Finding Investors

Sourcing Initial Funding For Your Idea

"Can you help me find an investor for my idea?"

You'd be astonished at how often we hear questions about finding funding in our line of work. It's usually asked just after the inventor has done just enough scribbling to convince himself that he has solved one of the world's most pressing problems.

He might have. But...

There's an expectation by many entrepreneurs that if they create and patent what they believe to be a great idea, investors and customers will come knocking at their doors. Many are clearly surprised when they discover this isn't the case.

Creatives will spend months working on designs, perhaps prototyping them, creating the drawings and material needed to apply for a patent. They'll pour thousands of hours and thousands of dollars into the project -- all this without really understanding that all those hours and all those dollars are being leveraged at the wrong time!

Take a Tip from the Skunkworks

Look at the way product development is done in a large company: Someone observes an opportunity, gets an idea about it. The first thing that happens is an investigation of the opportunity, the initial inquiry that goes on prior to the first decision of whether to spend more time developing the idea.

Such projects are often launched as "skunkworks." One or two workers -- let's call them Mike and David -- have an idea and, after doing some initial inquiry, they present it to a manager. The manager, if the idea piques his interest, might say, "I'll tell you what. You're welcome to use our resources here to spend a couple of weeks on this, so long as you get the rest of your work done on time. Come back to me with a report on why you think it's the right thing to do."

You could think of this stage as self-funding.

Two weeks later, Mike and David come back with a positive report. If the manager is impressed, it's likely they'll make a simple presentation to the department Director. If the Director likes the idea, what often happens is that the two aspiring entrepreneurs are given the go-ahead to do some further development on company time.

Think of this stage as early angel funding.

You can see where this leads. If an idea turns out to be really good, the Director will end up presenting the idea to an executive team whose responsibility it is to approve projects. If the executives give the go-ahead, a full-scale project is launched and our erstwhile inventors have just received their first round of venture funding.

It works no differently for the independent entrepreneur.

The All-Important Initial Inquiry

The initial inquiry is all about assessing the opportunity. There is a mile-wide chasm between thinking an opportunity exists and the fact of its existence. If there is an opportunity, how big is it? How many people would be affected by a product that addresses this opportunity? Are there any other products or services out there that address the same opportunity? How successful are they? What is unique about them, and can you identify areas in which your own product could achieve an edge?

And so on. As you can see, the process of inquiry goes along for quite some time. At some point, the entrepreneur may gather enough information to achieve a level of informed confidence that constitutes a green light for further development.

Development that is funded by themselves, by supportive family members, and by interested friends.

We have seen a variety of ways in which entrepreneurs have obtained initial funding:

  • Savings accounts 
  • Credit cards 
  • Lines of equity credit on their homes 
  • Personal loans from friends through promissory note

Our experience with one of our startup clients is a perfect example of creative self-financing. The two engineers who founded the company funded initial development themselves, and as they worked their way through development were able to attract money from angel investors as the proof of their idea's viability became clearer and stronger over time.

The Turning Point

At some point in an idea's development, the entrepreneur must obtain more funding to continue. That point usually occurs when the concept has gone through a certain amount of validation and is ready for primetime.

Certain types of products lend themselves to the process of bootstrapping: The entrepreneur manufacturers a number of units and offers them for sale. This simple market test both identifies the strength of demand and generates revenue that can be used to manufacture more product.

Other types of products require larger outlays of working capital. At that point, the entrepreneur -- armed with the results of research, confidence, and a often a prototype -- seeks out angels with deeper pockets, an investment banker, or a venture capitalist.

One must have done the initial inquiry deeply enough to be able to present a compelling argument to a potential investor. That means doing an extensive market study, quantifying the market size, understanding the competition, and qualifying the ideal customers.

It is a lot of work, to be sure. And it is not as simple as walking up to investors and getting them to believe in what you're doing. That will not happen until you have done some due diligence on your part. The fact is, if you are not confident enough in your idea to take financial risk yourself, how can you expect an outsider to do so?

Belief and Determination Make It All Happen

When you believe in an idea, when you have mounting evidence that supports it, you will find the personal resources necessary to make it a reality. But you must do the up-front work yourself. There is no magic angel, no substitute for self-funding.

And that seems right. Without our own passionate devotion to our ideas, they can gather no momentum. Ideas without momentum go nowhere.

But ideas with a head of steam can build their own tracks.

Michael Knowles works with entrepreneurs and growing businesses who are struggling to bring new products to market.

To Anyhoodles Home from Finding Investors  .  More Small Business and Entrepreneurs Tools