Dealing with the “money side of things” is often one of the greatest challenges that technology startups face, particularly if your background is in government, academia, or even if you have worked in a large company, where you got a regular paycheck with all the trimmings. You have probably been much more interested in your technology per se than in the potential to earn money from it, but your decision to commercialize means that you know or at least think that there is a market for what you have created. But funding technology startups isn’t mysterious – it’s all about understanding your options and the risks involved with each of them.
Your first challenge is to create a believable financial plan, and I’ll write more about the specifics of how to do that in a future post. For today, I want to look at what happens next – after you’ve created the plan and convinced yourself that your idea is a potential financial winner. How do you get money for that period of time between deciding to go commercial and being profitable?
The available funding options for technology businesses are:
- Your pocket
- Federal grants, and Small Business Innovation Research (SBIR) grants in particular
- Debt, backed by your own credit rating and secured by you
- Friends and family (a special category of angel investors, also known as “Friends, Family, and Fools”)
- Angel investors
- Venture capitalists
A successful business is likely going to use many of these during its journey from birth through to success. What works for your business’ size and stage today will probably not work tomorrow. So let’s take a look at each of these options and strategies, what stage they are appropriate for, and what the risks are for each of them.
Funding a Startup From Personal Funds: The reality is that everyone starts from here. But… the very earliest days of a business are the only time you should be doing this.
What types of expenses will be funded out of pocket? You will have some expenses even in the very early days of thinking about creating a business. These expenses might include getting a legal consultation (if you have intellectual property that needs to be secured), help creating your business roadmap or your financial plan, purchasing a domain name, perhaps creating a website, taking a course or two, and so.
The risks of this spending are clear – at this time you really have no solid ground for knowing how the business will do. Now is the time to learn to control spending – a habit that will be the key to your long-term success. Decide on a budget that you are willing and able to invest in yourself, and then stick to it.
If your technology is a fairly simple app or a database-driven SaaS solution, you may be able to fund the entire venture out of pocket, or at least get it to a point that you will be able to secure funding to grow the business or venture.
Be realistic, however, whatever your situation. To the best of your ability, figure out what the “pre-business” (the seed stage according to my Business Growth Stage taxonomy) costs are likely to be before you have funding from some other source. Creating a budget that has no basis in reality is likely to end in the budget being used up before you get there.
Using Federal Grants to Fund Your Technology Startup: This is where any serious technology business should first look for funding! These are grants – free money – that you don’t have to pay back – to help you get started. It’s not a joke or a myth. Small Business Innovation Research (SBIR) grants are appropriate for new technologies that have commercial potential. If you’re looking to fund a technology startup, SBIR is where you should start.
It’s true that not every software business fits into the SBIR mold. For example, many interesting Software as a Service ideas have tremendous commercial potential, but they are really just clever database manipulation. SBIR would be looking for deeper levels of innovation – computationally intensive software that solves a problem, or new technology for wind turbines, for example.
One strong area of SBIR potential is licensing software that was created within a government lab and turning it into a commercial entity. For example, I just met someone yesterday who had started with a command-line driven piece of software that solved very technically challenging problems for using natural lighting in buildings, and then used SBIR funding to create an interface that architects could understand. That particular company was funded through the Dept. of Energy SBIR program.
My “flagship” client, HOMER Energy, went down a similar path. They began with a piece of software that was created at the National Renewable Energy Laboratory, and have been very successful creating commercial products from that. Their only external funding to date has been a National Science Foundation SBIR grant.
There is a National SBIR Conference happening in Washington in May of this year – go check it out now! It looks like an amazing opportunity to have face-to-face contact with all the various agencies involved in the SBIR program, who are looking for the best and the brightest. Even if it’s not possible to attend the conference, serious technologists should make their fingers and eyeballs run over to the official SBIR website at SBIR.gov.
This post is getting a bit long, so I’ll split it into multiples. Keep your eyes peeled for Part 2 – where we look at debt, friends and family, and more. If you want to be notified about future posts, make a comment below and subscribe to responses. I’ll write a response when the new content on funding technology startups is available, so you don’t have to miss a thing.