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Funding Sources for Inventors

Updated: Mar 24, 2022

[Note: The below presentation will be delivered to precocious young inventors (under the age of 18) at 5 pm Pacific US time on Saturday, April 23, 2022 who will be gathered together on Zoom through a wonderful program called GIFT. GIFT welcomes clever children tinkerers as well as adult mentors, teachers, and funders. For more information, please see:]

You are talented inventors who have great inventions. You decide that you want additional money to make more products or to sell them or to create a company around them. Where can you secure financing? What do you have to do?

First, think of this analogy: As an inventor, you saw a hole in the market that you could fill with your creation, right? Your invention addresses an existing need or interest. An app. A gadget. A service. A process. Financiers see holes in the market, too. They are interested in companies and products that can fill those holes and make enough profit to repay them for their investment. They often specialize in certain industries or geographic locations. So as you approach sources for money, be attentive to THEIR interests. You will save time and be more successful in securing money if you contact people whose interests align with yours.

Let me outline three sources of money: (1) donors and grantors, (2) investors, and (3) bootstrapping.

Donors and grantors are people and organizations that have charitable orientations. This can also include government grants. A grant is money that supports you and your efforts without requiring a return of their money, as long as your efforts meet their requirements. For example, let’s say that you have designed an app to teach Spanish or Hindi. What sources of funds would be most interested in this? Well, you might approach people and organizations interested in education or languages or particular populations. If you have created a device that helps people with damaged legs, you could approach organizations that focus on healthcare, veterans, elderly, or physical disabilities. Review their websites or email or call to ask if they offer grants. If they do, you will fill out a long application. You may need a demo and prototype, testimonials of users, perhaps a video. You will need to spell out what you will do with money from them, within a period of time. This application process can take several months. To see if the effort is worthwhile, you might contact prior grantees (the people who received money) to learn of their experience with this grantor. They are usually listed on a grant page.

You may also identify organizations or individuals interested in your area of expertise who do not provide grants, but their industry knowledge can be very useful to you. Email and then call to schedule an appointment to speak with someone so you can demonstrate your invention. Many non-profits have someone called a Development Officer who writes grants and approaches donors to secure funds for their organization. They can lead you to others in your industry. Ask for referrals to entities that can provide funding. Also ask if the organization would consider beta testing your device or app. Even if they do not provide you with money, this testing is very valuable. Work with them to have lots of people try it out, give you feedback, write testimonials. These users may suggest that you tweak your invention a bit so it is easier to use or more effective. Collect all this information. At the end of that period, you may have not only a better product, but also the endorsement of a relevant organization and initial, paying clients! This will be impressive when you fill out a future grant or loan application. A second source of funding is from investors. Investors have a different interest. Theirs is to make MORE money by investing SOME money. So they scrutinize many options. If they share your interest in a certain market need, they may be looking at other inventions and companies in that space, too. They do a risk calculation. Which invention looks most likely to earn me money? Which invention is further developed? Which can be sold or licensed for more money than others? Do I know anyone to sell it to? There are basically two types of investment: debt and equity. Debt investment means a loan that you repay with interest. This works best for inventors who have cash flow. Let’s say that you are currently selling 10 widgets per month at a local store. It is very popular. People are asking for more. You estimate that if could get a loan, you could buy more parts, produce more product, and hire a sales person to visit other stores. You calculate that if you can sell 100 per month, these sales will generate enough profit to cover the cost of additional inventory, and the sales person, and the interest payment AND make more money for you to expand further. In such a case, a loan could be a good idea. Just make sure that you do the math first. If with the loan, you hire a bad sales person who cannot sell more than 100 or if you are unable to produce that many products, you will owe money to the lender that you already spent. Not good. Inventors who do not have cash flow can still secure loans with collateral. Collateral is when the inventor owns something of financial value that the investor can take if not repaid on time. For example, the loan amount might be the value of the inventor’s car or jewelry or home. You can see how taking loans requires you to be careful about being sure that you can pay them back on time. Equity investment is when the financiers become partners with you. Inventors or companies that lack cash flow may seek this sort of funding. In exchange for their money, you trade a portion of the company or of future revenues from the invention. In some contracts, they join you as decision makers in the future of the company or the invention. This can be wonderful if they have expertise you need, in, say, finance or sales or marketing. The term for such investors is often “smart money” because they understand what you are doing and how to help that business grow. You gain both money and a team with other resources. Early stage financiers who take a stake in unproven inventions and businesses take a financial risk. Therefore, to offset that risk, they often negotiate a larger portion of the company or future revenues than later stage financiers. Inventors and entrepreneurs often hate this. They are SO SURE that their idea will make money that they resent “giving up” part of the business to others who pay so that the business can go forward. However, look at this from the point of those with the money. They know that a high proportion of startup businesses fail. One investor may put money into 10 small companies, expecting 6 to fail, 2-3 to break even and 1-2 to make money. Without that infusion of early cash, none of those 10 companies could even try to move forward. So early money has value. There are many good, honest people willing to back inventors and small businesses with fair contracts, but there are also others who take advantage. Their target is naïve inventors and entrepreneurs who are so excited that someone offered them money that they do not check the details. If you are early in your career of dealing with financing, make sure of three things: 1) Get the commitment in writing. 2). Read the fine print. 3) Engage some dispassionate and knowledgeable person to review the contract before you sign it. What are the rights of you and the other party? What are your respective responsibilities? Is that what you understood in conversations and emails? The written, signed contract is final. A terrible contract might sneak in provisions that you cannot possibly meet. Two I saw required the companies to meet unrealistic revenue and growth targets within a short period of time in order to get the next cash infusion. If the entrepreneur failed, the financier got the whole company. These financiers are sometimes called “vulture investors.” Another trick is people who pose as investors but they charge you to deliver services before they will, supposedly, finance your business. They are fake. Be as attentive to the money as you are to the details of your invention. The third source of funds for growing your business is bootstrapping. This means that you generate the money yourself. You do not make interest payments to others; you do not share part of your company or revenues with them. Most inventors pursue this route until they have a track record of sales. After that, they have learned a great deal about business, have a better sense of the value of their invention/company, and can negotiate better terms with lenders and equity investors as well as customers. For many business people, whether children or adults, bootstrapping means earning money through some other endeavor, saving that money, and putting it into the invention or new business. This can take years. Let me give you my personal examples. I am not the clever inventor that you all are, but I am a serial entrepreneur. I started money making businesses in Junior High School, when I was 11 years old, saved money to apply to more lucrative businesses that I ran in High School and College. With early money from labor jobs, like cutting yards and shoveling snow, I decided to buy equipment I could own. I chose to buy snow cone and cotton candy machines and supplies to sell those sweets at community and church fairs in the spring/summer/fall. I scrutinized local papers for the dates, contacted the organizers, and split my profits with them. I saved that money. Later, when I could drive, I bought a snow plow to attach to an old truck. In the fall, I went door to door to secure contracts from neighbors to plow their driveways for a certain price every time the snow fell over a certain number of inches. I routinely walked into my 8 am high school math class with lots of money in my pocket after plowing for 4 hours. Now that I could drive, I decided to upgrade from my summer snow cone business. I had a truck. How could I use it? Chicago parking lots suffered from every freeze/ thaw seasonal change. I decided to address that problem. I took the profits from my prior businesses and bought equipment to start an asphalting business. In the fall, I measured cracked parking lots of restaurants and shops. In the winter, I sent out estimates to resurface them. By summer, I had a season of clients lined up to repave their parking lots. Because of the advance contracts, I could estimate how many people to hire. I looked so young that I actually hired a retired sergeant to meet the clients for me and to make sure that they paid. I ran this business through high school and college. In these ways, I bootstrapped several businesses. The money I made as a kid paid the down payment on my first house and started my stock portfolio. Later, I decided that I wanted to learn more about the financial side of business so I earned a MBA degree from Rice University so I could help other business people. As a serial entrepreneur, investment banker, and angel investor, I have enormous respect for inventors and entrepreneurs. All of you are creative and visionary. Those of you who are also practical about money will likely be successful.

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