By Dave Lavinsky

If you want to turn your invention into a thriving company – versus licensing or selling your intellectual properly – there’s one thing that’s significantly more important than the quality of your goods.

And that one thing is funding.

Without funding, you can’t invest in new product development, manufacturing, staffing and everything else that’s needed to grow a successful company.

Who would be more successful – someone with an amazing idea but no funding to execute on it, or someone with a mediocre idea but who knows how to raise money? The person who can raise cash wins every time.

When raising money, the most important factor is choosing the right sources or sources. This is where most inventors go wrong and why most fail at fundraising.

Too often inventors go after the “usual suspects,” mainly because these sources are relatively easy to identify and contact.

One of the biggest usual suspects is venture capital. Yet raising money from venture capitalists is perhaps the most challenging avenue any entrepreneur can pursue.

Venture capitalists typically are inundated with deals. On average they fund less than one out of every thousand business plans. Even if your invention is the best opportunity for them, it far from guarantees that they will love your business plan, or that you will “wow” them with your presentation.

Venture capitalists generally have strict criteria regarding the companies they fund, including funding floors of no less than $1 million, your ability to grow to at least $50 million in revenues within five years and that you already have a working prototype and ideally beta customers or a sales history.

VC figures from last year’s third quarter are sobering. VCs invested $4.8 billion in 780 deals, according to PricewaterhouseCoopers and the National Venture Capital Association. That was a 31% drop in terms of dollars and a 19% decrease in deals from the second quarter. The only good news, “venture investors continued to invest more into first-time deals versus follow-on rounds,” the report said, “suggesting a confidence in today’s entrepreneurs and innovators.”

Another Way

Google didn’t start with VC funding. It bootstrapped itself with credit cards.

In 1997, Google used credit cards for its initial $35,000 in financing. In 1998 it raised $100,000 from angel investors. It took Google another year of using this funding to further develop its organization and offerings before it became eligible for the $25 million in venture capital it received in 1999. And even then, in 1999, several venture capitalists turned Google down.

The Google case study shows, (1) there are much easier sources of money than venture capital, (2) you need to raise multiple sources of funding, and (3) funding is typically an ongoing need. That is, you don’t just raise money once, but typically need to raise more money as you grow your company.

Consider the following alternatives:

Crowdfunding is a new form of funding that solicits donations for your invention from your friends, colleagues and the general Internet crowd.

Last October, the founders of Glif raised more than $110,000 in crowdfunding. Glif’s invention? A simple accessory that allows you to mount your iPhone to a tripod or acts like a kickstand to prop your iPhone at an angle (see theglif.com).

All the Glif founders had was an idea and a prototype. But they posted it on a website and within weeks more than 4,000 people donated money. With the money, they can start manufacturing products and build their company.

Among the upsides of crowdfunding: You don’t need an amazing credit history, first sales or even a business plan. The downsides: This route constitutes public disclosure, which starts the clock ticking in the U.S. on when you can file for a patent. Moreover, you’re giving would-be competitors a look at what you’re up to.

(Full disclosure: The author sells a crowdsourcing how-to guide for $97)

Another great source – vendor financing. This is what Kenneth Cole leveraged when he started his business with no money but some great ideas. At that time, banks, angel investors and venture capitalists declined to fund him.

So Cole got creative and convinced a struggling Italian shoe manufacturer, knowing that they needed clients, to manufacturer hundreds of thousands of dollars of shoes for future payment. Cole succeeded in financing his business this way and now owns a massive empire.

Or perhaps you can do what Australia’s Blowfly Beer did and get customer financing. To fund early operations, this company sold equity to its customers. Not only did this provide the capital that the company needed, but it provided the company with market research, a customer base and great word-of-mouth advertising. The takeaway lesson here: People are much more likely to support and promote products in which they invested.

Mint.com, a personal finance application, received some of its funding by entering and winning contests. In 2007, it won a $50,000 prize in a TechCrunch competition. Two years later, Mint.com was sold to Intuit for $170 million.

There are also strategic or corporate investors.

Scott Mitchell, president and CEO of Learning Productions, a corporate training and “eLearning” company, presented his learning software idea to a Fortune 500 company called Avnet, an electronic components distributor. Avnet promptly offered more than $1 million in financial support for him to build his business.

These types of investments typically involved established relations.

A huge key to raising money is being creative. The good news is that as an inventor, you are already highly creative. You just need to harness your creativity differently – toward raising capital and not only toward creating a better product or service.

Crowdfunding Sites

 

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