Finding funding for a venture can be very confusing; there are multiple types of investors, each interested in investing in particular markets, and at certain stages of a company's growth. Approaching the wrong investors at the wrong stage, for the wrong amount, with the wrong company valuation, with the wrong product is the norm.
In general there are four types/stages of funding.
Research Grants seldom support the actual commercialization of IP into a product or service. This step requires creating a proof of concept model or sufficient data to prove the concept workable. The university and the state provide limited funding to demonstrate a research discovery's potential commercial value. These are called GAP or Seed funds. They are often grants and may include equity.
Once there is sufficient proof of commercial value, a company can be formed around the IP, and the next, larger round of funding can be acquired. This round may come from personal, family, private angels, angel networks, state, or federal (SBIR and STTR) sources. Some venture capital groups fund at the seed level, often alongside these investors. Finding a "lead" investor willing to do the required due diligence can be a challenge.
GUST is the entire entrepreneurial ecosystem in a (virtual) box. It is designed to help investors and startups connect, from initial meetings to funding and monitoring. Most of the 1,500 Angels and Angel groups use GUST to screen their applicants. To start your investor search:
- Create a business plan
- Set up a website
- Complete a full GUST profile
- Now seek out investors.
What's my company worth?
Here is the reality check for inventors:
- At this stage of a new company with new management, and no proven product, the company has no real value as far as an investor is concerned. No matter how great the potential is!
- Using valuation formulas for a pre-funded venture is meaningless.
- The founders can set the valuation at this stage at any value as long as it is between $4M and $8M (Setting it higher just shows the founders' inexperience).
- Whatever value the founders' set, investors will cut it in half. (i.e. $2M - $4M)
- Don't get hung up on insignificant details
- Get advice from your advisors on what are insignificant details.
- Venture Capital-VCs prefer to invest when a technology is proven, i.e. the company has a functioning management team and a product at least in beta if not already with a few paying customers.
An alternative to professional funding, is to seek out "strategic partners." These are the companies in your potential market that would be interested in sealing your future product, or purchasing your company in the future. They are looking for future sales growth, and are less interested in equity. Since these companies know your market, less time and effort should be needed to convince them to fund and commercialize your product.
Gap funding is targeted at very early stage proof of concept to prototyping, though generation of data. Unexpected hurdles and set-backs are expected for such early technology transfer projects. All funds are directed at preparing IP for commercialization. Clear project deliverable must be set by the PI. Milestones are monitored during the project. Project Plans are limited to 1 year, however, an extension of a 2nd year is permitted if there is a understandable delay and the chances of success are still high. PIs can request additional round of funding if their 1st project goals were met, or if it involves new IP. Pivots during the process, and failure of the IP to meet its intended purpose, are not penalized.
Gap funding is considered a success if progress is made at substantiating the underlying IP, or early failure. Some of the deliverables include: a working prototype, data of commercial value, patent applications, finding an interested licensee, or intentions of the PI to form a new venture based on the IP. These successes may, of course, evolved some months after the completion of the Gap project. In any case, every project includes and educational component. The PI and students take away a better understanding of the commercialization process and are more open to consider commercial value as well as social value in their research.