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Strategies for Funding the Commercialization of an Invention
Among all of these costs, the expense of patenting a product may be most overwhelming, and may seem excessive or deferrable. Note that expenses relating to patents are typically incurred gradually over a period of a few years and often form a necessary part of the expense of running a commercial enterprise. While it may seem tempting to cut corners early in the process, correcting mistakes made in the patenting process can be particularly difficult and expensive, resulting in government and professional reinstatement fees or even the loss of potential patent protection. A good commercialization strategy will almost always include patent protection and a rough assessment of the associated costs. Without patent protection, your investment into your product and business are at risk of being almost instantly undermined by competitors who can offer the same or a similar product to consumers at a lower price. With patent protection, that investment is admittedly greater, but anyone who copies your product is infringing your exclusive right to make, use and sell that product and is liable to you.
While covering these costs can seem like a daunting task, it should not be an insurmountable barrier to pursuing your invention and growing your business. If your idea does turn out to be a market success, you will be able to recuperate those costs and may turn a significant profit, as well as fulfill personal dreams. There are several funding opportunities available to aspiring inventors, many of which are likely accessible to you.
Using personal resources
You may start off by using personal savings and resources. Some advantages to self-funding your invention in the early stages include the ability to retain complete control of the process, to accelerate decision making (by having no one to consult), and to retain any initial revenue from the invention. Some strategies for obtaining personal funds outside of savings could involve applying for personal credit and refinancing or selling assets. Although some may hesitate to take on debt in furtherance of their big idea, the advantages of retaining full ownership of your invention should not be overlooked.
If you are beginning the venture as a partnership with other innovators (for example, several co-founders in a start-up), the personal resources of the other partners can also be used as a starting ground.
While self-funding is the first avenue that you should consider, some may not have enough financial resources to entirely finance a project from personal funds. Do not feel discouraged if that is the case as there are many other viable funding strategies to enable you to bring your idea to life.
Network funding
Another fairly simple way to obtain funding for your invention is to reach out to your personal network. This can include family, friends, coworkers, and anyone else with whom you have a personal relationship who may be interested in helping you build your business. One advantage of asking for such assistance is that it is more likely to be provided despite the absence of, for example, a detailed business plan, or a working prototype. Often this money may be given as a gift or an interest-free loan – terms that are much more favourable than those which may be obtained through private or corporate investment. Another advantage is that personal investors are unlikely to be interested in the actual happenings of your business development and are thus not likely to request a degree of control in return for their funding. As such, they tend to make great initial investors when expediency in decision making is a priority.
Also remember that absent an agreement to maintain confidentiality, disclosing your idea to family and friends may constitute a public disclosure that disqualifies you from patent protection. Therefore, it is useful to file a patent application before speaking with potential inventors or to ask potential investors to sign a non-disclosure agreement before disclosing the details of the invention to them. While broaching the topic of a contract with close connections may seem unnecessary and bring with it some discomfort, it is often better to take the precautions than to create issues around the potential invalidity of your intellectual property rights down the road. It is in your and your investors’ best interests to ensure that the invention you develop is patentable in the future. Further, inadvertent disclosure is not uncommon. A discussion surrounding confidentiality can be helpful to clarify what can and cannot be shared and what the consequences may be for the business.
Private investment/loans
After you have exhausted your personal connections, it will be time to cast a wider net to see if any private investors would be interested in helping you develop your idea. A private investor is not affiliated with any sort of bank, corporate firm or organization that specializes in money lending. Private investors independently select which projects to support.
A private investor is highly unlikely to finance your project without seeing a prototype and hearing a cogent pitch, so it is important to figure out exactly which niche your idea will occupy in the market and how you expect to gain a return on investment. Ultimately, the investor will want to have a clear picture of how their investment will make them money and when. Looking to private investors may be a good option before reaching out to corporate investors or government, as this route is often less formal and does not require the product to be developed in detail.
You can find private investors by exploring both your personal network and industry contacts. At the same time, a private investor should be treated with the full care and caution that you would exercise when pursuing corporate investors. Make sure that a non-disclosure agreement is in place before revealing the specifics of your idea and secure a written contract that clearly stipulates the terms of repayment, business stake (if applicable) and any other expectations that apply to the investment.
Note that private investment typically refers to being granted a sum of money in exchange for a royalty or a share in the business. Private loans on the other hand are, as the phrase suggests, repayable loaned sums which may incur interest at a below-market rate or have other attractive features not typically had by more formal loans from banks, for example.
Government funding
There are a number of government loans and grants available to aspiring inventors. The nature of your invention, your stage of development and your personal circumstances (additional funding is often available to inventors from underrepresented populations like young entrepreneurs, women entrepreneurs, etc.) will determine your eligibility for the different programs available. Other considerations include your city and province of residence, personal income, and whether the invention is being made for commercial or charitable purposes.
Most government funding requires a detailed application, including a prototype and plans for further development. Government grant applications also typically take longer to be processed than applications to banks or corporate investors, so government funding is therefore unlikely to be expedient. Government funding may be a useful avenue to explore after you have determined the details of your project and secured some initial, short-term financing.
We have compiled a list of some government grants and loans that may be available in Canada to inventors that are looking to commercialize their invention. This list is by no means exhaustive and if you do decide to apply for government funding, it is important to check whether other applicable grants or loans may be available to you. A couple of noteworthy sources of funding are available through the Business Development Bank of Canada, including small business loans of up to $100,000 accessible via an online application and a 160M fund (in the form of debt, quasi-equity or equity) for Canadian companies in knowledge-based industries looking to scale and expand.
Business financing
Funding from businesses can encompass a wide range of financial assistance, from applying for corporate loans at the bank to contacting venture capital firms with an investment proposal. This is a more common avenue for obtaining funding but tends to come with more strings attached in terms of interest on the loan and ceding control or equity in the business. For example, an investment may be offered in exchange for a percent stake in the company – this may be nominal or may be as substantial as 50% or more. Parting with equity in your business will impact decision-making and distribution of profits. While it is often possible to recoup equity a later stage, this can be expensive.
There are also some additional considerations to be mindful of when requesting funding that are not relevant to smaller-scale individual investments. These include signing a specific equity agreement that clearly defines timelines and obligations before accepting any funding and creating a repayment strategy. Further, make sure to evaluate the method of compensation requested by the corporate investor and how well it fits with your short and long-term plans (for example, interest versus equity-based compensation).
Corporate financing, particularly through venture capital firms or angel investors, is more often turned to in the middle stages of development, as professional investors are reluctant to invest in undeveloped projects with a high degree of risk. Funding tends to be easier to obtain when your product has already produced some type of tangible result, such as being ordered by wholesalers or having a successful crowdfunding campaign. This tends to hold less true for banks and other professional lending institutions.
Crowdfunding
Crowdfunding has become a very popular option for inventors looking to raise money to bring their project to life. Crowdfunding involves showcasing your product to the public on platforms such as Indiegogo or Kickstarter and setting a fundraising goal to which anyone invested in the product’s commercialization can contribute. If you succeed in reaching your target goal, the funds raised, minus a commission retained by the crowdfunding platform (in the case of Kickstarter, this fee is 5% of the total raised), are released to you. In return for their investment, individuals who contribute to crowdfunding campaigns typically receive the finished product, once available. In almost every case, the amount invested is substantially less than what would be paid to purchase the product once it hits the market. On top of helping you raise money, crowdfunding creates an opportunity to gauge the amount of market interest for your product – if you don’t meet your funding goal, this may be an indication that consumers don’t want to own your product or simply don’t see it’s value as presented.
To successfully crowdfund your project, it is key to have not only a prototype and a functional explanation, but also a creative marketing pitch that will capture imaginations and make consumers feel like your product is worth not only buying but helping develop. Video pitches are a great way to help consumers conceptualize what kind of impact the product could have on their everyday lives.
If you choose to use crowdfunding as an avenue for funding the commercialization of your invention, make sure to protect your invention with intellectual property rights before launching – check out our article on IP considerations particular to crowdfunding for more information. Further, note that you will not receive any of the funds you raise through crowdfunding unless you reach your funding goal, so it's key to not only set a realistic goal but also to make sure that your campaign immediately receives funding so as to get ample attention and exposure. A good way to do this may be through contacting your personal networks and asking them to donate money to the crowdfunding campaign when it starts, as well as sharing it widely across social media and industry channels.
Other sources of funding
The above list of financing avenues is not exhaustive and is meant to serve as a starting point for your budget planning. Depending on the nature of your invention and your business, there may be other funding available on a grant or loan basis. You may become aware of additional options by speaking to other inventors in the industry about their funding sources, exploring local community boards and publications to see if any small-scale funding is available, and, if applicable, contacting alumni networks of your past educational institutions. In addition, you may want to consider reaching out to philanthropic organizations with goals, objectives and missions that are met by your proposed inventions. For example, the Bill & Melinda Gates Foundation has funded over a hundred healthcare related innovations in support of their mission to enable every person access to a healthy and productive life. Another source of funding may come from strategic alliances with organizations that offer complementary technologies or products. These organizations may not only provide you with funding but also access to a range of expertise that could be beneficial for developing and improving the technical aspects of your proposed invention.
When seeking financial aid, it is important to be creative and always keep your goals in mind. While concrete financial assistance may not always be an option, there may be other assistance you can obtain, such as supplies or subsidies to hire employees that could still help bring your invention to market. Make sure to cast a wide net when looking for help, and to not exclude opportunities prematurely.
Conclusion
Bringing an invention from an idea to a consumable and marketable product can be challenging and expensive. Many inventors who do not have the means to self-fund mistakenly believe that this prevents them from pursuing their idea. Thankfully, there are several options available to secure funding, including tapping into personal networks, seeking out private and corporate investors, applying for government assistance and using novel financing strategies such as crowdfunding. Most importantly, having faith in your project will help get others excited and on board with supporting the idea and can be the key to your success.
Ready to discuss protecting your invention to enable subsequent commercialization? Contact us for a confidential and complimentary initial telephone appointment with a member of our team.
