Four ways to fund your product idea

Four ways to fund your product idea

From design to prototyping and marketing, taking your product from an idea to reality is not cheap – and that shouldn’t come as a surprise. Great companies spend anywhere from tens of thousands to millions developing their products and bringing them to market. Unfortunately, for a lone entrepreneur or small team, affording the costs of product development is not so easy.

If you have a great product idea but don’t have the funds on hand to start developing it, here are four ways you can raise funding to move forward. But first, by way of introduction, I’ve worked with hundreds of clients across a range of different industries, many of whom have had to raise money to invest in their ideas. I’ve also raised over half a million pounds myself to launch my own product. Funding your product idea can be split down into the following four categories.

Grant funding

The first way to fund your product idea is through grant funding. No doubt grant funding sounds like a fantastic idea if you’re limited on money and want to get developing, but grants are extremely difficult to win and you’ll have a lot of competition. Most of Britain’s funding is done through an organisation called Innovate UK, who are the government’s leading provider for investment into new and risky technologies. 

The grant funding Innovate UK offers is up to half a million pounds, so it isn’t a bad idea to apply if you’re eligible since that money is useful to have in the early stages. The application process is fairly extensive, and you’ll need to provide a strong case for your business. However, do bear in mind that it’s extremely difficult to win a grant from Innovate UK so you shouldn’t bet all your product development hopes on getting funding this way. 

We’ve been through the grant process with four or five of our clients and none of them have been successful yet. This is because the product development grant space is very competitive. Innovate UK usually awards grants to very niche and specific technologies, for example sustainable energy. You’ll be competing against many other companies and shouldn’t depend entirely on grant funding to get your idea off the ground. 

Smaller, local grants are however easier to win and definitely a viable option if you’re just trying to build some momentum at the beginning. For example, we are currently working with a client who won a £50,000 grant from a small local fund. We recommend visiting your local growth hubs, talking to your chamber of commerce and doing a general Google search for product development grants in your industry or area. 

There are often many industry-specific grants for particular product sectors that might be worth looking into. Let’s say you’re planning to develop something in the oil and gas industry. You’d want to research development grants for oil and gas technologies and see if you’re eligible for any of them. 

We’d always recommend doing as much initial development as possible before applying for a grant, though. To give yourself the best possible chance of winning a grant, you have to answer a lot of the application questions in detail. Initial development will let you know how much it’ll cost to compete in your market, what use cases there are for your product, what your unit cost and profit margin might look like, and what kinds of challenges you may encounter along the way. 

If you’re unsure what steps to take to set your product development off on the right foot, we put together a free Project Starter Bundle explaining everything you need to know. You can download it here. [link]

Investment

Selling equity is how a large number of startups get off the ground and take their products to market, and it’s a sensible option for you to consider too. Investment is where you give up a percentage share of your future revenue and business in return for an injection of capital that’ll allow you to take your idea forward. What usually happens in the early stages is a company will offer a large cut of their company for a relatively small amount of funding early on, but as their product development advances and they grow, they’ll sell a smaller amount of equity for a relatively larger injection of funding. 

Obviously early on in your development you will face some challenges convincing investors to take a risk with your company. There are of course angel investors who will put money into very new startups, but for most companies a good bet in the beginning is to get investment from friends and family. Once you’ve developed your product a bit further and have proven its marketability, you may find success pitching to investor groups and angel investors who would be prepared to back you. 

It’s absolutely critical in this stage that you sort out your pitch to make yourself appealing to investors. You’ll want to properly form your company, put together a foolproof business plan and investigate the commercial viability of your idea. Investors want to see that you’ve evaluated the risk of your business, so research and analysis is vital early on. 

To make yourself more attractive to investors, it’s worth signing up to the government’s Seed Enterprise Investment Scheme (SEIS). This reduces the risk for early stage investors by providing tax relief. For example if an investor puts £50,000 into your company and you go under, they can offset about £25,000 of their loss against future tax liability. 

Of course signing up to the SEIS is just one thing you can do to build credibility for your company, and it’s super important you do whatever you can to strengthen your pitch, reduce investor risk and prove the commercial viability of your product. 

Crowdfunding

Although crowdfunding has always been an option for product developers, it has been on the rise recently making it increasingly easy for people to fund and invest in new and exciting product ideas. 

Crowdfunding doesn’t require you to speak to banks or investors face to face, and it’s possible to raise a lot of money quickly with little stress. However, it’s also possible to start a crowdfunding campaign and get nowhere, or put a lot of work into marketing it and achieve limited funding. So, it’s important to know what you’re getting into.

Crowdfunding can be broken down into two types. The first is based on equity selling, where you’re giving up a percentage stake in your business for capital. Platforms like Crowdcube allow you to sell small pieces of equity to a big number of micro-investors rather than a few larger backers. For example, each person might pitch in £500-1000 for a small stake in your business, and you’d get dozens of micro-investors to buy equity. If you raise money and the business eventually goes south, no individual will be losing a huge amount of money, which is advantageous to convincing people to invest in your idea.

Of course, platforms like Crowdcube have an entry process and you’ll need to have built a functional prototype first. A video demonstrating your prototype helps, as well as forecasts for future revenue, an idea of unit cost and what your marketing plans are. There’s a barrier to entry to raising money through equity crowdfunding, albeit not as daunting as pitching to macro investors. 

The other model of crowdfunding is through pre-orders and donations. Kickstarter is perhaps the best-known example. Customers pay a discounted rate to place pre-orders on a product you haven’t brought to market yet, and that money allows you to move forward with development and bring your idea to fruition. If you can sell enough pre-orders, you will put your first batch into production and then ship the products out to your Kickstarter customers. 

People may not be buying equity and putting their savings on the line with pre-order crowdfunding, but they are taking the risk that you may not finish your product. This is why you should offer a discounted rate for your product to entice customers to support you. 

Platforms like Kickstarter are very attractive to product developers who need to raise money, but the requirements to be successful are often fairly high. 

You’ll need a functioning, good-looking prototype and must be able to demonstrate it in a video to build trust with potential customers. Additionally, you’ll need to have an idea of unit cost and profit margins so you can price your pre-orders appropriately. It’s also not wise to launch your crowdfunding campaign too early, or your backers will get impatient when you’re not finishing your product. 

Although you need to have made some significant progress in product development to launch a successful crowdfunding campaign, it can be a useful tool if you have a prototype but can’t afford the high tooling/manufacturing costs. 

Loan capital

Finally, you can raise money to develop your product by taking out a loan. Although this method can provide you with a guaranteed influx of capital, we’d generally recommend you never fund your project through loan capital. Eventually you’ll need to pay back those loans and the interest on top, and this can place a big financial burden on your company when it’s growing. Investors also don’t like startups that have outstanding loans, which might make it difficult to get investment as you grow.

Funding your product development can be a challenging and intricate process, and some inventors never manage to launch their products due to financial limitations. We recommend you use a combination of the above methods to raise capital, with the exception of loan capital simply due to the risk and financial burden. 

Validating your product idea, building a first prototype and landing some sales are also major challenges you’ll face when bringing an invention to market. For first time product developers, this can be very daunting. D2M helps you turn your concept into a reality, from designing to getting user feedback, finding manufacturers and getting your product put in stores. We take the hassle out of product development. Contact us to find out more here.

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