Inventors often have brilliant ideas, often excellent patents. Yet bringing them to market may be a tremendous challenge. Finding investors for going concerns is hard enough; finding investors for new, greenfield projects is even harder. This article will first deal with some of the reasons why finding investors is such a challenge for inventors; and second, I will talk about what investors look for and what an inventor can do to maximize the probability of finding investors.
Why is finding investors for inventions such a challenge?
In a nutshell, it boils down to lack of track record. There is many a slip between cup and lip, between idea and execution, to the point of an invention commercialized to successfully delivering cash flow and value for investors. Hence, risk is significantly higher than for a going concern, where a company has already gone through its teething issues, and usually already established cash flow. It therefore takes a certain breed of investor who has the kind of appetite for risk, and the expertise to evaluate investment proposals. There are relatively few of these in Central Europe, particularly who are prepared to offer equity financing for larger amounts.
Where inventors come up with a brilliant inventions or technologies, and then seek to commercialize it, they run into numerous challenges:
- If the invention is not patented, the act of showing their concept to potential investors increases the chances that someone will run away with the idea.
- More often than not, inventors are looking to raise financing on a shoestring budget. They lack the funds necessary to obtain patent protection, advisory fees, market research, etc. You usually get what you pay for.
- The inventor often does not have the expertise to commercialize the project; often they will seek to maintain control of the venture. From the perspective of an investor, it is a non-starter to have a project managed and controlled by someone with only technical expertise, lacking commercial expertise, or indeed the experience and track record of launching a comparable project.
- There may be a significant valuation gap between what the inventor expects for his world-changing invention, and what an investor is prepared to pay. For example, I once met a physician who had a truly remarkable invention that was likely to dramatically alter the fight against cancer. But he was expecting to raise over $200 million, while keeping control, and lacking any real business experience. A non-starter.
What investors look for and what a project promoter can do to maximize the probability of finding investors
- Generally to finance an invention, there must be a powerful idea. A ho-hum idea, or even a strong idea, might be insufficient. The idea must be outstanding. And preferably, it should be an idea that has certain barriers to entry (e.g. patent protection).
- While it is probably not possible to cure the lack of track record with respect to bringing a particular technology or project to market, it is possible to put forward a project team that has depth of relevant experience. This will add credibility, hence reduce perceived risk for investors.
- It is important to provide as much visibility as possible on the revenue side: is it possible to receive orders? A strongly worded letter of intent? Or detailed market research that will forecast demand in a way that will be credible for investors? The better you can do, the better the chances of financing.
- You must also get a grip on the cost side of the equation, and capital expenditures. A project with a low “burn rate”, everything else being equal, will be preferred to a project that is “gold plated”.
- The investor will want to see professionally prepared projections that give an appropriate risk-adjusted rate of return.
There are thousands of worthy technologies and inventions throughout Central Europe that are not achieving funding due to the factors mentioned above. This is a loss not only for inventors, but for society at large.
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