As an advisor to new business owners, and an occasional angel investor, I see new business proposals daily, many seeking investors to fund early research and development (R&D) of a new product idea. Unfortunately, most entrepreneurs don’t realize that the words “research” and “development” are red flags to investors, and all such proposals are routinely discarded.
Although it may seem counter-intuitive, angel investors and venture capitalists (VCs) are looking for solutions that are already complete, with some real market traction, that need funding to be scaled to a large market, with potential for rapid growth and a large return. Funding new product research and development is just too risky, with a large time delay before any return is likely.
In fact, there are people and organizations amenable to very early stage opportunities, so my advice is target your proposals to the right people to match the stage of your effort. Broadcasting or repeatedly hitting the wrong people is not only is a waste of time, but it kills your credibility with those investors later when you really may need their help. Here are the guidelines I recommend:
- Recruit friends and family at any stage. People who know you, trust you, and believe in you above all else are always candidates for requesting an investment. In the trade, this category of investors is called friends, family and fools (FFF), and is the primary source of funding for entrepreneurs with no prior track record in business or technology.
- Look to academia and the government for basic research. If you are looking to fund a technology study, before any specific commercial product can be considered, you need to focus on relevant large organizations with deep pockets. Sources include government grants, universities, and large enterprises searching for next generation products.
- Find private fund incubators for technology pilots. If you project is more in the applied research stage, ready to solve practical problems, but haven’t yet named a final product, the investment sources should be extended to include large private and public fund initiatives, such as AMA IBM Healthcare or Environmental / CleanTech Projects.
- Explore crowdfunding for the prototype stage. Funding for commercial product prototypes is still R&D in the eyes of most VC investors, but in business areas with large consumer opportunities, this activity will catch the eyes of crowdfunding investors. It’s still considered high risk for investment, since manufacturing and quality issues are likely.
- Target specialized VCs for the certification stage. These days, almost every new product is not deemed scalable until it has been certified as meeting a multitude of quality and agency standards, including the Environmental Protection Agency (EPA) and Food & Drug Administration (FDA) clinical trials. Industry specific VCs may jump in at this stage.
- All professional investors love the scaling stage. Solution development at this stage is the process of scaling up for manufacturing and marketing rollout. The technology is now embodied in a replicable solution, and has been sold to at least one customer. Your fundability with investors now depends on traction and perceived execution capability.
- Reinvest early returns to expand the product line. Even for mature startups, there is always a need for further product development and research to compete and diversify the business, and investors understand this. But to prevent confusion with basic R&D, these costs should never be called out as a major category in your use of funds to investors.
Fortunately, in many attractive business domains, including mobile software, Internet apps and ecommerce, the cost of product development is at an all-time low. Developers are finding powerful tools to build mobile apps and websites for a few thousand, rather than millions of dollars. They don’t need the long research and development cycles of a new technology.
Thus smart entrepreneurs often find personal funding for solution development, and save investor funding pitches for the larger scaling-up marketing costs later. Build solutions, not technology, and don’t waste your time and credibility talking to angels and VCs until you have something of interest to them.