You’re all geared up as a startup to commercialise your idea and you’ve got the idea, IP and customer gap under your belt. Perhaps you’ve also got some initial customer feedback to bolster your business case. But you really need the funding to make it happen, ’cause you can’t make love on the telephone’.
You really need to map out the investor universe, since the most important thing (I know you won’t believe this till you get the funding) is to get investors who are aligned to your vision. To get the money, you need to know where it is and more importantly, what the persons with the money want in exchange. They always want something in exchange, and it’s not only the equity you give them.
Angel Investors: The first investors you’re likely to encounter are angel investors. They invest small amounts, starting from $50K to about $500K. They often invest as a consortium and invest in areas within their areas of competence. The timeline before exit varies from 2 years to 2 decades or more. One of the concerns of Angel investors is that they seldom bring anything other than money, which is why they are sometimes called ‘dumb money’. Since these are often individuals who have made their money by selling their business, they don’t have global industry relationships or credibility with the next level of investors. Another factor of concern is that since Angels is that since they invest a significant chunk of their investible assets into your startup, they are prone to micromanaging your investments. Since as a startup, you don’t always have justification for your why you need to buy or build a particular machine, this can become a limiting factor and hinder your growth.
Venture Capitalists (or VCs): These are finance investors and they only have one focus: to multiply their money. They can be brutal in defining and following your milestone plan and will always push you to accelerate your commercialisation. Although there are industries such as software platforms where this focus on constant acceleration makes sense, for many businesses, including manufacturing or technology startups, this can have a negative impact on technology development, where testing and stability are critical.
Strategic Investors: These are large corporates who invest if your technology is complementary to their business (or can potentially compete with their business, so that they can control you). These take longer, if only because they have a longer outlook than VCs. VCs normally expect to exit 3 to 5 years after they invest. Strategic Investors, on the other hand, expect to invest larger amounts and it’s not uncommon for them to plan for (& look at outcome options) 10 to 20 years down. Since they invest in areas complementary to their business, they are not impacted by the buzz. They can often have a huge positive impact during development since you essentially have the run of their knowledge assets and resources. It’s an attractive option, particularly in uncertain times.
Stiftungs (Trusts): These are family offices of wealthy individuals who have died and left their fortune for investment in certain sectors. This is more a phenomenon of the German speaking part of the world. Since their focus is not an immediate return or timeline to profitability, these can be a very attractive source of funds for startups which are some way from profitability or real customers, or those that are still in the process of developing their value proposition.
Family Offices: These are large and very wealthy families where the entrepreneur who really made the money is still around. These are similar to angel investors, other than one very important difference – they have very deep pockets. These have funds that are often north of a billion dollars, although if the entrepreneur has only exited from one company with this amount of money, it’s likely that the funds are already largely locked into illiquid investments. The fund timeline can be long and it’s also likely to get additional funding from these investors, so long as you get in early. You can find them, but references are key to making it happen.
Sovereign Funds: These are government funds which enable countries to focus on their long-term objectives. These objectives include employment generation or insourcing world-class technology. An objective can also be to drive the economy towards value-added, than cost-plus businesses. For you as an entrepreneur, it’s important to keep in mind that the funding takes a long time and may be subject to political considerations. However, the funding can be very large and the startup may have a great deal of flexibility in driving the business forward. The other advantage of this funding is that this can also open doors to government customer opportunities, since you are considered ‘part of the system’.
Awards: Since most countries recognise the value of entrepreneurs, this has resulted in a number of awards and recognitions for entrepreneurs. These cover all kinds of areas, right from sustainability to women entrepreneurs. These not only provide funds without strings (that’s normally rare in the life of a startup) but also bring a significant amount of credibility, which in turn attracts Stiftungs and Family Offices. Awards are have a tendency to coagulate, which means if you win one award, you are that much more likely to be considered for other awards, since it’s always easier to bet on a winning horse for these in the selection committee.
Research Grants: If you’re a spin0ff from a university or research entity, it’s quite likely that you may be eligible for a research grant. Entities like DARPA in the US and EU funds in Europe are great options, but not the only ones. You often need to put in your own money which may be a percentage of the total grant provided. However, you are often permitted to put in your time in lieu of your proportion of the money. Thus, you can simply show your team’s time spent and qualify.
Loans: If your certainty of getting revenue and the timeline for this is certain, loans are a good option. However, you need to be cautious, since if you slip on the timeline for revenue, you could end up paying interest from your capital. A loan can be a reasonable option if instead of repayment, you have the option to convert this to equity at an agreed-upon discount to your next fund-raising.
Stay tuned, there’s more to come.