A recently overused phrase connoting inability to raise money is the “valley of death”. It refers to the funding gap between research and revenue, that is product development funding.
There is plenty of funding for research from government agencies and nonprofit organizations. This money usually goes to universities. There is also some applied research money called SBIR (or “Small Business Innovation Research”). While this is supposed to be money for prototyping and early product development, it rarely really is. SBIR money goes to small businesses that have scientists and engineers on their staffs and a senior person with a zippy wowwy resume and some talent for proposal writing. The money usually serves the special interests of the funding agency.
For example, the DOD often issues engineering funding to solve hard problems. The NIH uses the SBIR program as an extension of their research program because for the most part, they have no clue what the word “business” means (or more likely, they are left wingers who hate the word capitalism). Lately, a number of universities have been trying to form programs where their professors, who are good at writing proposals, can set up companies and grab the money and just spend it from their university office. This, of course, is an abuse of government funding. Most of these professors don’t have a clue how to start a venture and probably shouldn’t be doing so.
Later stage companies that have completed products and customers have little problem raising capital. Many of them qualify for loans based on assets. Others will find strategic partners or sell receivables. Venture capitalists like to fund here. They have shied away from true venture investing because their record has been dismal at it since the dot com crash. Who cares? I would not take money from one of these “vulture capitalists” to fund an organization that already makes money. That is akin to allowing someone on the street to pick your pocket.
The “valley of death” is that space between grant funding and a going concern. Government agencies do not fund this. Venture capitalists and bankers are afraid of it. The source of funding for the valley of death today in 2010 is known as “angel investors”. Angel investors refer to individuals who have a net worth over $1M and/or an annual income greater than $200K. Hopefully, they also have some business experience and know what they are doing. Some do. Many don’t (consider, for example, asking your dentist for money to fund your nanotechnology venture - the sale may be made on buzz words).
Lately, it has become popular for groups of these investors to form a dinner club and call it an “angel fund”. Typically they meet once per month and have a few companies present to them. Once in a while, they do a deal. But mostly they eat dinner and drink wine. They are often organized by crusty old men who like to hob nob but who know nothing about technology. If you are an entrepreneur, it is popular to clamor for their attention to get a speaking slot. Sometimes worth while, but often just a ticket to free drinks. Angel groups add unnecessary bureaucracy to the angel investing process, in my opinion.
So then, how do you fund your product company to transition across the valley of death? Two sources: the first is known as FF&F, and the second is the angels themselves. FF&F stands for “friends, family & fools” (as well as your own money). When an entrepreneur takes this kind of money, the probability of success goes up a bit, because the entrepreneur does not want to lose face with these people and he or she will do what it takes to succeed.
The angels themselves may lead to larger investments. Here, you forget the angel groups, eliminate that bureaucracy, and sell the deal directly to the payer. By far the quickest, most effective, and lowest overhead of all the methods. Angel groups are slow and sometimes take management fees. VCs take 20% of the deal, substantially more than they are worth, and they take 9 months to close a deal.
You do need to make sure that you comply with securities law. That almost always means having a good lawyer who knows the securities business (not your family lawyer, this is a very specialized area of the law).
There is money out there for the valley of death and it is with people who have liquid net worth and are willing to risk some of it. But you have to be a convincing salesman to get it. That rules out most professors and inventors who can’t sell. If that is you, then get a business partner. Ventures succeed in teams.
