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Home > Invention Articles and Tips Access Sources
of Money to Fund Your Idea Friends and Family (debt and equity) It might be risky to infringe upon personal relationships, but friends and family are sources of funding. You have to consider what will happen to the relationship if you lose the money they invested. Some of your friends and family can probably afford to gamble a few thousand dollars here and there. You’ll need to determine whether they want to invest with a loan or with equity and become partial owners. Angel Investors (equity) Angels are typically wealthy individuals acting alone or pooling their money in an investment group. Instead of going to Las Vegas to gamble, they risk funding new businesses with the expectation of a high return. Angels are usually business people who have made enough to retire but are still interested in the excitement of business. Angels are usually only comfortable investing in a certain type of technology or market. You’ll need to find Angels who specialize in your type of product industry. Angels who operate individually may invest from $50,000 to $250,000. On the other hand, a pooled group of Angels may invest up to $3 million. The amount they will fund is usually enough to carry your business for one to two years. But before Angels provide funding, they’ll perform due diligence on you and your idea. In exchange for their investment, Angels receive a percent equity ownership in your business. And in five to seven years after handing over the funds, Angels hope to recoup from five to ten times the amount they invested. Venture Capitalists (equity) Venture Capitalists are managers of a fund. Wealthy individuals and organizations put money into the fund hoping for a large return for their risk. In fact, they seek a greater return on investment than what they could normally get in the market over the same time period. The Venture Capitalist (VC) manages the fund by investing in new businesses that are willing to give up equity in exchange for money. The goal for the VC is to grow the fund by getting the new business to go public or be acquired. When a new business goes public through an initial public offering (IPO) or is acquired, the proceeds are sold and placed back into the fund. The VC anticipates that an IPO or acquisition will occur in three to seven years. Acquisitions occur more commonly than an IPO. VCs provide more than just money. They provide expertise in management, marketing, and have key contacts who may become large customers. The VCs have a vested interest in growing your business. In some cases, depending on your expertise, your role may become minor as new management comes in to run the business. You still have equity in the business and when the business goes public or is acquired, you get cash or publicly traded stock that you can sell. Bankers (debt) Bankers help businesses grow by lending money. Bankers perform careful analyses to make sure you can pay off the loan based on your business generating a positive cash flow. Therefore, most Bankers do not fund startups, preferring instead to see a positive track record of revenue and paying your bills in a timely manner. In almost all cases, Bankers will seek a personal financial guarantee so that you don’t take the money and retire to the Cayman Islands. Personal financial guarantees include assets such as real estate, stocks, bonds, and mutual funds. Also, Bankers will loan money when it’s backed by the value of your inventory or accounts receivable, but that depends on the Banker. You’ll need to understand that Bankers consider many factors before handing over money. Also, keep in mind that Bankers can provide general advice, but they will not get involved in managing your business. Conclusion Plan ahead. It can take from six to twelve months from the day you ask for money to the time you receive it. This means you’ll need to have cash flow or other investments to keep you afloat during that time period. This article is a brief overview of funding your idea. To learn more, please see my how to get money for your product idea page. About the Author
Matthew Yubas is a Certified Professional Marketing Consultant for the
Small Business Development and International Trade Center. He has developed
products for 20 years as an engineer, product manager, and independent
consultant for startups, small business, and Fortune 500 companies. He
has launched new products such as software applications, wireless devices,
and websites. In addition, he has helped clients in a diverse number of
industries that include photography equipment, auto accessories, soy candles,
children's clothing, sporting goods, digital art, and home décor.
He has earned a B.S. in Engineering and an M.B.A. in Management. Information
about his Invention Success Kit is available at www.ProductCoach.com. |
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