EI can advise on the advantages and disadvantages of different sources of funding and support you in putting your idea in front of potential investors and throughout the process of securing their backing. All sources of finance expect something in return. Not for profit funders in the translational space usually expect a clear delivery plan and tangible outputs against the plan. Investors will demand equity in the new company as well as clear plans and deliverables. EI can advise on the advantages and disadvantages of each source and help to put your idea in front of potential investors, supporting you throughout the process of securing their backing. As we add to our successes each year, we broaden the range of investors keen to work with us. Most businesses rely upon multiple sources of funding and finance as they prepare to spin out, grow and scale up. Here is a quick guide the most common sources. Grants and Fellowships Researchers are often quite familiar with grants, and there are variety of grants available to you to help commercialise your idea, both pre- and post-company formation. Some grants are available to universities or companies operating on their own, others allow collaboration, co-development and co-sponsors. Examples of funders that provide grants include UKRI, the Research Councils, learned societies, Innovate UK and Scottish Enterprise. Pros and Cons of Grants and Fellowships Pros Cons You don't have to pay it back Often very competitive with low success rates Long timescales can inhibit company agility You don't lose any equity in your business It can be risky to be too reliant on grants, what if the funding dries up? You might be able to partner and benefit from access to arising IP If the grant programme isn't a good fit, it can be a distraction from your core business Equity investment Equity investment describes the process by which investors put cash into a business, and receive a share of the business in return, becoming partial owners of the business. There are four main types of equity investors: Venture Capitalists: specialise in risk finance and typically seek out high growth potential companies. Their primary driver is money, they are looking for a significant return on their investment. However, there are a growing number of “impact investors” looking for greater responsibility, sustainability and impact, some of whom are willing to accept a reduced return on investment. Corporate Venture Funds: These investors are large businesses willing to invest in innovative startups. They look to both make money and address critical matters of corporate strategy, such as accessing new markets, ideas and technologies. Business Angels: These investors are individuals, often successful in business, who use their own funds to invest in businesses. They often invest in areas of personal interest, to make money, and because it’s tax efficient. They can be very helpful in the early stages of a company. They may invest alone or as part of a syndicate. There is considerable financial risk involved for the business angel, so a significant shareholding in the company will be expected in return. Given that business angels tend to have interests in more than one venture, they are unlikely to want to be heavily involved in the day-to-day running of the company, which may be preferable. High net worth individuals keen to invest can be located through LINC Scotland and the UK Business Angels Association FFF(FF)s – Friends, Fools, Families (Founders, Fans): These investors often show support for the individual as much as the team or the company. They may not be regular investors, and while a return on their investment would be very welcome, FFF(FF)s typically don’t rely on it as their source of income, so they may be open to more risk. Their investments are usually quite modest and at an early -stage of company formation, often before other types of investors are on board. Equity investment rounds are often described in terms of size and/or the maturity of the business: Image Image Pros and Cons of Equity Investment Pros Cons Aside from the money, you often benefit from the investors experience and networks You are selling part of your business You will lose some control of your business Multiple investors may not be aligned (business models, timescales, exit strategies, etc) Investors have a vested interest in making the business a success Some investors are likely focused on the exit strategy Securing and managing equity investors requires lots of time of the CEO and a Chairperson Loans and associated products Borrowing money from a bank is rare at the very earliest stages of a technology spinout: it may be too early to value the company, and banks will often consider it too risky. However, variations on standard loan agreements can give lenders more assurances. Convertible Loans and SAFE Agreements (Simple Agreements for Future Equity) give borrowers access to capital now, before they have a valuation. In return, the lender will receive equity at the next funding round at a discount (usually 20% +/- interest). Pros and Cons of Loans and Associate Products Pros Cons Early access to funds before the company has been valued Loans might not be available to spinouts, or they might have very high interest rates You might keep control and ownership of your business, if you pay back the loan and it doesn't convert to equity in the future You have to pay it back, with interest You might still sell part of your business, and at a discounted rate, if the loan converts to equity in the future Sales revenue and income The sooner you get a product to market, the sooner you can generate income from your first customers. Your “Minimum Viable Product” is the smallest possible feature set that demonstrates the value that you can sell to customers, and it will likely be your first product on the market. Early adopters of your technology may even be willing to pay to develop your first product, before it Is available. Pros and Cons of Sales Revenue and Income Pros Cons You don't lose control or ownership of your company Uncertain Early entry to the market ahead of competitors Reputational risk of launching too early before product is truly ready Requires sales resource: production, sales, marketing, customer support, etc You can also consider what other products, assets and services you could sell to generate income, such as your time and expertise as consultancy, or your intellectual property under license. Other Other sources of potential funding and finance include philanthropy, crowdfunding, prizes and quasi-equity loans. They will each have different demands on the recipient, and you’ll need to weigh up the pros and cons to decide whether they are the right fit at the right time for your business. This article was published on 2024-07-01
