Introduction

In this book I will explain how to find the money necessary to empower your dream. The challenge of acquiring financial sponsorship for your great idea can be broken into three questions:

• How much money do you need to successfully commercialize your invention?
• How do you locate people willing to lend money for or invest money in your invention's potential?
• What are the objectives of the lenders and investors, and how can you meet them?

Throughout this book I will address these questions, but always keep in mind that no one—neither investor nor customers—will seek you out. Thomas Watson, the man who created IBM, once said, "IBM products are sold, not bought." This book will show you how to "sell" your invention and hopefully make the journey from idea to commercialization pleasant and rewarding.

You may find the path to successful inventing discouraging at times. Not every invention story has a happy ending. I say this based on my years of experience, observation, teaching, and writing in this field. In general, I am an optimist, and I consider myself successful as an inventor with many patents.

In the end, I think that you will feel good about what I have told you—encouraged to go on and create. And hopefully you will find support, both moral and financial, and even make money if that is your objective.

This chapter is devoted to the first step: familiarizing yourself with the sources of potential income, or what I call the money hierarchy.

Let's start the process by visualizing the sources of money utilized by inventors as a hierarchy—that is, a succession of steps with you starting solo at the bottom, and working your way upwards (See Illustration 1, below). You may not need to progress far to reach success. For example, inventors who license an invention (inventors-for-royalties) commonly stop after the first or second step in the hierarchy.

It's also likely that you won't need all the types of financing. For example, few inventors progress to the public offering stage, and some inventors manufacture a product and bring it to market (I'll call these "entrepreneurial inventors") with the help of a single investor (which I sometimes refer to as "angel investors.")

The principle underlying the money hierarchy is clear: Products evolve from inventions; inventions evolve from ideas; and each stage of evolution is increasingly expensive. Each of the steps and forms of financing, below, is discussed in detail later in this book.

Money Hierarchy Chart omitted for online sample chapter.

Gas Money [$500 to $1,250]

Most of the terminology I use—for example, seed money, angel finance, and venture capital—is well-known among those seeking finance. I created the term "gas money" as my way of saying that you will need "fuel" to drive to the "seed store" (or maybe several seed stores, because the first few may refuse your business).

You'll use gas money primarily to pay for a marketability study to determine the likelihood of commercial success and for a patent search to determine the likelihood of qualifying for a patent. You should not skip the marketability study; it may convince you to stop working on one invention and start on something new, thereby saving you thousands of dollars. The source for gas money is commonly your personal finances.

Seed Money [$7,000 to $15,000]

Seed money is commonly used to design your future product, make a prototype, and protect the invention with a utility patent. Be prepared; the prototype expenses may balloon if your invention is complicated—for example, an electromechanical device prototype may exceed $35,000. Sometimes seed money is also used to create a business entity—for example, to form a corporation—that will own the invention and will solicit investors. The source for seed money is either your personal finance or loans or investments from friends and family.

Angel Finance [$25,000 to $1,000,000]

Angel financing refers to private financing, specifically individuals willing to finance speculative ventures with higher-than-usual risk. (The term "angel" originated on Broadway to cover investors in stage shows, which are almost always high-risk ventures.)

Angel finance is often used to finance the design of the product—that is, its appearance, function, and design for economic manufacturing—and to obtain more patent protection if possible. Angels may also finance the protection and exploitation of a trademark—the name or logo that signifies your invention or business—or they may underwrite initial production and marketing expenses.

Many angels have started or bought into businesses, built them to a high level of success, and sold them to a larger corporation or "taken them public" (transformed them to a corporation having stock that can be publicly traded) and cashed out. Others are talented retired executives who want to "stay in the game." Usually, they become directly or indirectly involved in the management of your venture and help to drive it towards success.

Venture Capital and Bank Loans [$50,000 to $10,000,000]

Venture capital and bank loans are used for many entrepreneurial purposes, commonly to expand marketing efforts, increase production, expand product lines, and increase territory. Institutional investment is also used to prepare for the initial public offering.

I have grouped venture capital and bank loans together because they represent institutional lenders and investors rather than the private financing of angels, friends, or family. An entrepreneurial inventor may use one or both of these sources of institutional finance to take the fledgling business to full national and international marketing, add to the product line, and possibly finance the IPO (initial public offering of stock). In cases of both venture capital and bank loans, an experienced business team must be in place either to attract the investment or as a condition of the institutional funding.

There are obvious dissimilarities between bank loans and venture capital. Acquiring bank loans requires credit history, business experience, and some source of collateral to guarantee the loan. Venture capital—cash investments from investment companies—is granted selectively and is more likely to go to businesses based on patented technology products or methods.

Initial Public Offerings (IPOs) [$1,000,000 and above]

IPOs are legendary for making millionaires out of company secretaries, but they're also difficult to achieve and are probably used by only a small fraction of those who acquire a patent. An IPO is a company's first sale of stock to the public and is also referred to as "going public." As a result of an IPO, a company receives a large cash infusion and is listed on a stock exchange, and the public may buy and sell shares of the company.