Real World Money Options: Crowdfunding for Inventors

By R.P. Burrasca
September 18, 2018 (Reprinted from The Inventor Lady website, September 11, 2018)

Successful inventors know that it takes money to bring an invention to market. So, if you want to ensure that your invention is unique, want to get a patent to protect it from infringement by others, create a prototype from which production-run quantities of the invention can be developed, attend a trade show and, hopefully, eventually license your invention to a company that will manufacture it, distribute it, sell it and send you a check, you need to figure out how to come up with the financing, or otherwise secure funds, to realize your plans.

Traditionally, as an independent inventor you are most likely, in the beginning, to rely on your own savings and other assets, as well as money from family, friends and “other fools” (commonly referred to as the “3F’s”) to secure the funding you’ll need to finance the various stages of the inventing process. Assuming all goes well, at a later stage you might consider bringing in independent third parties, such as venture capitalists and angel investors, as equity partners to help fund whatever you are unable to finance out of your own funds and out of the funds provided by the 3F’s. Further on, you might consider applying for a loan or line or credit from a bank or other lender.

While there are other sources of financing as well for businesses, when it comes to individual inventors those sources are much more circumscribed. There may be inventory financing plans for those who already have an ongoing business and whose cash flow needs have overtaken their ability to fund those needs out of current cash flows. There’s accounts receivable financing for those who have significant accounts receivable from extremely reliable and credit-worthy customers. However, for the independent inventor who is in the process of just, first putting their “product” (i.e., the invention) together, none of those alternatives are available.

However, there is new hope for the independent inventor when it comes to financing his or her invention. Now, for the first time in nearly 100 years, there is another alternative to consider: attracting small investments from dozens, hundreds or even thousands of individuals through a process called “crowdfunding”. Since 2005, when the first “crowdfunding platform”, Kiva, debuted, crowdfunding has become an important source of funding for all those entrepreneurs and social cause promoters who, in prior times, were without the resources necessary to push their plans and programs forward. With online services like GoFundMe, Kickstarter or Indiegogo, these individuals can place their funding requests, for the first time, in front of thousands and, perhaps, even millions of potential investors.

On a global level, crowdfunding has increased dramatically over the past decade. For example, in 2014, crowdfunding worldwide expanded to $16.2 billion raised, up from $6.1 billion in 2013, and, again, more than doubled in 2015 to nearly $35 billion. The World Bank commissioned a study in 2015 which indicated their believe that crowdfunding would grow to a $95 billion industry by 20125. However, even they have been shy of the mark. In March of 2016, Goldman Sachs, the illustrious investment bank and source of reliable, indisputable financial information over the past 100 years indicated that of the four “horsemen” of what they called the “socialization of finance”, crowdfunding alone would be responsible for a $1.2 trillion dollar theft of market share from traditional financing sources over the next decade.

Pros and cons of crowdfunding

While one of the attractions of crowdfunding is the fact that your appeal lies directly to the “crowd” and that there are no gatekeepers between you and your intended customer or investor base, crowdfunding is neither simple nor easy. Those who approach crowdfunding thinking it’s “free money” or that you merely “build it, and they’ll come” will find, at the end of the day, that they are sadly mistaken.

However, while crowdfunding is not easy, it is relatively straightforward: cultivate, assemble and bring to your crowdfunding an enthusiastic crowd and you will be successful. Depending on the type of crowdfunding campaign you’re contemplating (with investment-based, both equity and debt, being more complicated than “pure donation” or “rewards” based crowdfunding), because you are asking for relatively small individual investments, you generally won’t have to prepare, before you’re allowed to “pitch” your idea, the dreaded, overly long, business plans that so many small business development centers, professional business consultants and traditional commercial banks insist upon and which, as a general rule, infrequently produce the type of success which the purveyors of such services promise.

Another plus is that, as a general rule, even with equity crowdfunding, you won’t have to give up the large percentage share of ownership in return for funding that private equity will typically require. You can repay your investors with a share of the profits from a successful crowdfunding campaign. Crowdfunding also lets you move forward with your plans without the financial burden of paying back a bank loan.

Since there is no guarantee that crowdfunding will generate the level of funds necessary for you to move your invention to the next step, in conducting their campaigns many individuals in the past have preferred to configure their campaigns as “all or nothing” campaigns. By doing so, this ensures that if the total falls short, the campaign creator is not required to move forward with the promised next step, but rather the funds are returned to the donors or investors and the campaign creator is free to either start over again or abandon any attempt to create a second, more successful campaign.

An important consideration in the crowdfunding space is that when it comes to both “product pre-sale” campaigns, as well as campaigns where the sale of equity is being proposed, many investors are attracted to innovative brands, technologies and business models.

Crowdfunding is proving itself to be an important alternative source of financing for small, mid-size and large online businesses. It can also be used successfully to fund innovative and exciting new technology and other inventions. Before you reach out to a bank, or a new partner to supply your funding needs, take a close look at crowdfunding to see if this new source of capital can help you achieve your inventing dreams.

The author is the founder and principal organizer for Colorado Crowdfunding (www.coloradocrowdfunding.org) and managing director or Windom Peaks Capital, LLC, (www.windompeaks.com), a small investment-banking boutique located in Denver, Colorado.

For a presentation on the real world options available for startup entrepreneurs and independent inventors, take a look at the author’s powerpoint presentation on the subject, which you can find here: https://tinyurl.com/y9pjy8pk

 

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As an independent merchant banking firm expert in bringing buyers and sellers together for equity, mezzanine and debt structured investments, mergers, acquisitions and divestitures, we turn challenges into opportunities. We serve the seed stage, early stage and middle markets, where companies typically lack adequate professional representation and access to the resources critical to achieving their goals when buying, selling or growing businesses.