Private-Sector Funding
This page provides useful information for locating and obtaining private funding.
Go in with Your Eyes Open!
A. "Love Capital"
B. Bank Loans and Loan Guarantees
C. Strategic Alliances and Partnering
D. Venture Capital
E. Angel Investors
Go in with Your Eyes Open!
Some developers have the financial resources to support their research, development, and later commercialization efforts, while others are fortunate enough to have attracted early interest from investors. Most developers, however, encounter a point at which they need outside help from private sources.
There are always stories about how hard it is for technology developers to obtain private capital. To some extent, these stories are true—it usually is not easy for individuals and small technology companies to obtain the private capital they believe is needed to move forward.
The problem is not a shortage of capital, however. There will always be capital available to support the development of worthwhile technologies. Instead, the problem is usually in either the technology and/or the developer and how both are presented.
Private Capital Invests in Market Opportunity, Not Technology
The first key is to remember that private-sector funding sources—much more so than public-sector sources—have one primary objective ... to make money. They're not in business to help technology developers or to create new jobs or to increase the tax base. They are in business for one main reason—to make a profit—and usually the intent is to maximize that profit.
The profit motive is not a bad thing. Indeed, while there are some exceptions, most technology developers hope to someday realize large financial gains from their efforts. But remembering that private-sector capital sources are driven by the profit motive will help you understand how and why they make the decisions they do.
Be Prepared ... and Remember, Initial Appearances are Crucial
Just like with public-sector funding, the process of tapping private capital stand by finding a source that is a good fit for your particular situation. Just because banks make loans doesn't mean a bank is going to loan you money to support the development of your technology. Similarly, just because venture-capital firms sometimes invest in new technologies doesn't mean every venture-capital firm is a candidate to invest in your technology.
Finding a source that a good match means you first must thoroughly understand your situation and needs. This understanding comes only through thinking ahead and planning—for both your business and the commercialization of your technology. (And NO!, business planning and commercialization are not the same!)
As an individual or small technology company owner, you are prepared to approach private capital sources only if you have a reasonable plan for how the lender or equity investor can recoup his investment. Such a plan might be quite informal if you're approaching your family, friends, or neighbors. But for other prospective investors—including banks, venture capitalists, and angel investors—your chances of success will be much greater if you are able to present a formal written plan.
A. Personal Funds and Family and Friends — "Love Capital"
Without a doubt, most individuals working independently to develop new technology use their own money or seek help from their network of family and friends. And it makes sense ... after all, if the developer isn't willing to invest his own money in his technology, then why should anyone else be expected to do so?
The sources and arrangements for "love capital" can vary over a broad spectrum. Initial capital may come from the developer's savings or from the sale of some asset. Later, it may come from family or friends, either as loans or investments.
When funds become scarce, developers may turn to credit cards or high-rate lenders. More than a few businesses have been started and/or financed with these borrowed funds, but it is not recommended. In hindsight, most debtors who used these resources would likely agree it was a last resort.
B. Bank Loans and Loan Guarantees
For individuals and small technologies, bank loans are usually difficult, but there are reasons for this. Banks are care-takers of their depositors' money, and as such, are highly regulated and strongly discouraged from making risky investments. Technology development and commercialization is inherently a risky venture, so it is not a good match for banks, credit unions, and other similar lenders.
There can be exceptions. Banks may be convinced to loan money to a technology developer, but usually only if:
- the borrower can fully collateralize, or secure, the loan with some asset that the bank can sell to recoup its funds in the case of a default; and
- the borrower can demonstrate some way to repay the loan (plus interest) that is not tied to the success of the technology's commercialization; and/or
- a qualified third party—e.g., another individual; the SBA; a community development organization—is willing to guarantee repayment of all or most of the loan in the case of a default.
In these situations, the bank is not making a loan decision based on the technology's commercial potential. Instead, the decision is based strictly at how the loan will be repaid, regardless of the technology's commercial success.
Knowing this, you should never try to "sell" a loan officer on the promise of your technology. This approach will almost certainly bring an immediate rejection. In the conservative world of banking, it may also raise hurdles that are hard to overcome later. Again, banks go to great lengths to avoid risk!
Instead, you should understand the bank's perspective from the beginning. Then you can decide either to try to meet the bank's requirements or not to seek a bank loan.
If you want to learn more about what a bank will require before approving a loan, you can visit the bank. But a better idea is to meet with one of the many service organizations that exist to help small borrowers obtain loans. These resources allow you to ask questions that may be uncomfortable to ask of a banker. They will also often help you prepare an actual application, working with you to make sure it will meet the bank's expectations.
Two excellent sources of this assistance include Small Business Development Centers, a list of which is available through the Association of Small Business Development Centers and the Service Corps of Retired Executives (SCORE). Both programs are funded by the U.S. Small Business Administration and often have numerous offices throughout each state. Services are usually available at no cost. Your state may have other helpful resources as well.
There are many other resources available on the web. Listed below are just a few of them:
Business Owners Idea Cafe
Introduction to bank loans, who they're good for, and when you should seek one. This article also discusses strategies leading to loan approvals.
Resources from Entrepreneur.com
An excellent collection of resources and articles from Entrepreneur.com, addressing many issues in bank financing.
Small Business Resource
This Web page provides information and Web resources for small business people. Their section describing the pros and cons of bank loans will be of interest to inventors considering whether or not to seek one.
PowerHomeBiz.com
While geared somewhat for home-business entrepreneurs, this page provides good perspective on bank loans—including why banks need to make loans.
Yahoo BuyerZone
Advice on securing a bank loan to grow your business, from Yahoo.com.
E-Commerce Digest
A useful overview of funding strategies, with an emphasis on success in securing business loans.
Wells Fargo Bank Business Loan Advice
Points to consider when pursuing a business loan, from the perspective of a large commercial bank.
C. Strategic Alliances and Partnering
Partnering can be a great option if you are willing to trade some level of ownership in your technology in exchange for funding or other needed support. Indeed, sometimes it may be the only option.
Increasingly, companies already established in an industry are looking to grow through strategic partnering opportunities. Many times, these opportunities are based on new technology that promises to deliver increased efficiencies, superior products, or both.
There are certainly no limits or restrictions on who you can approach as a strategic partner, but you should do your homework to make sure your targets are good candidates. At a minimum, you should learn whether each target is open to or has a history of partnering with other entities. There are a number of resources for this company-specific information:
- Numerous hardcopy and electronic search tools at public and state libraries
- Company and industry reports from brokerage houses
- Business Index ASAP and other electronic databases at colleges and university libraries for searching articles and reports from newspapers, industry periodicals, investment houses—Excellent and free!!
- Through EDGAR at the U.S. Securities and Exchange Web site
- Through DIALOG, a fee-based service, but one that opens the doors to superior data sources such as Frost & Sullivan, Investext, Freedonia Group, Euromonitor, and Datamonitor. DIALOG is most valuable when used by a trained researcher who can minimize the search cost.
Finding a strategic partner(s) is similar to the process of thinking about who will actually buy your new technology once it is developed. The key is to understand:
- what specific resources you will need from a strategic partner—i.e., what do you get out of the deal, and
- what benefits your technology can deliver to that partner—i.e., what does the partner get out of the deal.
Answering the first question is not usually too difficult. Generally, you'll be seeking individuals or companies that can help with funding, with some portion of the R&D, with production, with marketing and distribution, or with all of these activities.
Answering the second question is more difficult, especially if you are honest and objective about it. Indeed, you will not be well prepared to approach any strategic partnering candidates until you can discuss—specifically and with conviction—what benefits the partner will derive from the arrangement.
There are numerous resources available to help technology entrepreneurs learn about and explore strategic partnering opportunities:
NREL's Industry Growth Forums (IGF)
A forum bringing together start-up clean energy companies, venture capitalists, and senior business executives. The site hopes to encourage learning about business growth strategies and create strategic business partnerships. There is a chat feature where a group of venture capitalists (VCs) and other business executives can evaluate your business plan.
NREL Growth Link: A Directory of Clean Energy Companies for Linking Companies and Opportunities
A clean energy directory that provides business information to potential investors and partners. This site is intended to help a business be more successful, from start-up to accelerated growth.
The National Business Incubator Association's Business Matchmaker Database
A great place to look for partners and strategic alliances. This database profiles more than 1,000 early stage (recent graduates of business incubation programs), mid-sized, and large corporations interested in forming strategic alliances. Membership in NBIA (which starts at $500 for businesses with 5 or fewer employees) is required to access the database.
The National Alliance of Clean Energy Business Incubators
This site offers financing referrals and introductions to potential partners, among other services.
U.S. Small Business Administration's Tech-Net
Tech-Net is the SBA's electronic gateway of technology information and resources for and about small high-tech businesses. It is a search engine for researchers, scientists, state, federal, and local government officials; a marketing tool for small firms; and a potential "link" to investment opportunities for investors and other sources of capital. It is a free service for those seeking small business partners, small business contractors and subcontractors, leading-edge technology research, research partners (small businesses, universities, federal labs and non-profit organizations), manufacturing centers, and investment opportunities.
D. Venture Capital
Venture capitalists are just as their name implies—investors in high-risk ventures. They invest for one reason, and one reason only—to earn the highest possible rate of return on their investment. They invest in higher-risk ventures, because this is where the greater rewards are likely to be found.
What they look for
While there will always be some exceptions, most venture capital firms today shy away from new, small, unproven technology companies. Instead, they are increasingly putting their funds behind companies that have demonstrated a track record of performance and now need additional capital to expand and move forward.
Developers often make the mistake of trying to sell venture capitalists on the technical aspects of an innovative, new technology. Frankly, "VCs" don't care about the technology, and in the beginning, the last thing they want is to sit through a detailed lecture on how the technology does what it does.
Instead, they're much more interested in seeing that a new product or process:
- has a large proven market
- has at least one major competitive advantage
- is being (or can be) managed by individuals experienced in successfully taking new technology to market.
Thus, the best way to capture early interest from a VC is by focusing your opening presentation on these topics. And remember, VCs aren't generally interested in the developer's assessment of these issues. You can make reasonable claims regarding each of them, but be prepared to back them up with objective, outside data.
VCs focus first and foremost on markets and management, because they are looking down the road toward the time when they can recoup their original investment, together with the highest possible rate of return on those funds. VCs typically "cash out" following an initial public offering (IPO) or if management or other investors buy their shares. If VCs don't foresee a reasonable opportunity to recoup their investment and a return, you can count on them not spending much time with you. This is why it's so important to be well prepared for the few opportunities you may get to meet with VCs.
For technologies with strong market potential and competitive advantages, but less experienced management, VCs can actually play a valuable role by bringing industry knowledge, contacts, and management experience to the table. Indeed, in return for investing in your company, you can expect the VC not to request, but to require a role in managing the commercialization of the technology.
Making the approach
Venture capital firms typically focus their investments in just one or a few specific industries—e.g., medical; electronics; pharmaceuticals; energy. Part of your preparation before approaching a particular VC is to learn what types of investments it targets. This can be done with a phone call, by reviewing the firm's Web site, or through literature available from the company. Another highly regarded source of information on venture capital firms is Pratt's Guide to Venture Capital Resources, which is available at many public and university libraries.
Understand that established venture capital firms receive hundreds, if not thousands, of mostly unsolicited business plans each year. From these, they will actually read and consider perhaps one or two in every 10, and initial reaction often has a lot to do with deciding which ones receive further attention.
Nothing gets the attention of a venture capital firm quicker than a professional, well-prepared business plan. Be careful not to interpret the term "professional" as being flashy and full of hype. On the contrary, the best business plans are relatively brief (less than 20 pages), highly factual, and completely void of "trust me" statements. They should be reviewed and enhanced by an experienced editor to read smoothly and concisely.
The Internet is full of information and resources to help you prepare a top-notch business plan. Here are some good ones:
National Association of Seed and Venture Funds
The NASVF is a network of private, public, and non-profit organizations investing and facilitating investment in entrepreneurs. The group offers training and free access to an electronic newsletter that stays current with developments among especially state-level funding sources.
Center for Business Planning: Venture Capital
A portal site providing links to a variety of pages relating to venture capital.
"1,000 Ventures" Introduction to Venture Capital
Includes six questions venture capitalists ask.
Do's and Don'ts of Attracting Venture Capital
Article discussing the challenges of raising venture capital in the "post-bubble" period, with suggestions for overcoming the currently challenging climate.
"Raising Start-Up Capital"
An Inc.com How-To Guide.
National Venture Capital Association
The National Venture Capital Association (NVCA) is the premier trade association that represents the U.S. venture capital industry.
Webcast Archive Library"
Archived webcasts of the National Venture Capital Association available for purchase.
Tips for Getting Introduced To a Venture Capitalist
Just getting an appointment with a venture capital firm can be incredibly challenging. This articles discusses ways to increase your chances of getting in the door.
National Renewable Energy Laboratory
The NREL offers some good resources on the private capital investment process and the entrepreneurial strategies for obtaining financing. For further information see Working with Entrepreneurs.
"Corporate Venture Capital (CVC): Seeking Innovation and Strategic Growth " (PDF 2.1 MB)
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Examines the role of corporate venture capital in technology innovation.
Entrepreneur's Guide to Venture Capital Audiotape Series
Venture capital is available in the billions of dollars each year, but only to companies with breakthrough products and services with huge potential for returns. This program explains what it takes to attract interest from this highly specialized funding source and then details the steps that can lead to an investment from the entrepreneur's point of view. It even discusses what the entrepreneur can expect from the relationship with the venture capitalist once the deal is done
"What is Venture Capital?"
The National Venture Capital Association (NVCA) is the trade association that represents the venture capital industry. It is a member-based organization that consists of venture capital firms and organizations who manage pools of risk equity capital designated to be invested in young, emerging companies. Currently, the NVCA represents 400+ member firms, representing the majority of venture capital invested in U.S. based companies.
Venture Capital for High Technology Companies (PDF 1.6 MB)
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A comprehensive discussion of venturing and venture capital in free .pdf format. Developed by Fenwick & West LLP, this document introduces entrepreneurs to a variety of legal and strategic issues relating to founding and financing a start-up company, including determining your product and market, assembling the right team, choosing a legal structure, obtaining seed funding, negotiating venture funding, and many more.
VentureWire Alert
Each issue of this daily electronic bulletin has a short market overview and highlights from selected new venture capital deals and other significant events.
State and Regional Venture Capital (VC) Organizations
- Colorado Venture Capital Association
Connecticut Venture Group
Evergreen Venture Capital Association
Florida Venture Forum
Greater Philadelphia Venture Group
Illinois Venture Capital Association
Mid-Atlantic Venture Association
Minnesota Venture Capital Association
National Venture Capital Association
San Diego Venture Group
Venture Investors Association of New York
The Western Association of Venture Capitalists
Young Venture Capital Association
Venture Capital (VC) Organizations Specializing in Energy and Technology
Following are a number of energy-focused venture capital firms. Venture Capital Industry Focus on Energy & Environment lists many more venture capital companies specializing in investments in energy-related businesses.
ChevronTexaco Technology Ventures
ChevronTexaco makes direct and venture-fund investments in the power and energy sectors. The Power and Energy Fund focuses on direct equity investments in early- to mid-stage technology companies and established venture funds.
NextWave Energy
Provides assistance to emerging energy enterprises. Through the course of our work, it has developed relationships with investors interested in new energy opportunities and can arrange introductions for energy entrepreneurs.
Prospect Street Ventures
Invests in rapidly growing companies, including those in the energy/utility, information technology, communications, and life sciences industries.
Vfinance.com
A searchable database of venture capital investors. This Web site also provides useful information on venture capital available both for free and for purchase.
NREL's Clean Energy Investors Directory
This site provides an information service for clean energy entrepreneurs and investors. Listings for each investor include the type of investment, the funding stages it deals with, and technology interests. Through this page, entrepreneurs can find potential investors for any stage of the business development.
Arkansas Science and Technology Authority
The Seed Capital Investment Program found at this site can provide working capital to help support technology-based companies located in Arkansas.
The Ben Franklin Technology Centers of Pennsylvania
This firm invests time, money, and expertise in innovative technology companies that have strong market potential. They focus on the state of Pennsylvania.
Genesis of Innovation for South Dakota
A partnership between private enterprise and public universities in South Dakota, helping entrepreneurs with business development, startup capital, and other assistance. The Genesis Equity Fund, LLC provides equity financing for emerging South Dakota companies.
Hydrogen Ventures
This financial services company focuses on high-growth investment opportunities in hydrogen energy technologies. Acting as an investment facilitator, Hydrogen Ventures arranges financing for clean new energy technologies such as hydrogen and fuel cells, as well as renewable energy and energy efficiency projects.
The Indiana 21st Century Research and Technology Fund
This fund awards funding in two broad categories: Science and Technology Commercialization and Centers of Excellence. In addition, the fund provides cost-share on behalf of Federal proposals submitted by Indiana-based entities.
Kansas Technology Enterprise Corporation (KTEC)
The KETC offers Applied Research Matching Fund which invests in seed and early-stage technology companies in Kansas with a focus on new or applied technologies. It also offers the Seed Capital Funds which provide direct investments to companies in the KTEC network.
The Mid-Atlantic Venture Funds
This site provides information on four venture capital groups interested in purchasing the equity in new, young or growing businesses located in the mid-Atlantic. While they occasionally invest in the early expansion stage, they are best known for seed and start-up stage investing. They do consider deals outside the mid-Atlantic region.
NCIC CapitalFund
This early stage investment company invests in emerging, growth-oriented, technology-based companies in the Great Lakes area.
North Carolina Technological Development Authority, Inc.
This site details three separate programs. The Innovation Research Fund is the TDA's pre-seed stage investment vehicle, making investments of up to $25,000 to selected projects. The First Flight Venture Fund is the TDA's seed-stage venture capital fund, It provides equity financing from $50,000 to $500,000 to emerging growth technology companies. The TDA's Fund-of-Funds portfolio is designed to increase the amount of organized angel capital and professionally managed venture capital available in North Carolina. This network offers North Carolina entrepreneur's seed to later stage funding.
Pennsylvania Early Stage
A family of venture capital funds that makes investments in seed, start-up, and early stage information technology and life sciences companies.
Virginia's Center for Innovative Technology (CIT)
The CIT has discontinued its technology awards funding program for 2004. However, entrepreneurs can still sign up to receive the Virginia Venture Calendar newsletter, a monthly compilation of regional early stage financing events, deadlines and news.
E. Angel Investors
Unlike venture capital firms, which make investments from a pool of funds, angel investors are typically wealthy individuals who use their own funds to invest in promising companies. They generally prefer to remain anonymous and usually work by referral only. They are often ex-CEOs or retired executives.
Like venture capitalists, angels tend to invest in businesses and industries with which they are most familiar. They expect their investments to bring high returns in a short time, but because they're working for themselves rather than for a group of other investors, their terms and expectations are often more flexible.
Angels generally provide smaller amounts of investment funds than venture capital funds, but they are often attracted to invest in a company at an earlier and riskier stage. Thus, an angel investor can be a good match for a smaller company or perhaps one at an earlier stage.
Regional angel capital networks and the nationwide ACE-Net non-profit angel capital network use the Internet to make angel-funding opportunities available. Through an angel network, entrepreneurs can seek sources of capital in the $25,000 to $1 million range. This is less than most venture capital funds will consider. For-profit networks provide more services and exposure. They also sometimes charge a percentage of the funds when a deal is made.
ACE-Net
A nationwide not-for-profit network, the Access to Capital Electronic Network was started by the U.S. Small Business Administration.
Vfinance.com
A free, searchable database of angel investors, allowing targeted searches by region and industry.
Directory of Angel-Investor Networks
This site lists angel groups in the Pacific Northwest, Southwest, Mid-Atlantic, Northeast, North Central, California, South, and Midwest regions. It also lists those groups that will consider investments anywhere in the country.
Business Angel Investing Groups Growing in North America
This report, funded by the Marion Ewing Kaufman Foundation, highlights best practices of angel investing and provides insights for both entrepreneurs looking for financing and for venture capitalists who typically get involved in follow-on rounds of financing.