Raising People & Raising Finance

Why Do It?

This Project is about improving the resources available to help you exploit your idea. That means looking for people as well as money.

You may need extra people because exploiting an invention involves a range of skills that few individuals possess. If you’ve worked alone up to now, it may help to form a team to share the risk, share the workload, generally raise your game and get results more quickly.

You may also need external investment or support because exploiting an invention can quickly become dangerously expensive. Funding specifically for inventions is extremely sparse, but where there’s a will there’s usually a way. We point you in the direction of some of them.

Project 7: What is Involved

What you’re going to do:

Consider whether you need to build a team.
If you do need or want a team, plan how you might do it.
Calculate how much external funding you might realistically need.
Consider the different basic funding options.
Plan how to make one or more of them work for you.

Resources you may need:
This is another thinking project but it’s getting serious now so two or more heads will definitely be better than one. Try rounding up the people whose opinions you most trust, and bounce around a few ideas about teams, finance and support in general. More might come of it than you could imagine.

Time, cost and risk:
Shouldn’t cost anything but time is a luxury that may soon run short. A big risk is bringing on board people, including investors, whose agendas may be very different from yours. But an equally big risk is what might happen if you don’t bring other people on board.

Project 7 Checklist

Building a Team

If you’ve been working on your own up to now, that may have to change.

In the early stages of invention it’s the norm for inventors to work alone, when doing things cheaply matters more than doing them quickly. You may indeed be able to work alone indefinitely (and skip this Project) if your idea is easy to manage and finance from your own resources. But few inventors are so lucky. If you reach a point where you can’t go any further without someone else putting money into your idea, the economy of working alone may no longer be seen as a virtue. You have to start looking at things differently.

The main reason is that most investors want results, and their profit, in as short a time as possible. They’ll be reluctant to back you if they see you trying to do everything yourself. The more ambitious your invention or the more investment you want, the more they’ll reason that you can’t do everything well enough or quickly enough to be a safe bet. You have to prove to them that you’ve got the resources to make things happen quickly and successfully.

It also helps to demonstrate resilience, which roughly translated means the ability of the enterprise to carry on if you fall under a bus. All that may mean putting together a team, not just to share an increasing workload but to make you more investible.

You don’t need a big team; in most cases one or two other people will do. It does however need to be a balanced team, covering all the different aspects of exploiting your invention. In particular it needs to include business skills - often missing, in many cases because all the early focus has been on technology. For example, we’ve assessed many proposals from university research teams whose technical strengths are beyond dispute. Frequently though, there’s no one on the team with business experience. This typically shows up in a lack of credible data about market potential and routes to market - the only things that matter to most external stakeholders.

You can build a team in several ways. For example:

Use the ‘family and friends’ approach, recruiting people whose abilities and personalities you already know well.
Create a virtual or stand-by team of specialists you can call on when needed: for example, a product designer, accountant, business adviser, component supplier, university test facility. While not a front-line team, their expertise and goodwill could be crucial so it pays to put them fully in the picture, especially if you’re likely to need their input at short notice.
Contact a local inventors’ club and see if you can recruit a team from among their network. This may include retired professionals looking for a new challenge. (We know of one successful entrepreneur/inventor who owes the strength of his IPR to a retired patent attorney who was happy to work for a much lower rate than if he’d still been in practice.)
In the case of a heavyweight enterprise you could line up a professional management team for a real or intended company. However, it may not be easy getting useful involvement from people who may already have other commitments. They may also have strong opinions about how things should be done, so managing your managers might not be easy either.

However you build your team, these points are important:

You must be able to convince team candidates that your idea has commercial potential, otherwise you’ll struggle to get anyone worth having. Think of raising a team as a dry run for the later challenge of persuading companies and investors.
You can’t afford to carry passengers. Only choose individuals who can contribute something you lack, and whose total skills give you the balanced team you need. They shouldn’t duplicate each other’s skills either, or you risk having your team weakened by internal tensions.
Everyone’s effort needs rewarding. It’s straightforward when professionals simply charge their normal rate, but team members recruited on an unpaid or risk-sharing basis will have a right to be recognised as stakeholders. Before the teamwork starts you should (with appropriate legal advice) construct a mutually acceptable reward agreement for everyone to sign.
Every team needs a leader and there may be sound reasons for it not being you. But it’s your show so any decision about leadership should be yours to take after discussion with all other team members.
If you stay leader, stay in charge. Keep track of what the others are doing and try to understand what motivates them, especially any you don’t know well. Beware of letting one or more of your team gradually seize control of everything.

We've seen this happen, so make sure that if it should ever come to a showdown, you can ditch them rather than they you.

Insist on every team member (apart from legal professionals) signing a non-disclosure agreement before being allowed access to key information. This must include family and friends, if only to impress on them the importance of not making unprotected disclosures.

Sources Of Help For Invention

Blink and you’ll miss this section, because there’s very little decently-funded help in the UK specifically for inventors. While there are far more resources such as inventors’ clubs and patent clinics than there were when we first got involved in invention support, most are small, local initiatives which owe their existence to a few dedicated, overworked and undervalued individuals and have no funds to invest in good inventions. An honourable exception is the Welsh Assembly Government’s Wales Innovators Network (www.win4wales.com) for inventors resident in Wales. WIN is a rare example of high quality public sector support for inventors with a range of funding schemes, but even so, funds for investment are limited and must be match funded by the inventor.

By and large, this is the picture of help for inventors in the UK:

At the very early stages of an invention you can often get good basic guidance locally from a few professional volunteers and from inventors’ clubs (try Googling and ). But little or no funding.
When you’ve set up a business to exploit your invention, as explained in Project 6, you may be eligible for some of the funding and support schemes available to small businesses.
In between the two, there’s precious little practical help unless you’re prepared to pay for it. Consider yourself a nobody, but let that inspire you to try harder.

HELP YOU CAN DO WITHOUT

Apart from invention promotion companies (see Project 3, Can success be bought?) you need to watch out for cowboy business or marketing consultants, especially when you’re looking for people to join your team. Three examples we know about - there are countless others - illustrate how much of a menace they can be.

An inventor was persuaded by a consultant to remortgage her house to buy plastic injection moulding equipment she couldn’t use when there were several plastic injection companies nearby, all perfectly capable of doing the work.
An inventor let two consultants manage his start-up company. They took all the funding as ‘expenses’ and for months refused to let him see his own books.
A consultant employed to run a local authority enterprise scheme managed to get substantial grant funding for sixteen start-ups. Fine, except that he spent most of it on ‘feasibility studies’ done by marketing companies that all turned out to be him. None of the start-ups survived.

Anyone can set up as a consultant and until you know your way around it can be difficult to tell the good from the bad or indifferent. Another problem with consultants is their tendency to see your needs only in terms of their speciality. For example, for the same business an IT consultant might recommend a better IT system, a marketing consultant a better ad campaign, a management consultant a better business plan, and so on. You might end up with several expensive options but no idea which of them, if any, is worth pursuing.

Always beware of putting yourself at the mercy of someone whose contribution you can’t assess or control. Take small steps you understand rather than big ones you don’t. Progress might be slower but it’ll be a lot safer. As general procedure, if anyone approaches you wanting to pal up as an associate, consultant or whatever:

Be particularly wary if you only meet them in a social environment and never get invited to a place of work. Are they really who and what they claim to be?
Try contacting the names they drop. Are they known? Have they really done what they say they’ve done? Are they recommended?
Google them, especially if they claim to have a reputation in their field. If nothing comes up, you have to wonder.
Does their lifestyle stack up? For example, conspicuous spending could be a mark of success or it could indicate mounting debt and an urgent need for another sucker.
Test them. Ask them to do something small but useful. Does it happen?

If this all sounds extreme, bear in mind that a business run by a novice, perhaps with a decent pot of start-up funding in the bank, is just what some silver-tongued parasite will be looking for.

Raising Finance

Raising finance for inventions is nearly always difficult but not impossible. We’ll get to sources of funding later, but rule number one is: the lower the risk to an investor, the better your chances of getting funding. There are two basic bands of funding requirement, which we’ll call Band A and Band B. Some inherently expensive high technology inventions may have to skip Band A, but for the typical private inventor this is how it goes:

Band A
Informal or goodwill investment. Comparatively small amounts spread through the very early stages, typically for technical work needed to prove your inventive step and perhaps for IP protection. The risk is at its highest for other stakeholders because so little is known about commercial prospects, so don’t expect to get funding from anyone but family and friends - though it’s possible you might get useful non- financial help from sympathetic companies or support organisations. The benefit for anyone brave enough to go for it is that a small investment now could be worth a great deal later.

Band B
Formal investment. Comparatively large amounts to exploit your idea effectively once it has reasonably assured prospects and a business plan (Project 8). The risk will stillbe high and you’ll be bidding against stiff competition from other, often safer, investment options. You’ll therefore have to convince potential stakeholders that:

Your product can be successful and profitable.
Your business aims are realistic and achievable.
You’ll spend money wisely and responsibly.

High risk is usually associated with a lack of hard information about prospects. Band A is very much a leap of faith all round, but you can reduce risk considerably in Band B. One way of doing this is to get firm orders or letters of intent from customers, and so where possible you should try to win orders even if you haven’t yet got a product, or have only a few prototypes to sell. Evidence of even a handful of sales is more reassuring than a glowing report on technical performance but no sales. A potential backer then knows at least that the product can sell.

How much money do you really need?

Many inventors scupper their chances by asking for an unrealistic amount of funding, and asking for too little can be just as unrealistic as asking for too much. It’s therefore important to calculate the costs for which you want funding as accurately as you can. This may not be easy but anyone with experience of assessing funding bids will know more or less at a glance whether you’ve put in the effort. You don’t have to itemise everything down to the last penny and indeed some modest scaling up is prudent, but you need to present the sort of round figures that someone with experience can look at and say, ‘Yes, that’s about right’. To be out by up to 30 per cent may be acceptable but to be out by 300 or 3000 per cent could propel you straight to the Reject pile, so don’t pluck figures out of thin air. The excuse we hear most often - some variant of ‘I’ve never done this before so how should I know?’ - just doesn’t wash. Find out.

Asking for too much

You can ask for too much in two ways. One is to ask for an amount that may be correctly calculated but grossly exceeds the investment limit of the funding body. This can suggest that you think money grows on trees.

The more common way though is to ask for much more funding than is actually needed to do what you propose. Unless you can fully justify it, you’re likely to get short shrift, especially if you include a request for generous income substitution (see Income replacement). Serious overbidding can raise suspicions that:

You’ll be a liability because you’re increasing rather than reducing the risk to investors.
You’re not prepared to suffer for your cause, so how committed are you?
Despite the MBA-speak and nonchalance with big numbers, you actually haven’t a clue about business.
Your bid may be fraudulent.

One sure sign of overbidding is inflated patenting costs. For the first few years these are fairly uniform and predictable, yet we often get inventors telling us they need much more. That alerts us to look very closely at the other figures.

If you intend to license your idea to a company, there will be almost a natural ceiling to the funding you need to make your idea licensable. The only significant costs will typically be for IP protection, design, prototyping and testing. Adding other large costs may not go down at all well unless you can fully justify them.

Asking for too little

There are also two ways to ask for too little. Where underbidding is obvious (for example, asking for £2000 when more like £20,000 would be needed) it tends to be an innocent error of inventors on low incomes who perhaps assume, not unreasonably, that if they can get by on peanuts so can their invention. The problem is that sympathy may be in short supply at the point where a funding decision has to be made. Rather than win points for frugality, you’re more likely to lose points for a lack of realism if what you want to achieve is impossible on so little money.

Underbidding may be less obvious but much more damaging in cases of tactical bidding, where the amount requested is tailored to what the funding body or investor will (or might) give rather than to what the invention actually needs. The usual motive is to get some money rather than none. If costs really can be trimmed, fine; but if they can’t and serious underfunding goes undetected, a likely outcome is the worst of two worlds: the invention stalls and the investment is lost unless more can be poured in, which always smacks of throwing good money after bad.

Lesson: take a tip from Goldilocks and The Three Bears. If you ask for funding, it shouldn’t be too much and it shouldn’t be too little. It should be just right for what needs to be done.

Income replacement

Many applicants for innovation funding include a sum for personal living expenses or income replacement. Some of the requests we’ve seen have been generous to say the least, equating to senior executive salaries.

There are no hard and fast rules on this, but in general:

Don’t expect any request for income replacement to be welcome even if you’re given the option of making one.
Any income replacement that adds up to a significant proportion of the total sum requested may seriously harm your chances of getting funding.

We don’t want to suggest what is or isn’t acceptable. Even ten per cent might raise hackles and we’ve seen plenty of bids that are almost entirely income replacement. (These commonly come from academic teams. The immediate suspicion is that they just want their university salaries paid for while they get on with a pet research project. Is this likely to warm the cockles of an investor’s heart? No.)

Inventors argue that they’ve got to live while they’re developing their ideas. Funders argue that living expenses are not an investment and that making you financially comfortable removes your risk but increases theirs. They’ll also reason that if you’re already getting an income from somewhere, you shouldn’t need any more. Many inventors claim to need to devote themselves full time to their invention but in reality few inventions are so demanding. You may get away with it if the funder accepts that the enterprise has huge potential and can only succeed with your full-time involvement, but cases like that will be few and even then the income element allowed may be minimal.

If you think you have a cast-iron case for income replacement, by all means go for it. Overdo it though and your chances of getting any funding at all could be drastically reduced.

Do you need external funding at all?

Many inventions undeniably need a lot of investment and support to get them into production. But for many others, production isn’t really a problem. The key to their success is skilful marketing, and marketing is an area where there is usually plenty of scope for trimming and controlling costs. If you do your own marketing and link it to a strategy of making sales before you manufacture, you may be able either to get by without any external investment, or to raise it much more easily.

For example:

Your new mousetrap is designed, tested and ready for manufacture.
You send details of it to firms which sell or use mousetraps, and invite orders.
You make customers happy to wait for delivery, for example by offering a big discount on bulk orders placed (and ideally paid for) by the end of that month.
On the first of the next month you instruct your manufacturer to go ahead and produce the ordered quantity plus a sensible surplus for future stock, knowing that the manufacturing cost is covered.
Even if you don’t get cash with all your orders, proof of those orders should make it easier to get extended credit from your manufacturer (especially if he sees good ongoing business from your product) or perhaps a short-term bank loan or overdraft to tide you over until payment starts coming in.

Your profit may initially be small or even nonexistent but the bigger point is that you’ve successfully launched your mousetrap and the only funding you needed was a small amount to sell it rather than a much larger amount to make it.

Always remember that the aim of a business is to make money rather than spend it, so consider every possible way of cutting your costs and wheedling prepayment out of customers before concluding that yes, you do need external finance.

Sources of Funding

Let’s start by dismissing two sources of funding that many inventors pin their early hopes on:

Bank lending
Banks won't fund inventions or high risk start- ups unless their lending is guaranteed in full, for example by your house. Bank lending is cheap, but it can only be cheap if the bank doesn’t take any risks. Banks don’t come into the picture until you’ve got start-up finance from somewhere else and you’re trading.

Venture capital investors
These range from big names like 3i (Investors In Industry) to lesser-known regional enterprise initiatives. Venture capitalists are supposed to take risks but (a) they won’t take any risk they can avoid and (b) they usually want to invest at least £250,000 in an existing and expanding business run by proven managers for an annual return of 30 per cent or more, so they’ll barely glance at a small start-up or pipsqueak private inventor, no matter how promising the product. Later maybe, when you’re an established entrepreneur, but not now.

For an individual prepared to launch a small business venture to license IPR or market a new product, the basic sources of funding are:

Personal funding

Family and friends willing to put in smallish, affordable amounts.
Small-scale private investors willing to take long shots.
Larger scale private investors often known as business angels.

In the earliest and highest-risk stage of invention development, when all anybody knows is that there might be a market for the product, you can probably forget all but family and friends. But they can be a potent source of start-up capital, as the inventors of the board game Trivial Pursuit discovered. When every company they approached rejected the idea and they had spent all their own money, they offered $500 and $1000 shares to friends and associates and raised all they needed to launch it themselves. The rest is history. The Google search engine had a similar start. Closer to home, an inventor we know raised £50,000 in lots of £1000 in a few weeks, starting at his local pub. Many people will often gamble sums they can afford to lose in return for a small but worthwhile stake - for example one per cent per £1000 invested - in a business venture if it appeals and if it’s presented convincingly.

One way of making ‘family and friends’ investment more attractive is to promise that you’ll refund their money as soon as more substantial (Band B) funding is raised, but they’ll retain a stake in the invention. An established practice in the film industry, it offers early (Band A) investors the double reward of reduced risk and an assured share of potentially big profits later.

Once you get to private investors it becomes a much tougher challenge. Business angels are private individuals with money to invest, usually in the five-figure range that most start-ups need and that is exceptionally hard to find elsewhere (see Catch-22 of invention funding). Most are successful business people and professionals who look for three things: effective management, a good product and a worthwhile market. If one element isn’t up to scratch there might still be a chance. Two down makes it unlikely, so a good product with a small market and an inexperienced inventor at the helm is normally judged a risk too far. Private investors answerable only to themselves will take on bigger risks than corporate investors with shareholders to keep happy, but to stand a reasonable chance of support you must still make every effort in your business plan (Project 8) to minimise the ‘unknowns’ associated with your venture.

Private investors often form local syndicates, so find those in your area through a Business Link or the British Venture Capital Association (www.bvca.co.uk) or just Google <"business angels" UK>. Many prefer ventures within easy reach - say less than an hour’s drive away - and most like to be personally involved in the projects they back. This can be a mixed blessing. Their contacts and expertise may be an enormous help, but they may equally want to take over entirely if they’re unhappy with the way things are going.

Catch-22 of invention funding
Here’s an irony. Most inventions don’t need much funding in the early stages. Somewhere in the £5-15,000 range is typical for basic technical development and IP protection. But very few funding or investment bodies will even entertain such small amounts. One innovation fund manager told us that anyone wanting less than £30,000 ‘doesn’t even appear on our radar’. Why?

One reason is that the administrative costs of processing applications, awarding funds and monitoring progress tend to be quite high and are about the same no matter how much money is awarded. What this means is that if, for example, you ask for £8000, it might well be judged to cost that much again just to give it to you. From an accounting point of view an administrative cost of 50 per cent or more makes no sense. Much larger funding makes better sense because as the amount awarded goes up, the administrative cost percentage goes down.

Why then can’t inventors who need small amounts just ask for more? The answer is that they’ll then risk being rejected for overbidding if they can’t justify the larger amount. That’s their Catch-22. Whatever they ask for, they probably won’t get it. Until funding bodies can find some way of awarding small, realistic amounts to start with, which can perhaps be increased incrementally as an invention progresses, potentially valuable ideas from private inventors will continue to have a much harder time of it than they deserve.

Business funding

Potential partners.
Joint venture support from a company.

You might find a business partner prepared to invest in your venture, but beware a match so unequal that you risk being sidelined when things take off. A partnership is often a bust-up waiting to happen, so it’s vital to have in place a legal agreement, based on sound professional advice, that defines the relationship and its objectives, the sharing of spoils, what happens if the business or partnership ends, and so on.

If you can each invest roughly equally and the division of responsibility is that you market and your partner manufactures (or vice versa), a possible way of heading off problems is to consider forming two separate businesses: one to market, one to manufacture. You can own them jointly but you own most of one and your partner owns most of the other. This arrangement protects you if the partnership breaks down, by enabling each partner to keep control of the part of the business that concerns him or her most. Instead of dissolving a business, all you’re dissolving is a contract between two businesses.

A company might invest if they’re interested in making, selling or using your product themselves, perhaps to secure an advantage over competitors. They may invest not just money but resources, human and otherwise. There are clear advantages in joint ventures (see Project 6) but beware giving away more control than the deal is worth. Careful negotiation and a detailed legal agreement will be essential to protect your longer-term interests, especially regarding ownership and control of IPR.

If ‘your’ IP belongs legally to your employer, a partnership or joint venture with your employer could be a good way for both of you to benefit if your employer is constrained by time or priorities, rather than money, from doing anything with your idea.

Public funding

Government or EU grants and subsidies.
Local and regional enterprise grants.
Support from universities.

Public sector funding or support may not cover all your costs but it can help cut your need for private sector investment to a level where you’re more likely to get it.

The most usual source of government funding for small and medium-sized enterprises (SMEs) is the Department of Trade and Industry. Funding schemes come and go, so find out what’s currently available that might fit your circumstances. Funding is typically a percentage of eligible costs, so you must somehow make up the balance yourself. Many business consultants will claim to know ways round this, but be careful who you take advice from as too much ‘creativity’ could land you in trouble. Processing your bid may take some months, but it can be worth waiting for the kind of funding that isn’t available anywhere else.

Contact local authorities to find out what help is available to business start-ups and other forms of enterprise in your area. It varies from authority to authority, so shop around. It may be worth locating your business away from home but analyse all grant offers minutely, especially if they tie you to specified premises. Many are repayable if you move out within a stated period (typically three years), during which rents have been known to rise steeply. We know of instances where they became several times higher than equivalent premises nearby in the private rented sector. This is just the sort of trap you must avoid if your business is to survive.

Universities are well worth exploring as a source of cost-reducing help, though as we cautioned earlier (Project 4, Help with design or redesign), you must go into any relationship with them with your eyes open. Options range from student projects, for example in market research and product design or testing (best for individuals), to DTI- or EU-subsidised schemes designed to encourage academic and commercial partnership on innovation projects (best for small companies). Most universities now have commercial liaison departments, so start there. You might also find contacts via AURIL, the umbrella body for university knowledge transfer.

Competitions and publicity
Innovation competitions with worthwhile prizes - nationally, an excellent example is the Prince of Wales Award for Innovation - are thin on the ground and almost by definition a long shot, but winning can give you credibility and should generate interest and enquiries leading to sales, investment or other support, especially if you help the process along by sending out your own media releases. But always ensure before entering any competition that the organisers understand the need to limit disclosure, and only consider entering if you have adequately protected your idea. Don’t file a patent application prematurely simply to enter a competition (see Project 5).

Aside from publicity arising out of a competition win, be very wary of any offer of media publicity. TV is particularly risky, except perhaps as a last-ditch attempt to generate interest when everything else has failed. No matter what anyone tells you to get your co-operation, the priority will be to entertain an audience rather than do you any favours. Pull out if you’re being set up as a wacky inventor or if you think key benefits of your idea are being misrepresented or ignored, as invention is definitely an area where not all publicity is good publicity. (Through sloppy editing, a regional TV programme made a hash of one inventor’s product, missing its main benefits and focusing on things it didn’t do. The inventor estimated that those two or three minutes lost him over a year’s sales.)

Project 7 Checklist

The following checklist is partly an action planner and partly a reminder of what matters. If you’re tempted to think ‘I don’t need to do all this stuff’, it may help to point out that we’ve modeled the checklist on questions professionals are very likely to ask if you want their advice, support or money. We therefore have to be stern and say that if you aim to be a respected and successful inventor, you can’t afford to duck any of it.

Your team:

Identify the people in your team, indicating what each will do.
State how each will be rewarded for their involvement.
List other resources available to you or members of your team.
If you don’t want a team, explain how you’ll cope alone with all the different aspects of exploiting your invention.
Identify skills and resources that you’ll need but don’t have. What are you going to do about them?

Funding:

How much external funding will you need, and what for?
Provide evidence to show that your figures are realistic.
Find out which sources of public sector funding you might be eligible for.
Find out which sources of private sector investment might be available to you.
State how you’ll reduce risk to investors.
If you need income replacement, justify it.
Plan how far you can cut costs if offered less funding than you want.

Remember:

You’re now entering an environment where inventions per se cut no ice. You must offer a well-managed business venture leading to high profit for relatively low risk.

Next Project...

PROJECT 8

Business or project plan

Producing one isn’t many people’s idea of fun, but there are some things you just can’t do without.

View Project 8

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