How to decide between different possible forms of innovative development projects’ financing?
Companies who are searching funds for the realisation of their projects have more possibilities. Due to non-refundable character of national and European programmes these are the most desired once. In spite of that we should not to forget other financial opportunities as well.
Only when we analyse all possible ways of the project’s financing we are able to choose the most suitable financing type, or in most cases the combination of different financial sources.
The main questions which should be answered are related to the:
- project’s stage and maturity, which in many cases conditions the availability of an individual financial source;
- time which is needed for the funds acquirement;
- specific requests and conditions required by an individual financial source;
- average successful rate;
- business opportunities which might come of the project also after the project’s official end.
The spreadsheet below presents simplified principal differences among individual groups of possible financing forms.
| Form of financing | Main characteristics | Average time needed for the project proposals' preparation | Time from the application date to the project/funds approvement | Opportunities beyond the project's official end or investor's exit |
|---|---|---|---|---|
| Banks | refundable funds; gurarantees and suitable credit status are requested; usually favorable interest rates; no need to have other partners; | the shortest time of all other possible ways of financing | the shortest time of all other possible ways of financing – in average from few days – 1 month | / |
| National programmes of sectoral ministries and national agencies | non-refundable funds; other partners are mainly not requested; strong arguments reffering to creation of new jobs, export growth or similar are needed; | from 1 – 2 months | 2 – 3 months | eventual partnership strengthening in case there are more partners in the project |
| EU programmes and initiatives | non-refundable funds; the quality of the consortium is important; strong arguments reffering to the EU dimension of the project, innovative project's idea and project's results influence on the consortium partners development and growth; co-ownership of the project's results; | 1 – 6 months | 3 – 9 months | eventual international partnership strengthening; other business opportunities in consortium partners' countries; |
| Web3 Grants | non-refundable; early stage Web3 projects are financed by web3 protocols' platforms, web3 infrastructure and other service providers in order to use and test their Web3 solutions or support their community or enrich their offer with your own solution; | 1 month | 1 – 2 months | many times further financial support is offered by a granter after the first granted project is completed; the solution built on once protocol's platform is seen by investors, which increases the chances of financement by various investors; |
| Crowdfunding | a likeable product for end users is needed (most often in the idea or prototype stage); good presentation of the project and the team is needed; well planned pre-launching crowdfunding campaign is needed; cheaper price is offered to the early buyers; | 1 – 3 months | 1 – 2 months | project published on a crowdfunding platorm is often seen from potential distributors and retailers, which increases the chances of sales growth |
| Business Angels | angel investors invest their own money into startup ventures; most often an investment in the form of a convertible loan, which can later be converted into equity; investment into early stage projects; trustful team is very important; angel is often well connected or familiar with the project's topics, target markets and/or target segments; ROI – Return of Investment is an important factor in the investor's decision making; strong market potential in the perspective sector; strong investor's commitment; | 1 – 2 months | 2 – 4 months | eventual further co-operation (e.g. advisory board membership) |
| Venture Capital | already good business results are requested; ROI – Return of Investment is an important factor in the investor's decision making; strong market potential in the perspective sector; co-ownership of the project results; strong investor's commitment; very often also an active investor's participation in management and marketing activites; | 1 – 6 months | 3 – 9 months | eventual further co-operation (e.g. advisory board membership) |
| Strategic Alliances | strategic, agreement based co-operation; very strong market oriented decision of partners with high level of complementarity among them; ROI – Return of Investment; stronger market potential in joint Strategic Alliance; often the joint brands are developed (co-branding and co-ownership of common brands); | 1 – 6 months | 3 – 9 months | long-term co-operation and a common vision achievement are desired |
In all cases the project initiator has to present to the potential financial source a very good value proposition as well as organisational and management capabilities which convince the financial source about the high probability of successfulness of the project.
Greater consideration is needed between the possibility of (co)financing the project within the framework of public funding sources or with the help of private investors. An important difference is that public sources provide grants, which is especially important in the earlier stages of the project, while investors have a great interest in getting the product to the market as soon as possible and also help intensively in this process.
Above mentioned “pre-decision making factors” should be also the first subject of any business consultant who offers an advice and assistance to SMEs in their search for funding. Only then the other business consulting support eventually may follow (proposal preparation, and other assistance in the implementation and other phases)
* The above table does not mention private and public incubators and accelerators, which also offer support to start-up innovative companies both in terms of mentorship and finance.
* The article was originally written back in 2004 and published in the Slovenian newspaper “Finance”. An updated version is published on this business portal, the last updated version adds Web3 Grants as a new non-refundable financing option for Web3 projects.
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