Pursue Investors/Funding

Commercializing technology is typically a capital-intensive process, with the exception of some software development. Entrepreneurs need to present their opportunity to people with the funds to help them make it happen: typically these are venture capitalists, angel investors and – perhaps in the initial stages – friends and family. Using Yale’s network is one way to start the personal introduction process that can help get the attention of angel and venture capital investors.

There is a broad network of investors that support ventures. The most common forms of technology startup funding are angel investing and venture capital (VC). In very early stages of startups, entrepreneurs raise funds on their own and through friends and family funds (FFF). However, technology commercialization often requires multiple rounds of funding from multiple sources. Angels and Venture Capitalists (VC’s) are private investors who take on high risk ventures with goals of high returns. Return requirements vary based on industry and stage of funding, but many investors seek 10x their initial investment over 5 years.

Angel investors are typically high-net-worth individuals who have a personal interest in funding new companies. They are often willing to invest in earlier stages and with smaller amounts of money than VC’s, in exchange for equity. They can take passive or active roles in the startup and typically have a longer investment horizon than VC’s. According to the Securities and Exchange Commission 2015 report there were approximately 316,600 active angel investors in the United States in 2014 and angel investing funded 73,400 entrepreneurial ventures. According to the survey, the average angel deal size in 2013 was $328,500.

Compared to angels, venture capitalists can invest larger amounts of money (usually millions of dollars) in a company and in exchange they tend to receive more equity. VC’s also exercise control and bring experienced management talent to help guide and grow the company. Sometimes they invest in several rounds of funding and are part of a larger consortium of investors in the company. According to PriceWaterhouseCoopers (www.pwcmoneytree.com), the U.S. total of VC investments in 2015 was $58.811 billion from 4,380 deals.

This graphic is an example of a startup financing cycle using traditional funding sources, through an initial public offering (IPO). There could be more or fewer rounds of funding. The 1st, 2nd, and 3rd rounds can be equivalent to Series A, B, and C. (Source: “Startup Company” Wikipedia, The Free Encyclopedia. Wikimedia Foundation, Inc. 11 March 2009. Web. June 2012 http://en.wikipedia.org/wiki/File:Startup_financing_cycle.svg)

Startups may also pursue funding from non-traditional sources. Some examples of these are:

• Government grants – Certain research grants are available through programs such as SBIR/STTR (Small Business Innovation Research and Small Business Technology Transfer – http://www.sbir.gov/) or the Department of Energy (https://arpa-e-foa.energy.gov/).

• Banks – Banks do not usually participate in equity investments in new companies, but they are a source of loans, particularly for capital purchases when there is some kind of collateral (such as large equipment).

• Crowdfunding – Various companies enable entrepreneurial fund-raising by pooling small investments from a network of individuals.