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Inventors should always raise outside money for their inventions, even if they have considerable resources. Two major reasons you should consider different avenues for how to raise money are:
- Inventions are typically expensive to introduce, and even well-off inventors might run out of money eventually.
- Invention investments are risky, so inventors should try to spread their risks.
If you want to bring your bright idea to life, then you’re going to need to prepare a few things ahead of time. Once we cover that, we’ll talk about four different sources for securing funds.
What inventors should prepare before raising money
Help potential investors understand your product by preparing a short presentation that explains your invention. This effort shows you understand what is necessary to not only raise money, but also what it takes to succeed with a new product.
Include these items in your presentation:
- A statement of what your product is. For example, an improved masking tape for corners, window sills and doors.
- A prototype is best, but a 3D model or a good illustration of your product will also work.
- A short statement of why your product is needed. For example, it’s tough to find good masking tape that works around window and door woodwork.
- A list of the more popular existing products that try to accomplish the same task as your product.
- A small market survey to show that your product is preferred by consumers.
- A list of any market contacts you have. These could be industry sales representatives, retail store owners in relevant markets, or key influencers in the marketplace.
- Your patent status, if any. Only include this if you have started the patent process.
- An outline of how you will structure your business, which could be an S Corp, LLC or C Corp.
- An explanation of how you plan to spend the investment.
You will need to update this presentation frequently if you raise money at various times in the invention process.
A funding chart
People investing in your product will be investing in you just as much as they are investing in your product. So it is wise to have a chart to show you have an orderly process for raising money.
Do not include your own investment, but be prepared to tell people how much money you plan on investing if asked.
This chart is just a starting point and you might need to adjust it while raising money. However, it shows you know what is involved in the process and that you are taking a professional approach.
Typically three steps are sufficient, as shown in this sample chart:
|Stage||% of ownership||No. of shares||Approximate share price||Money raised|
|Low-volume production||15 %||60,000||$1.25||$75,000|
|Large-scale production||10 %||40,000||$2.50||$100,000|
This chart shows that early investors, who are often hardest to get, are receiving a good deal on their stock price. Refer to your local Small Business Development Center (SBDC) to be sure you are following laws and guidelines about raising money in your state. The SBDC also can assist you in preparing the proper forms for taking on your initial investors.
How to raise money from four key sources
Now that you know what you should have prepared ahead of time, let’s take a look at four different avenues for securing funds.
- Family and friends.
- Your business network.
- Angel investors.
If you want to understand more about how to raise money for your invention, then keep reading.
1. Family and friends
First investments, which include the money for models, patents, initial brochures and possible attendance at trade shows, typically comes from people you know. Friends and family will be interested in what you are investing. Tell them about your current investment, and also what you plan to invest in the future.
2. Your business network
Your business network includes people who sell into your target industry, industry sales reps, retailers and potential manufactures of your product. People in your network who like your product are often agreeable to invest because they are in an excellent position to judge whether or not your product will sell. In addition, by investing, they might profit from your ideas, either by selling your product as a rep or retailer, or by manufacturing your product.
They can benefit if you are successful, and they typically have funds to invest.
One reason I advocate that inventors should do upfront homework before seeking investors is that your business network will expect you to have completed this preparation.
3. Angel investors
Angel investors are people who like to invest in small startups. The best way to reach angel investors is by attending startup conferences or other events sponsored by entrepreneurial organizations. I find the best approach is to do an internet search for “pitching investments” in your state. You will typically find a number of conferences in your area.
Don’t worry about presenting your product if you are not ready.
You can still attend the conference and meet angel investors. You also can do an internet search for “angel investors” with your state name. But I have found that many angel investors who look to make an investment in a new invention aren’t in the larger angel investment network. You can also visit angel investor sites like the Angel Investment Network and the Angel Capital Association. Take a look at this article from Entrepreneur for more possibilities.
For those looking for more ideas for how to raise money for their inventions, crowdfunding has become a strong avenue for inventors. Indiegogo and Kickstarter are two of the bigger reward-based sites.
Most inventors use a crowdfunding option that is reward-based. That means you offer to send people a finished product or other “reward” in return for their investment.
For example, Thomas Larson of Micro Phone Lens felt there was a need for a mobile microscope. His solution was a lens that fits over the camera feature on a mobile phone. Larson raised more than $230,000 in three Kickstarter campaigns and was able to build the equipment needed to produce 4X, 15X and 150X lenses. More than 7,000 people funded the campaign, with the reward of a 15X lens for $12 in the first two campaigns, and a 150X lens for $29 in the third campaign.
To help your crowdfunding campaign succeed, try to have all of your friends and family invest in the campaign so it gets off to a fast start.
You also can do equity-based crowdfunding campaigns, where you take on investors for your company. Some sites to check out include Wefunder, Localstake, AngelList and EquityNet. There are many regulations that govern how to raise money, but these sites can assist you.
Gain some capital
Hopefully, these four avenues can give you an idea of where to start when you’re learning how to raise money for your invention. Just remember, do some legwork beforehand to show potential investors you’re serious about your idea.