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Funding and Investors - Product Development Connection

Product development and commercialization, in most cases, requires a substantial amount of capital investment, exposed to a high level of risk.

Funding your new invention project can be achieved in one or more of several methods:

A) Personal bank loans - Banks operate on a close to zero risk format and require a massive amount of information while insisting to hold personally owned assets as collateral against the loan. Additionally, payments are due every month regardless of product sales volume. This usually hurts in the early stages of commercialization. One benefit is that the total cost of borrowing can be substantially less than other forms of funding.

B) Grants - Grants are available to a very limited group of innovators, with various economic development initiatives phased in and out occasionally.
For most inventors, this option is likely limited or not available.

C) Personal Funds - Some inventors (only about 2%) actually fund their own projects with personal funds.

D) Private Investors - There are three basic types of private investors:
Family/Friends: The casual investor, sometimes referred to as "Love Money"
"Angel" Investor: The educated investor who looks at the project as strictly business, but does not want to take an active role in the business management issues. This investor is only interested in projects between $20,000 and $150,000
Venture Capitalist: Let's just say he is an investor that dabbles in $200,000 plus projects and as high as $10-20 million.

In the invention industry, the most common form of funding remains with private investors.

Private investors may accept varied forms of agreements but according to many lawyers and accountants, the most respected method to engage an investor in a project is to form a limited partnership. This partnership would be split between the patent owner(s) and the investor or group of investors in their respective portions as agreed.

Below is an illustration of a typical agreement and the logistics that make it happen. In this case, two inventors each own 50% of the invention and require $80,000 additional to the $20,000 invested so far by the inventors. They find an investor for the $80K and agree to the following: The total investment in the project is $100K, 80% funded by the investor and 20% by the inventors. The partners agree to compensate the investor with a percentage of the limited partnership equal to 50% of the invested percentage (50% of 80%=40% of the company) thus the company is split as follows:

While the above illustration may be very logical, it must be understood that a perfect agreement is one from which all parties feel they will benefit.

Remember that investors invest for one reason and one reason only... that is to earn profit!

Investors have been a popular source of funding for many projects, some win, and some lose, but a clear understanding of the project, due diligence and proper planning can help ensure a mutually beneficial inventor/investor relationship.

Always seek professional advice prior to entering into any agreement that binds you or places you or your company in a liability position.