they are interested in seeing you succeed and can help you, or introduce you to contacts who can help you, with inside market advice to make and sell your product
Angel Investors
Angel investors could be anyone, for instance: your dentist, neighbor, people at church, or even parents of your children’s friends. They probably won’t know much about your business, and don’t want any involvement, but angel investors can give you the investments you need to get started. Once you get your first investor presentation ready, don’t be afraid to start approaching potential angel investors. You probably already know dozens of people who could invest.
Now, most people have less money to invest, so you will want to find a number of angel investors and ask them for smaller investments. It will be easier to find three or four investors to make a small investment than it will be to find one investor to invest a larger sum.
Angel Investor Groups and Syndicates
Due to the economy, individual angel investors are investing less, but more and more angel investors are becoming parts of angel groups or syndicates. Investors join these groups to pool their money and spread their risk. These groups save time for both the investors and for entrepreneurs. Entrepreneurs can present their product to many potential inventors at once and raise more money than from an individual angel investor, and investors save more time because of the screening process the group or syndicate does beforehand to eliminate overly risky or unqualified businesses.
Because of the screening process, expect to answer tough questions. Only a small percentage of entrepreneurs seeking money from groups or syndicates receive it, so make sure your presentation, and financial information, is dynamite.
Funding from Manufacturers
Funding from manufacturers often is not outright investments. Manufacturers have lots of resources and sometimes working out deals with a manufacturer can only cost them a little bit, or even nothing at all, but can be a huge savings for you. Often manufacturers make these kinds of investments when you have already signed some kind of deal with them, or are intending to. When you make a deal with a manufacturer, like for contract manufacturing, you can ask for certain investments as a part of the contract.
In-kind Investments
If you need a part machined or some engineering drawings done, a manufacturer probably already has someone on salary who can do it for you. The manufacturer is paying these employees anyway, so it doesn’t really cost them anything.
Amortized Tooling
When you start manufacturing a product, there are molds and other equipment accessories that need to be purchased to start making your product or to speed up the manufacturing process and ensure high quality. Usually manufacturers want you to pay upfront for these purchases, but you can also ask them to amortize the cost, which means instead of charging an upfront fee, they will charge an extra fee for every product manufactured to cover those costs. This again isn’t a real savings, but it keeps your upfront investments low when you will have no sales to cover the costs.
Prototypes and Product Development
Some manufacturers have the equipment and staff to make prototypes in-house. If you will work with one of these manufacturers, either in some kind of partnership or contract manufacturing, they could help you with prototyping and finishing your product’s development, provided you can demonstrate that your product has the sales potential to justify them investing their time and energy. Your goal is to show that the product has so much potential that they will make lots of money manufacturing it, even in a contract manufacturing agreement, so covering the cost of prototyping and developing the product is worthwhile for them.
Outright Investments
If manufacturers like your product, they may buy stock in your company, or at least loan you money to launch your product. Also, if you have strong orders once your product is launched, manufacturers will often loan you operating capital.
Joint Venture Financing
Manufacturers also are often willing to enter into joint venture or alliance partnerships if they like your product and believe in your business skills. These agreements can vary widely, but generally these are agreements where partners pool their resources and skills and split the profits, all of which is detailed in the joint venture agreement signed by all the parties.
Presentation to Raise Initial Funds
Often inventors need to raise some early investments to help pay for prototypes, patents or other items to help get the project off the ground. You have three goals, one avoid trying to write a 40 to 50 page business plan, two, to show you are serious about taking your product to market, and finally, you need to show your idea has a real chance to succeed.
1. A brief history. Provide a short summary of why came up with the idea, what made you take your particular product design, and why you think it will sell. Include a list of any industry related people you’ve worked with, such as sales representatives, retail store owners, distribution people, inventors who have succeeded in the market, or key end-users.
2. A competitive products chart. Analyze the products that are already on the market, what they cost and what their strong and weak points are. Include your product in the chart. Also try to get some of the more popular products either the actual product or brochure, printed web pages or ads for the competitive products.
3. Current sales efforts. If you have done anything to sell you product list those efforts here. If not list any feedback you have from industry people or end users. If you are going with end-users, try to have them evaluate not only your product, but also the competitive products so that they can rate your product above others.
4. Transitional sales plan or a licensing plan. If you plan on taking the product to market on your own you need a plan to show how you will start to sell the product until it sales expand into a large market. This plan doesn’t have to be long, usually you can show your plans in five to eight bullet points showing the steps you will take to market the product. Be sure to list in this plan any contacts or connections you might have made that will assist you.
If you plan on licensing the product you should list at least three potential licensing targets. You need to show how you will meet the key contacts at those companies. This is usually done either by showing you have a personal connection into the company, perhaps you know a sales rep, or other employee, or a major customer of the targeted company, or by listing the trade shows you will attend to start the licensing process moving forward.
5. Show the product’s expected sales price and projected costs. The projected costs should be now more than 25 % of the products final sales price. You can estimate the products sales price by comparing it to other products in the market, both with competitive products and with products very similar to yours in construction or manufacturing techniques. One effective tool is to have a focus group evaluate your product against others and then list them by order of value, from the highest price product to the lowest. You can use the product rated just above and just below you to estimate your price. You can get the manufacturing cost by getting quotes for several potential manufactures for 5,000 or 10,000 units. Don’t use a price for a low number of units as it will be too high and you probably won’t meet the criteria that manufacturing costs can’t be any more than 20% of the final retail price.
6. An orderly financial plan. Don’t go wild here and come up with pages of performa data or spreadsheets. Instead you just want a simple layout. For example:
a. Finalize prototype $ 5,000.00
b. Apply for provisional patent $ 3,500.00
c. Arrange for first small production run $ 12,000.00
d. Attend Las Vegas trade show $ 15,000.00
including brochures, booth and display
e. Start larger production, establish operating cash $ 20,000.00
7. Ask for a specific investment. You don’t want to ask for all the money, as then you will have to give up too much of the company. But usually you want to ask for $10,000 to $25,000 for five to ten percent of the current shares of the company. Be careful here to mention the persons shares of the company will be diluted (become smaller) as more and more shares are sold to raise money. For example, today you may sell 10% of the shares and you own 90,000 and the investor 10,000. But if you sell another 10,000 shares, then there will 110,000 shares, with each investor owning about 9% of the shares and you about 82%.
Crowdfunding and Inventors
Crowdfunding is a way of financing a project by pooling the donations / contributions/ purchases of many individuals. This has become an emerging method for inventors trying to raise money. Here is a short list of some of sites that do crowd funding. www.kickstarter.com/ , www.techmoola.com/ , www.profounder.com/ , www.rockethub.com/ , www.indiegogo.com/.
How Crowd Funding works
Reward based crowdfunding however works great for inventors. You post on one of the sites a video that talks about your invention in as intriguing way as possible and then you list how much money you are trying to raise and what you are offering. You can offer anything from a finished product once you have it made to a share of your business, royalties on sales or another offer that you may be considering.
Costs
4 % – 6% if the inventor reaches his or her goal, sometimes more if they don’t, plus credit card processing fees of up to 4%. If you pursue crowdfunding as a method of raising money be careful to understand when you will get the money and what fees you may pay if you don’t raise enough money. For example you may have a goal of raising $25,000. If you only raise $20,000 some sites will return the money to investors and charge you a fee. Others will give you the money but charge a higher fee. And other sites may offer a different fee structure so be sure to completely understand the fee structure before moving forward.
Success Stories
Isaiah Coberly invented a new cover for the iPad, which can be folded into a variety of configurations for use on a lap, desk, airplane tray and a host of other impromptu settings. While Coberly had some prototypes and people raved about the product, he didn’t have enough money to move forward. So he and his partner, Becca Iverson decided to try the online fundraising through Kickstart. They had as their initial goal $10,000 raised in 60 days and they hit that goal at 30 days and ended up raising over $20,000.
People who invested online got a thank you note for less than $500, and for those who put in $500.00 they received a promise of a hand signed Flip Steady once the product was produced. Though not the final count, on May 13th the inventors had received money from 224 backers for a total of $23,242.00 for an average donation of just over $100.
Since raising the money Coberly had received an offer from an investor to buy 35% of the company and another offer from someone who wanted to buy the idea. Coberly thought both of those offers benefited the investors more than him and he turned them down. He wanted to keep control of the company and where it was going.
25 year old Thomas Larson was student volunteer in the biology department at the University of Washington when he observed there was a need for mobile microscope. There were some products on the market but the prices were in the hundreds of dollars and they were large and difficult to transport. Larson though a much better solution was a lens that fits over the camera lens in a mobile phone. Larson raised over $230,000 in three Kickstarter campaigns and was able to build the equipment needed to produce 4X, 15X and 150X lenses. Over 7,000 funded the campaign, with promise of a 15X for $12.00 in the first campaign, and a 150X lens for $29.00 in the second campaign.
Points for Success
- Check out the site carefully, and be cautious of upfront fees. Crowdfunding sites are being started by a wide variety of people and there may be some unscrupulous sites trying to get you money.
- Post a personal video – a personal video with a passionate cause or story, will raise more money at crowdfunding sites.
- Show you are in business – have your own web site and other marketing activities to show you are a real company. Focus group sessions, attending trade shows and having booths at local fairs are all ways to demonstrate you are not just trying to raise money but are trying to start a viable business. A crowdfunding campaign without proof that this product, service, or startup really exists will struggle to raise money.
- Don’t take getting on the site for granted – Kickstarter only accepts about 60% of the ideas submitted, so take the time to prepare initial information that shows that you are seriously trying to get in business.
Resources
http://www.inc.com/magazine/201111/comparison-of-crowdfunding-websites.html is a good article comparing some of the leading crowd funding sites.
http://www.crowdfundingofferings.com/wp-content/uploads/2012/03/CrowdfundingOfferingChecklist.pdf offers information about the CrowdFund Act that allows business to take in up to $1 million in investments per year.
Indiegogo Executive says Crowd Funding is Hard Work
From an article in Newsday February 28, 2017
Successfully raising capital through a crowdfunding campaign — seeking contributions from many people, usually via the internet — is harder than it looks, an executive of Indiegogo told an audience of Nassau County inventors and entrepreneurs in Mineola Monday night.
Sarah Meister, hardware and design outreach manager for San Francisco-based crowdfunding website Indiegogo, said that high-profile campaigns are the product of months of effort.
“People have a lot of preconceived notions of crowdfunding,” Meister said. “I just want to emphasize all the work [that went into ] those blockbuster campaigns you read about . . . It is incredibly grueling launching a crowdfunding campaign.”
Speaking before an estimated 60 people at a meeting of the Nassau County Inventors & Entrepreneurs Club at the Theodore Roosevelt County Executive and Legislative Building, Meister said that crowdfunding entrepreneurs should figure on running a campaign for one to three months at minimum and spending 20 percent of the amount they plan to raise.
Crowdfunding is an alternative method of financing a business or charitable project by raising money from many people. Entrepreneurs often seek money before a product is launched. In return, the contributors typically get a discount or other incentive once a product is launched. Contributors don’t get equity stakes in the company raising the funds.
Indiegogo, which competes against other crowdfunding sites such as Kickstarter, takes 5 percent of the funds raised by entrepreneurs, Meister said.
Before an Indiegogo campaign is launched, Meister recommended, the startup needs a working prototype of its product, an “engaged, excited audience,” and a deal in place to manufacture the product.
She also said that before the crowdfunding campaign launch, the entrepreneur should consider the skills that will be required. Those include: copywriting, graphic design, Web page setup, product photography, social media, video, media outreach, email and customer acquisition and campaign management.
Though there are challenges, Meister said that using crowdfunding to secure capital has clear benefits.
“Customers pay for your manufacturing,” she said. “You don’t have to put all your money on the line.”
In addition, Meister said that entrepreneurs can get valuable feedback from their customers. “Your crowd tells you so much about what isn’t working and what is,” she said.
The crowdfunding format also lets entrepreneurs gather email addresses of customers and prospective customers. “Your email list, when you launch, is your most valuable product,” she said.
For those who decide to take the plunge, Meister said data indicates the best months to launch an Indiegogo campaign are March through October and the best days are Wednesday through Friday.
Non-Reward Based Crowd Funding
Monday the 16th, 2016 was the first day that crowd funding investor financing can start. Inventors and entrepreneurs can raise money from investors from crowd funding sites. Up until now inventors could only do reward based fund raise, which is where you take in an investment and then promise to send a product in the future once production has occurred. An example is Pebble’s Time smart watch which raised 20 million on Kickstarter in a reward based financing. Burt reward based funding only works when you have a product you can get made to furnish people. Products like a smartwatch, or a get a Carbon Flyer, a carbon-fiber smartphone-controlled airplane, which the inventors could get made under a contract manufacturing agreement. Trident, the maker of the Carbon Flyer, received 5,000 orders with a value of $430,000. But sometimes inventors want to start their own manufacturing company, or they need to finalize R&D, or possibly they need new manufacturing equipment. One of the issues with reward based funding is that buyers expect their product fairly quickly. The Carbon Flyer for example, ran into some production delays and had to issue refunds to 150 upset buyers. If your time to market is long, reward based crowdfunding doesn’t work well.
Which is where the new SEC regulations that allow people to raise money from investors for a share of the business comes into play. Under normal rules inventors and product entrepreneurs cannot publically solicit investors, and they can only take money from accredited investors, which are people with over $1 million in assets or with an income over $200,000. That’s not the easiest way to raise money as most inventor/entrepreneurs don’t know accredited investors. The new regulations allow people to use a funding portal, first to promote to accredited investors, and second to take money from non-accredited investors. Under the regulations non-accredited investors can invest $2,000 or 5% of their net income or net worth, whichever is less. There are a lot of regulations, but the funding portals, Of which there is only one that I know is currently listed, Start Engine https://www.startengine.com, but there are sure to be more to come. To keep current the rapid changes crowdfunding is sure to have, consider frequently checking on the web site Crowdfundinsider.com
While there are federal regulations, (for the whole regulation go to https://www.federalregister.gov/articles/2015/11/16/2015-28220/crowdfunding) your state might also have specific regulations. Visit your local Small Business Development Center, the SBDC, to check on local regulations. You can find your local SBDC center at https://www.sba.gov/tools/local-assistance/sbdc.
Highlights of the new legislation
- Issuers can raise up to $1,000,000 over a twelve-month period.
- Investors will have limits on the amount they can invest, based on their income or net worth.
Accredited investors, over $1 million in assets or an annual income of $200,000 per year can invest up to $100,000. Others can invest $2,000 or 5 percent of their annual income or net worth, whichever is less.
- Crowdfunding must be conducted through a registered broker dealer or a newly created funding portal.
To find out how to register for raising money as a funding portal go to https://www.sec.gov/divisions/marketreg/tmcompliance/fpregistrationguide.htm
- Broker dealers or funding portals must provide an online investing portal, where investors can view and evaluate companies, engage with the crowd and the companies through the portal.
TRADITIONAL WAYS TO RAISE BIG MONEY
Professional Investors
These are people who are looking to put serious money into a new product or business that has the potential to give them a good return. They may put anywhere from $50,000 to $1,000,000 into a project. Expect them to be very careful about where they put their money and check and double check everything about your product and business. Also expect them to try to negotiate a deal that is good for them. You can find these investors through other start-up companies, at entrepreneur clubs or venture conferences.
Venture Capitalists
These are firms that invest in companies with high-growth potential, experienced management and a sound business plan. Often they are unwilling to invest in a company without a sales history, unless it is involved in an exciting new technology, and they are not looking to make small investments–usually they invest $1,000,000 or more. To find these firms, look for Pratt’s Guide to Venture Capital Sources, which is a fairly comprehensive list of venture capital companies, at a larger public library.
Private Placements
Private placements mean raising money by hiring a broker to sell stock, but not making the stock publicly available like on a stock exchange. The stock is sold mostly to accredited investors, who make more than $200,000 a year (or $300,000 together with spouse, if married) or who have a net worth of more than $1 million. This stock can be hard to sell and investors generally hope that you eventually go public with your company so they can sell their stock on an exchange. Broker and legal fees for this can be considerable, for instance raising a $1 million or more can easily cost you $250,000.
IPOs
Initial Public Offerings (IPOs) are much like private placements, except that your stock can be freely traded on stock exchanges. The timing of your IPO is important for investors because it offers them the first time they can sell their stock and usually they want you to go public when the company is doing well and is going public to raise money for a major expansion. Before an IPO, you can only sell stock to people you know, or people someone in your company knows, and to accredited investors, so an IPO opens you up to many more investors and gives you the potential to raise serious money. But the legal fees to offer an IPO are also very expensive, typically well over $250,000.
SCOR
If you don’t have the money to set up a private placement or an IPO, you can still sell stock publicly through the Small Corporation Offering Registration (SCOR) program. Through this program you can raise up to $1 million for a much lower cost because of the reduced paperwork.
Community/Minority Funding
There is a huge amount of funding available for you depending on what area you live in and what your ethnicity or religion is. Many cities and counties, especially in rural areas, but also sometimes in the inner-city, have economic initiatives to bring business and jobs to their area. These funds can be low- or no-interest loans, tax breaks or even grants. Sometimes even if you are not located in an area that offers these funds, you can still access these funds if your manufacturer is located there.
If you are part of a minority, either religious or ethnic, there are also funds available. These funds are usually not available through the government, but often successful members of the minority set up funds to help others in their minority also succeed. A simple internet search may help you find some of these funds, or you can also contact minority media outlets, like newspapers or websites, and they probably know who offers such funds.
Sales/Leaseback
Real estate investors and equipment leasing companies are often willing to buy your building or manufacturing assets and lease them back to you.
Other Funding
Factoring
Factoring (also called receivables financing) companies buy your account receivables from you for 4% to 8% off the face value. They then receive payment as the client or customer pays. This can be very expensive since you are giving up to 8% of the bill to get the money two or three months in advance.
Cash Deposits
Instead of just offering 30 day terms, you can require down payments, especially on custom made orders. These deposits will help your cash flow and pay for the products your are producing to sell.
Bank Loans
Banks always want collateral for their loans, and if don’t have business collateral, they will want personal collateral. Some of the most common bank loans are:
- installment loans, where you make a monthly payment for a certain number of years
- term loans, where you repay the entire amount after a certain number of months or years
- asset based loans, for inventory or equipment
- revolving line of credit, which you can withdraw when you need cash and repay when you have extra cash
SBA Loans
Small Business Administration loans are similar to bank loans, except the borrower doesn’t need to offer collateral because the government guarantees the loan. These loans can also be easier to get than bank loans.
Borrowing Money Off Orders
With a big order from a reputable company, you can often secure a term loan from a bank. Private investors also can offer you a short-term loan, but they will charge you a much higher interest rate.
Tips to Consider
Not all banks are equal, some of the smaller regional banks are much better loaning money to small entrepreneurs than the bigger national and regional banks. Contact your local Small Business Development Center to find out which local banks offer you the best opportunity for a loan. Be sure to do all your banking at a bank that is “small business friendly.”
Do an internet search for Economic Development Resources in your state. For example check out this site for the state of Minnesota: www.ecodevdirectory.com/minnesota.htm. Often towns will have economic resources to help you get started. Sometimes if you look at smaller rural towns you might even find that the city has lined up some local business or investors to help you get started in your town.
Always consider using exclusive agreements to get cash. You can agree to make a product at a manufacturer in return for the manufacturer picking up tooling costs and you might also be able to strike an exclusive deal with a distributor to carry your product in return for an upfront fee. You can also use exclusive agreements with distributors, manufacturers or vendors in return for an investment in your company.