8.1.1 How to choose the right way to finance your innovation

In general, innovation finance comes from the public sector, banks or from private finance-sources. Which of these is appropriate to a specific case depends on a number of factors: the stage of development of the project, the size of the innovating company, the amount of money required…1

As it has been mentioned above, finance may be available from a number of sources, but before looking at these, some general factors need to be considered. The first point to take into account is: at what stage of development is the project/process/company?

Stage of development of the project/process/company


Research Stage

Funding will come in the form of non-reimbursable grants from:

  • Public sector – national governments, regional authorities or the European Commission
  • Corporate – industrial/commercial companies, industrial research associations, charities (when the research is directed to social benefits such as health).

At this stage of the project/process/company neither banks nor any form of equity investor is likely to be interested.

Development stage

As the project reaches this stage in which a prototype of pilot plant can be built to demonstrate its viability, the situation changes. The public sector and corporate sector remain as sources of financing but other actors such as seed capital and venture capital may show interest.

  • Seed capital – venture funds prepared to make pre-start-up investments in the technology, followed by further investment if/when the project results in a company formation. Pre start-up funding may be in the form of loans, convertible to equity when/if the company is formed
  • Venture capital – may be interested where an established company seeks additional finance for a specific project.
Start-up stage

In some aspects this is the most difficult stage to finance, though much depends on the size and type of project involved.

  • Business Angels: may be able to provide the start-up equity finance and “hands on” advice and help to the new company. This source is the most appropriate when relatively small sums are needed and where the project in question is not in the high technology area.
  • Venture capital (VC): although most venture funds concentrate on large deals, there are some willing to provide start-up finance. Usually venture capitalists are very experienced and able to contribute management assistance.
  • Public sector: can provide grants or other non-reimbursable finance to cover start-up and capital costs. Public sector venture funds may want to intervene where for example important employment opportunities are seen.
  • Corporate finance may also be available from industrial or commercial firms looking for a “window” on developments. Such firms are potential buyers of the new company.
Exploitation stage

At this stage of a company’s life, when it is in full commercial operation, banks and all kinds of venture funds can be interested. It is also a stage at which the management might wish to consider a stock market flotation as a means of raising additional capital. This would normally be on one of the “new” markets: AIM (Alternative Investment Market), Nouveau Marché, Neuer Markt, etc which do not have such strict regulation as the main stock exchanges.

Players at each stage

We will now look at the different players at each stage:

Founders and Entrepreneurs

Founders and entrepreneurs will have normally put in all the finance that they are able to afford, as well as non-financial contributions, e.g., little or no salary, working from home (no rent) etc. Putting a value on these non-financial contributions (“sweat equity”) can increase their effective shareholding. New investors will expect to see a significant contribution from the founders, since this shows a commitment to the project.

Friends and family

They are a “helping hand” rather than a serious investment because on the one hand they generally invest less than 10.000 € and they cannot be relied upon for follow-up finance and on the other hand they do not have useful commercial contacts.

Informal investors or Business Angels

Informal investors or business angels are “individuals of high net worth”, that is to say people having investable assets in excess of US$1 million2. The amount of money they usually invest can vary between 15.000 € and 150.000 €. This sum can be increased up to 250.000 €3 when they co-finance with others.
The projects they are interested in usually cover subjects they understand and take place in the region of the investors or even in their cities.

Venture Capital

Venture Capital seeks investments over 250.000 Euros with high-growth possibilities. It takes a long time to decide but once the decision is taken it is very thorough. Venture Capital support not only gives financial assistance but add value as well.


The role of banks is to provide the usual bank services such us loans and loan guarantees from a few thousand to millions of Euros. They usually decide fairly quickly whether to support the idea or not.

Public sector4

The support of the public sector is by way of grants, awards, investment support schemes and European Investment Fund (loan guarantees and investments in venture funds)

The following figure shows the stages of development of a process/idea/company and the sources of finances that play a main role in each stage.

Figure 1 "Stages and source of finance in the development of a process/idea/company."5

It can be seen that some sources are more appropriate than others at a certain stage. Entrepreneurs’ own resources and those of friends and family are easy enough to find. Business Angels, although a very important source of money –for early stage investment the total available from them is greater than from the formal venture capital – may be difficult to find. They have their own networks and anyone seeking capital from this source might try financial consultancies, banks and similar sources.

SMEs and other companies or organisations with projects co-financed by the European Commission may be attractive to various sources of capital, including the Business Angel sector (especially where groups of these individuals are prepared to syndicate their finances), but are most likely to appeal to more formal sources.6

1 InnoSupport: Supporting innovation in SMEs. 8.1 Financing Innovation in Europe, 2005
2 http://en.wikipedia.org/wiki/High_net_worth_individua
3 Figures taken from Gate2Growth. A guide to financing innovation. European Communities 2002
4 For further infotmation you can go to www.insme.org/
5 Figure based on presentation “Financing Innovation: Funding the Phases of Knowledge Transfer” by Mark Coticchia from Case Western Reserve University (Cleveland – Ohio)
6 The chapter is based on Gate2Growth. A guide to financing innovation. European Communities 2002.