You can be on Entrepreneur’s cover!

Realistic Strategies for Seeking Investor Funding for Research and Development If you're developing new and unproven technology, keep these six stages in mind as you seek financial backing.

By Martin Zwilling

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Shutterstock

Angel investors and venture capitalists are looking for startups with real products and a proven business model, ready to scale. Yet I still get too many business plans that clearly are looking for money to do research and development (R&D) on a new and unproven technology. If you need funding for these early stage activities, I have some suggestions on better strategies to follow.

The first is to be more precise in your definition and understanding of where you are, and how the money will be spent. If this is your first foray into the entrepreneurial arena, with no track record in business or technology, your best and perhaps only supporters will be that class of investors known in the trade as friends, family and fools (FFF). They believe in you above all else.

Related: 5 Mistakes Entrepreneurs Make When Pitching Their Ideas to Investors

Beyond these believers, you need to match your credentials and interests with the multitude of public, academic and government organizations that proclaim to foster research and early development, to satisfy the long-term needs of the people or organizations they support. In this context, there are at least six stages often included in the scope of R&D to narrow your focus:

1. Search for new technologies

This early stage is often called basic research, well before any specific commercially viable products might be envisioned. Here your options are limited primarily to large organizations with deep pockets, including government grants, universities and large enterprise sponsors searching for disruptive technologies.

2. Technology pilots

This is the transition stage from basic research to applied research. Applied research is still primarily scientific study, seeking to solve practical problems, but doesn't yet focus on a commercial product. Funding sources for this stage extend from grants to large private fund incubators, such as the IBM Watson initiative.

3. Commercial product prototypes

Funding for commercial product prototypes is still R&D in the eyes of venture capital investors, but in business areas with large opportunities, this activity will catch the eyes of specialized angel investors. It's still considered high risk for investment, since manufacturing and quality issues are likely.

4. Product verification and clinical trials

These days, almost every new product is not deemed scalable until it has been certified as meeting a multitude of quality and agency standards, including the Environmental Protection Agency (EPA), Food & Drug Administration (FDA) and Underwriters Lab (UL). Specialized VCs start to jump in at this stage.

Related: Avoid the Seed-Funding Surge Trap With These 8 Tips

5. Business commercialization

Product development at this stage is the process of scaling up for manufacturing and marketing rollout. The technology is now embodied in a solution that can be replicated to reliably solve a real customer problem. Your fundability with investors now depends primarily on the execution capability of your team.

6. Expanding the product line

Even for mature startups, there is always a need for further product development and research to compete and diversify the business, and investors understand this. But to prevent confusion with basic R&D, these costs should never be called out the major category in your use of funds statement to investors.

While all forms of technology research and development will always be required, entrepreneurs need to understand that the funding for these efforts comes from many different sources, depending on the stage. Business equity investors are buying a portion of your business, so they are looking to fund a specific business with a specific offering, not a generic technology.

Don't waste your time and energy talking to angels and VCs about technology funding when you could be focused more productively on grants, private funds and future business partners. Business investors and customers want to hear about solutions, and tend to back away from technology, until it is proven.

Fortunately, in many attractive business domains, including mobile software, Internet apps and ecommerce, the cost of product development is at an all-time low. Developers are using powerful technology tools to build mobile apps and websites for a few thousand, rather than millions of dollars. Thus the best entrepreneur strategy for funding is to build solutions, not technology.

Related: 4 Steps to Beating the Odds and Winning Startup Capital

Martin Zwilling

Veteran startup mentor, executive, blogger, author, tech professional, and Angel investor.

Martin Zwilling is the founder and CEO of Startup Professionals, a company that provides products and services to startup founders and small business owners. The author of Do You Have What It Takes to Be an Entrepreneur? and Attracting an Angel, he writes a daily blog for entrepreneurs and dispenses advice on the subject of startups.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Side Hustle

This Dad Started a Side Hustle to Save for His Daughter's College Fund — Then It Earned $1 Million and Caught Apple's Attention

In 2015, Greg Kerr, now owner of Alchemy Merch, was working as musician when he noticed a lucrative opportunity.

Business News

Yes, You Can Buy a Foldable Tiny Home on Amazon — And Now It's Selling for Less Than $12,000

The waterproof and flameproof house was listed around $35,000 a few months ago.

Business News

This One Word Is a Giveaway That You Used ChatGPT to Write an Email, According to an Expert

"Delve" has increased its presence in written work since ChatGPT entered the scene.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.

Starting a Business

4 Common Mistakes That Will Spell Doom Your Ecommerce Business

It's hard to spot a success story before it happens, yet it's easy to tell if a business will struggle. With that in mind, here are the four most common mistakes people make that you should avoid when starting an ecommerce business.

Business News

This Futuristic Wearable Smartphone Alternative Projects a Screen on Your Palm — And It's Now Widely Available

Humane's Ai Pin fastens magnetically to clothing and becomes a voice-activated AI assistant that can make calls, send texts, take notes, and find answers to complex questions.