As a business counselor at the Small Business Development Center, I advised a variety of inventors – most of whom were just getting started. When I would ask how they planned to finance their new inventions, a common, flippant answer was, “oh, I'll just find an investor.” Really?
A typical new invention has the following characteristics:
- It is a new product with no prior sales history
- Demand for the product is unknown
- Sales volume can be estimated, but is also unknown
An invention is a high-risk item that is unproven in the marketplace is unlikely to be attractive to investors in most cases.
The View From the Investor's Side of the Table
The typical investor is an entrepreneur with a net worth of $1 – $5 million (or more). He or she could invest $50,000 on a worthy project and would be willing to take some risk for a nice potential return on investment (ROI). But, what are the characteristics of a ‘worthy' project?
As shown on Shark Tank, investors prefer to own equity in a growing income-producing business where the investor's capital injection could springboard the business to higher revenues, providing a nice ROI for the investor.
Unfortunately, nothing about a new invention fits into this mold. The invention is all risk – there are no revenues in many cases and; in the early stages, an invention may consume large amounts of capital while producing no financial gain. It may be many months or even years before the invention yields any significant sales, The only certainty is that the invested capital will soon be gone.
A canny investor may, over time, earn about 7 – 10% in the stock market with moderate risk. Furthermore, he might achieve perhaps 15 – 20% ROI by investing in established small businesses with proven sales. Given such options, why would an investor choose instead to risk everything with an unproven, risky invention? The answer is that he wouldn't do that!
Inventor's Reality Check
It is not impossible for an inventor to get financing from an investor, but It is extremely unlikely.
The ideal source of funding for your new invention is your own capital perhaps combined with help from friends and family.
This is why it is always preferable to pursue an invention that is inexpensive to manufacture (ideally $5 or less) and can sell at an attractive retail price to consumers (ideally around $20 – $25). Such products are much easier to bootstrap than items that would cost $10 or more to manufacture.