Early-stage funding for innovation: what are the options?
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Early-stage funding for innovation: what are the options?

You've gotten to the point where you want to innovate. For example, you have a brand new idea for a startup, or you want to introduce an innovation with your existing company. Whatever your idea, you probably need money. Innovating is often an expensive journey. But finding investors for innovation is very difficult. The risks are high and relatively little capital is available for early-stage funding of innovations. Unfortunately, this leaves many good ideas on the shelf. In this blog we would therefore like to help you on your way.

The early stage in the innovation process

Innovation often starts with identifying a particular problem for which you want to develop a solution. You then go through several steps to bring this - often still vague - idea to the market. A large part of this innovation process you will spend doing research and realizing a proof-of-concept and prototypes. And precisely this early phase of innovation costs a lot of time and money, with no guarantee of success. So how are you going to finance that?

What makes early-stage finance so difficult?

Finding early-stage funding is not easy. As an entrepreneur, when you need money for a new idea, you may be the first to step to the bank. But then you will find that it is difficult to get a business loan for an innovation. Reason is that the financial risks with an innovation are much higher than with a proven business model. Moreover, it is very difficult to assess the risks.

Innovation is really about a new, unproven solution. Not an improvement or further development of an existing model. Funding innovations therefore involves much more uncertainty. After all, the idea is not yet proven to be viable and profitable. Also, it often takes time before there is revenue. Not for nothing do most innovations perish in the infamous "valley of death. Unfortunately, only a small percentage of all innovations are successful.

Early-stage funding of innovations

So traditional financiers like banks are reluctant to invest in the early innovation phase, but does that make finding early-stage funding for innovation impossible? Fortunately, no! There are several funding options that are interesting in the development phase. In particular, consider government schemes such as early stage finance (VFF) and venture capital.

Funding innovations with venture capital

When you need funding to develop an innovation, you quickly turn to venture capital. The name already indicates that these investments come with higher risk. It is often uncertain whether the investment will pay off. But if an innovation succeeds, it can lead to a thriving business. Returns are then often higher than average. And that can be especially attractive to investors who are able and willing to take a risk. Providers of venture capital include informal investors (also known as business angels), seed funds, development companies and specific innovation funds. But crowdfunding can also be included.

In the case of venture capital, investors usually buy shares in your company, making them co-owners. Another form of venture capital is the subordinated (convertible) loan. For example, Rabobank has a Subordinated Innovation Loan for innovations in the idea, plan or start-up phase.

Government regulations and grants

For early-stage funding of your innovation, you can additionally turn to government grants or funds. The central government has all kinds of credits and other financial schemes for startups, scale-ups and innovative SMEs. Some possibilities are:

  • Early-stage funding (VFF) is a loan for startups and SMEs who want to investigate whether their innovative idea has a chance of success (proof-of-concept).
  • The WBSO is a tax innovation scheme to reduce the financial burden of research and development.
  • The innovation credit is for the development of new products in technical or clinical areas.
  • Through the Seed Capital scheme, the government supports innovative companies in technological and creative fields to obtain venture capital.

These and other schemes can be found on the website of the Rijksoverheid voor Ondernemend Nederland (RVO). At www.123subsidie.nl of the SNN you can find all kinds of grants for entrepreneurs in the Northern Netherlands.

The right funding mix

Because of the higher risk involved in innovations, it is often necessary to attract multiple financiers. Spreading the risks through stacked funding makes it more attractive to invest. If you already have one or more investors behind you, it will also make it easier to get a business loan from a bank to supplement it. Venture capital is also often part of a funding mix.

Delve deeply into the possibilities

Another aspect that makes it difficult to finance innovations is the fragmentation of the supply of funding. For example, there is no overview of informal investors or other forms of venture capital. Informal investors often operate under the radar and then you have to rely on your network. So mapping the various possibilities is a time-consuming task.

Moreover, every form of funding has advantages and disadvantages. However, familiarize yourself carefully with the terms and conditions and whether the investor fits your company and the phase of innovation, including knowledge and vision. Venture capital is often expensive. So don't take any chances and take your time. And don't accept all the conditions just because you need money. Stay critical!

If it is so difficult, should I innovate?

The answer to that is a resounding yes! While innovation presents risks, it also presents many opportunities. Indeed, most businesses need innovations to survive in the long run. Innovating is necessary for a thriving business community and a strong economy. So it is well worth exploring funding options.

How can NOM help you?

At NOM, we believe it is important that innovative ideas are given the chance to grow into business opportunities. That is why we stimulate innovations in the Northern Netherlands. We do this by making knowledge, capital and contacts available. Together with you, the entrepreneur, we lay the foundation for a successful business. We have a good overview of the various funding possibilities and we have a large network.

In addition, NOM is one of the few investors offering funding for the early phase of your innovation. Because we use a careful selection process, we also remove barriers for other financiers. Our early-stage funding therefore makes it easier to attract other investors for your innovation in addition.

Just want to spar about the possibilities? Then feel free to contact us. And download our whitepaper to learn more about NOM's innovation process and early-stage funding.

NOM Mockup Whitepaper Innovative Idea
From innovative idea to commercial product

In this white paper you will learn:

  • What the innovation process looks like and what challenges you face along the way
  • What opportunities there are to fund this early stage of your idea/product
  • In what ways NOM as an investor can help you

    Please note that this whitepaper is only available in Dutch at the moment. We are in the process of translating this whitepaper.