Financing Innovation

Significant investments are necessary to turn an idea into a usable patent or even a saleable product. Not every inventor has the financial resources to do so. In this article you will find information about financing options.

Basically, there are four different possibilities for financing:

1. own resources: the inventors finance all activities from their own resources.

2. investors: give money and receive shares in the invention/company in return

3. bank loan: a financial institution gives money as a loan

4. convertible loan: investors give money as a loan with the option to convert this into shares in the company/invention in the future.

Financing exclusively through own equity has the advantage that all future profit belongs to the inventors. In addition, the money is available at short notice (if available). However, the disadvantage is that the entire risk is borne by the inventors alone and the financial requirements cannot be accurately estimated at the beginning. From experience, it is known that the financial requirements are usually greater than expected.

In the case of financing via investors, the need for own funds from the inventors is less. In addition, no guarantees have to be given by the inventors (the investors bear the risk). However, the disadvantage is that especially in the early stages of a startup, financing with investors is complex and requires a lot of preparation on a detailed business plan. In addition, investors will demand a say and the founders are therefore no longer free to decide on the exploitation of their invention. Empirical studies also show that the profits of the inventors/founders are often small at the time of exploitation.

Financing by banks seems obvious. These will give a loan after detailed examination, which must be paid back after a term. During the term of a loan, interest is due. This variant has the advantage that the possible profit is only slightly reduced (interest costs) and the financing for the inventors is smaller. However, this variant also requires a detailed business plan, which is often very difficult in the early stages of a startup. In addition, banks often require collateral, which can often only be covered by the inventors' private assets. Thus, the inventors take a considerable financial risk.

Another possibility is financing through a so-called convertible loan. Convertible loans are used by investors in the early stages of a startup to provide them with funds and defer the valuation of the startup to a later date. In essence, a convertible loan is a loan - an investor gives the startup money to build the company. But unlike bank loans, the inventors/founders don't pay back the loan with money. Instead, the original loan amount is converted into equity (shares) at the end of the term. The investor is compensated for taking on the risk either through a discount and/or a cap. This variant relieves the inventors financially. The lenders are not shareholders and will therefore have little influence on the business. This type of financing is suitable for early stages of a startup. The disadvantage is that the possible profit has to be shared with the investor.

Which variant of financing is best suited for your product idea/patent idea cannot be said in general terms. A detailed analysis of the financial needs and the financial possibilities and expectations of the inventors forms a good basis for the decision. However, it should not be forgotten that the three variants with external financing require serious and detailed preliminary work.