Businesses across all industries are tasked not only with the need to be innovative, but also with finding the funds to fuel innovation. Deciding on the type of investment as well as the investor are both key factors in evolving a company through innovation.
On the other side of the equation, investors need to decide what makes the innovation worthy of investment and how to disperse funds to support it.
Here are some ways for both the investor and the investee to support and fund innovation within a company.
Securing funding as an investee
Company leaders must be creative in finding ways to secure funding from a variety of sources. To fund innovation in business, regardless of the company’s age, consider reaching out to venture capital investors, accepting crowdfunding opportunities or asking for small business loans.
But be aware, “How you choose to fund your business could affect how you structure and run it thereafter,” according to an article from the Small Business Administration.
To secure venture capital funding, the SBA recommends executing a five-step plan: find an investor, share the business’ plan of operation or innovation initiatives, go through a due diligence review, work out the terms and finalize an investment.
Be sure to vet any venture capital firm willing to invest and make sure the business’ needs align with the investors. Be aware also that venture investments will likely come in rounds, with adjustments in price as the firm executes its contract, according to the article.
Crowdfunding may be the best option if a company is willing to sacrifice product in exchange for a relatively low-risk investment. Crowdfunders often expect a gift from the company rather than a share of the company’s ownership in exchange for their investment.
“Not only do you get to retain full control of your company, but if your plan fails, you’re typically under no obligation to repay your crowdfunders,” the article said.
Another option is to secure a small business loan. Before requesting a loan, however, be sure to prepare a business plan, expense sheet and financial projections for the next five years.
Understanding the trade-offs
When investing in new technologies, leaders must consider the trade-off that comes with substantial capital investment. When accepting outside investment to fund innovation, investors may require the innovator to give up some amount of control while being pressured for quick returns, according to an article from Forbes.
“Traditional bank loans offer stability but may lack the flexibility required for a potentially high-risk tech venture with the covenants that need to be maintained,” the article said.
Investors’ how-to
On the investment side, a company interested in funding innovation should be open to new ideas, make the funding flexible, apply rigor to its investee, manage risks appropriately and plan for success, according to an article from the Global Innovation Fund.
Working across multiple sectors and geographies allows a company to remain open to new solutions, the article said.
Diversifying the locations in which a company chooses to fund innovation could open up a new sector – industry-wise and geographically – of investing for a company looking to give.
“Too often, promising ideas falter for lack of funding,” the article said.
GIF calls this the “missing middle,” or the lack of support for ideas that are past the pilot stage and supported by many incubators and accelerators, but still too small to attract federal-level grants. To combat this, investors should make funding flexible to accommodate all calibers of innovation.
While recognizing that the evidence available for new innovation is challenging, GIF suggests applying rigor to its clients to estimate the impact of an investment early.
“Where direct evidence is limited, draw upon other sources like data collected by innovators,” according to GIF.
Managing risks rather than avoiding them is essential when choosing to invest. Find comfort in having a few projects that succeed spectacularly rather than several that are less ambitious and rarely fail.
“Invest in data collection and evaluations so pilots can generate useful information even when they fail,” the article said.
Lastly, plan for success by appropriately scaling the needs of the investee and facilitating proper partnerships to achieve optimal impact on the investment.
“Prioritize local partners, strong communication plans and early investments in developing scaling plans,” the GIF article says.
