Friday, March 25, 2011

The Fund Raising Funnel

I spent the earlier part of this spring at the World’s Best Technologies Show in Arlington which highlights technologies from university and government labs moving through the commercialization process. In the session on raising funding the panel provided an interesting perspective on the “funnel” used to describe the fund raising process as follows:

1. Self –fund –80% of the companies do this and it will let you start a company that can grow at 20% a year max.

2. Friends and Family – another source the can generate funding from an emotional investment as well as a financial one.

3. Strategic Partners – sell your product in its early stages (even if it doesn’t fully work) and charge an NRE (non-recurring engineering) fee for it.

4. Angel Groups – there are 300+ of them throughout the USA.

5. Individual investors – sign up the potential investor as a mentor first and then move to the investment stage.

6. Grants – check out which lists all the grants the US government has to offer.

7. Early Stage Venture Capital – There are 75 firms in the US operating today. You can find them on PWC Money Tree

8. License/Royalties—you can generate cash for your startup by licensing the use of it to someone in exchange for a royalty stream. It takes $9M of funded research to create 1 license which will last on average for five years and generate $375K of cash to the licensee.

As an angel investor, one of the first questions put to the entrepreneur is what other sources of funding have your tried and in the future what will you consider. If you haven't put your own money into it, it will be difficult to convince others. If you're building a life science or cleantech product requiring a great deal of capital, then government funding is a must.

Best regards,
Hall T.