Financing Startup Ventures
Bruce Gjovig, Entrepreneur Coach & Director
UND Center for Innovation

The most common question economic developers hear from entrepreneurs goes something like this, “I have a great idea for this venture, but I need some money to get started, especially those grants I hear about.”

Out of the 800,000 to one million startup ventures launched each year, 8-9000 companies or less than one percent (< 1%) receive grants funds. There are few grants available for startup ventures. Government entities, economic developers, banks and investors are interested in the investment opportunity to create jobs, not giving out grants as often thought. Nearly one in nine (11%) Americans are directly involved in starting a venture either as an entrepreneur or as an investor. So start up financing is a major concern. And our economic future is highly dependent on entrepreneurs and innovators for new products and new jobs. Mature companies do not provide the dynamic new products, services and new jobs our economy needs.

There is one significant grant program for technology entrepreneurs funded by the federal government: the Small Business Innovation Research (SBIR) program that provides over 4,000 awards worth $1.6 billion per year in grants or contracts for R&D. The SBIR program is the single largest source of seed funding in America, but it is very competitive. About 10% of the proposals are funded, i.e. one in ten. This is a small business set-aside to do competitive research to develop new technologies and solutions the federal agencies are interested in advancing. Remember, only 4,000 awards are given nationwide, less than 1% of the startups launched each year. North Dakota companies secure about $2 million each year in SBIR grants. 27 ND companies secured 80 SBIR awards in the last decade. The program is an important source of grant funding, but targeted for tech entrepreneurs. Check www.Innovators.net to tap into the information.

There are also a few other targeted grant programs such as the DOE Inventions & Innovations program that awards 75 grants per year worth $2.2 million (www.eere.energy.gov/inventions); the DOC Advanced Technology Program (www.atp.nist.gov) for larger technology development programs ($60 M); the USDA Rural Business Opportunity Grants; or EDA funds that usually fund economic development infrastructure and not individual companies. Additionally, there are a few of state programs for targeted industries like value-added agriculture through the North Dakota Ag Products Utilization Commission (www.growingnd.com).

The bottom line on grants: There are a limited number of grants to be secured (thus do not believe the late night TV commercials), and most grants go to ventures that develop new technology that is strategic in nature especially in areas where the government is looking to solve a problem. Also remember that funding goes to ventures and entrepreneurs not to invention. Less than 2% of patents issued are commercialized or brought to market, so the risk is high. It is important to remember:

Investors are looking for viable ventures, not inventions. Their goal is a return on investment (American capitalism) not philanthropy.

Financing innovative startups is one of the greatest challenges in helping entrepreneurs and innovators launch new technologies, products and ventures.  When raising startup capital the most common sources from “most likely” to the “most difficult” to secure are:
 
1.       Founder's personal savings
2.       Founder's credit cards
3.       Founder's cash raised by selling assets (boats, hobbies, etc.)
4.       Founder's second mortgage on home
5.       3-Fs: friends, family & fools (also called “love money”)
6.       Vendors, suppliers, other businesses
7.       Commercial bank loans
8.       Private investors or “Angels”
9.       Government grants
10.   Venture capital
 
Most new ventures secure early capital from the first 5 categories. They purchase assets like machinery, equipment and supplies, and pay for other startup costs from savings accounts, selling assets, loans, investments from close friends or family, and from funds drawn against the equity in the family home. Once launched, new firms often use credit cards to cover cash flow while building an income stream from paying customers. This is the art of bootstrapping, i.e. doing more with less.
 
Sometimes new ventures can go to a supplier, vendor or customer who has a good reason to see the venture succeed, and “make a deal” to help cash flow. A common deal is to extend payment terms 30 to 90 days in return for the venture’s exclusive business.  This is a good way to buy time on the front-end of cash flow cycle before customers begin making payments.
 
Commercial banks “rent” money, but only if they think the venture can pay them back.  They require collateral for 80% to 90% of the loan value, and prefer a solid business plan with a 2-year track record and a team leader with good credit. Sometimes an investor may “lend” their good credit for an equity portion of the venture, i.e. co-signing on a loan.  The venture secures a loan that otherwise would be declined, and the investor gets equity while keeping his funds invested elsewhere.
 
Private investors or “angels” are looking for ground-floor investment opportunities.  They are found through referrals among business leaders and other successful entrepreneurs. They often invest as a team, and want a good return on investment like 25-40% or more. A solid business plan is ‘a must’ for this activity, as well as good investment agreements.
 
Then, near the bottom of the list of funding sources are government grants.  At the University of North Dakota (UND) Center for Innovation we often hear this question:  “I have a great idea for this product (or venture).  How can I get one of those government grants I’ve heard about to help get it started?” 
 
One important federal grant program is the Small Business Innovation Research (SBIR) program that provides over 4,600 awards worth $2.1 billion per year in Phase I & II grants/contracts for R&D. SBIR is the single biggest source of seed funding in America, but it is very competitive with about 10% of the proposals being funded.  It is a small business set-aside to do competitive research to develop new technologies that federal agencies are interested in advancing.  Check http://www.Innovators.net to tap into the information on the program or check by topic area at http://www.zyn.com/sbir.
 
Other important grant programs are the DOE Inventions & Innovations program that does about 75 grants per year across the nation, and the US DOC Advanced Technology Program for larger technology development programs.  Bottom line: there is limited grant money to be secured, and most goes to ventures to develop new technology that is strategic in nature – i.e. the government is looking to solve a problem.
 
Finally, venture capital (VC) funding is a possibility, but the most difficult to secure because almost all funding goes into ventures and entrepreneurs not inventions.  In evaluating business plans of ventures and entrepreneurs for investment, VCs fund less than 1% of startups because of their high risk level and amount of effort required to realize gain.  Inventions belong to an even higher risk level and VCs very rarely fund inventions.  Of the tens of thousands of new ideas that receive patents, less than 2% of them are commercialized or brought to market.  The rule: investors are looking for viable ventures, not inventions.
 
There are over 500 Venture Capital funds nationwide with $175 billion under their control. In 2003 they invested $12 billion in 2022 ventures. There was $106 billion invested in 8,200 deals in 2000, but no one is expecting to return to those levels anytime soon. However, less than 10% of those investments were in a early stage companies as VCs prefer fast growth companies that are “later stage.” About 300 early stage companies will benefit from venture capital this year - not many of out of a million.

Entrepreneurs with innovative tech-based startups should assess what financing is available for their new ventures.  Advice:  “know your customer,” that is, know which financing sources are appropriate and a good fit.  As Abraham Lincoln said: “Things may come to those who wait, but only the things left by those who hustle.”  The time is now to hustle for startup financing.

This discussion is not to discourage entrepreneurs, but to encourage realistic assessment of what financing is available for new ventures. Most of the money available is for investment, not grants (think capitalism). Investors are interested in growing ventures with promise of good return from solid leadership and innovation. There are many financing options; so “know your customer.” That is, know which financing source is appropriate and a good fit. The final thought comes from Abraham Lincoln, “Things may come to those who wait, but only the things left by those who hustle.” Time to hustle for some investment.

NOTE:
The UND Center for Innovation was among the nation’s first technology entrepreneur outreach centers. The Center has helped launch more than 400 new products and ventures since it was formed in 1984 and has won four national awards for excellence in innovation and entrepreneurship.  See http://www.innovators.net for more information on entrepreneur funding opportunities.