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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 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. Read The First Steps in Raising Money to find out more information on meeting industry insiders.
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.
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.
Payment terms are usually 30 days. This means once a manufacturer finishes producing a shipment, you have 30 days to pay them, but also if you have 30 day terms with a distributor, they won’t need to pay you for 30 days until after they receive the shipment. The result? You need to have the money on hand to pay the manufacturer for the shipment before you receive money from the distributor. This causes a big cash flow problem by requiring you to have larger amounts of operating capital (something overlooked by many inventors). But if you get extended terms from the manufacturer, say 60 or 90 days, you will get paid by the distributor before you need to pay the manufacturer, allowing you to have much less operating capital. In a sense, you aren’t really saving money, since you still pay the manufacturer the same amount you would have paid them in 30 days, but it allows your cash to be used in growing your business instead of keeping it on hand to pay the bills.
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.
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.