For many small businesses, the costs of developing their invention to a marketable stage may be one of the largest obstacles. Patenting an invention is an additional obstacle and investment.
Each funding requirement, timing and situation is different. The initial source of capital is typically from one or all of the three “F’s”, the founder (inventor), family, or friends. At some point, the inventor/business may seek the assistance of an angel investor and/or a venture capitalist. Startup incubators may provide a path to venture capital/angel investors. Crowdfunding may also be a source for obtaining funding, particularly for a specific goal, e.g., software development or purchase of equipment. Government grants (SBIRs) may also be a funding source.
Small Business and Startup Incubators
In the Houston area, there are multiple groups that can provide funding assistance to the small startup business. Several of these groups are incubators. The incubator provides desk space, conference rooms, wifi and Internet connections plus an informal and congenial work atmosphere. Additional services may be included such as mentoring from individuals having expertise in support areas, such as financing, accounting, marketing and legal. Perhaps most important, they provide practice venues and coaching for business presentations to funding sources.
Examples of startup business incubators are TMCx, Station Houston, and Canon Ventures. Other groups that provide services are Rice Alliance, Enventure and the MIT Enterprise Forum.
Crowdfunding may be a valuable source of funding to push your startup business to a next level. It may allow you to achieve a specific goal, that may create your business into an attractive operation for angel investors, etc. There are numerous crowdfunding platforms. See “Crowdfunding for Business: What You need to Know” by Erin El Issa and Jackie Zimmermann and “The 15 Best Crowdfunding Sites to Launch Your Business or Product” by Meg Prater.
I recommend crowdfunding be considered when there is a definite goal or purpose and not for general operating funds. You should carefully review the fees and terms that are required. Terms of granting equity must be carefully considered. Be aware that granting equity to numerous non-professional entities may complicate your ability to obtain third party funding from angel investors, etc. It may also hinder you ability to grant licenses to your product or IP.
Small Business Loans
Loans from the Small Business Administrations should be investigated. See https://www.sba.gov/funding-programs/loans/. Other related platforms may be: “Fundera” at https://www.fundera.com/business-loans/; “Kabbage” at https://www.kabbage.com/small-business-loans/; and “Lendio” at https://www.lendio.com/small-business-loans/.
There are also grants available through the federal government. These can be “Small Business Innovative Research Contracts” (SBIRs) and “Small Business Technology Transfer” (STTRs). It is necessary to submit a proposal to qualify for a grant. There are typically rigid requirements or protocols that must be followed to create an acceptable proposal.
It is important to understand and comply with the contractual requirement of an SBIR or STTR award to avoid loss of ownership of the invention or loss of rights to information related to the invention.
Government Acquisition of Rights in IP
SBIR and STTR agreements can impose a challenge. The applicant will want to protect his/her intellectual property. One path is to avoid inserting non essential proprietary IP into the proposal. Any proprietary IP submitted must be accompanied with the specified legend. Proprietary information, including patentable ideas, should be included ONLY if necessary to understand the proposed project. The first page of the proposal should contain a specific statement (see the proposal instructions) that the data can be used only for evaluation of the proposal. An express disclaimer of license rights may be appropriate. Each page of the proposal containing the actual data must be similarly marked.
The government obtains rights in data (including software) developed in performance of the SBIR or STTR project. The inventor typically retains ownership subject to the government’s royalty free license. The license includes the right of the government to transfer the data to another party to for use in a separate government project.
In regard to creation of patentable inventions made in performance of the project, the small business may retain the patent rights but the government retains a royalty free license to the patentable invention for use for government purposes. Note the small business must timely disclose the creation of such an invention. Failure to timely disclose the invention to the government as detailed in the contract can result in complete loss of rights.
Please note the above is a summary only. The proposal instructions and model contract terms must be carefully studied.
© David McEwing, 2019