How to set up an innovation start-up business
As well as being the inventor of an idea, you will need a business plan of how to exploit it. If your idea comes from an existing organisation, eg a business or university, the new business is called a ‘spin-out’.
This guide shows you how to create an innovation start-up and how to set up the business. It outlines the different types of finance that might be available and how investors make a return on their investments.
Protecting the assets of your new company
It is important to assess what your assets may be and how you can protect them.
Tangible assets include premises and equipment related to production or delivery. Having these assets valued will provide an accurate description of what they are worth. Intangible assets are more important to innovation start-ups. These include less measurable things, such as knowledge, motivation, vision and intellectual property (IP). Although these may be difficult to quantify, you can still protect them.
Intellectual property (IP)
IP is any knowledge or creation – such as a brand, logo, name or invention. Your IP rights can be legally protected by:
- trade marks
Some forms of IP protection apply automatically: for example, original ‘literary works’ (such as instruction manuals) are automatically protected by copyright. In other cases, you need to apply for IP protection: for example, patenting a new invention.
Securing and protecting IP could be vital to your future success. You also need to ensure that your business does not infringe the rights of other IP holders.
Creating an innovation start-up business plan
A business plan can help provide your innovation start-up with credibility and focus. A plan is also vital if you want to attract investors. To exploit your innovation to the best advantages, your business plan must show:
- how you will develop and exploit your innovation
- the capability and experience of your team
- how you will finance costs
- how investors will be able to realise their profit
Other key questions that your business plan should answer include:
- What is unique about the innovation and is it protected?
- Who will buy it and why?
- What will it cost to deliver and how much will it sell for?
- What is the competition, and how do you propose to tackle this?
- When will the business start receiving income and when will it break even?
Finance your innovation start-up
You may need several rounds of investment while you are developing your idea until your innovation start-up starts generating profit.
Banks are often reluctant to lend money to innovation start-up businesses – especially if you have no significant tangible assets such as premises and equipment. However, there are many alternative sources of start-up finance available to new businesses, including:
- equity investment
- unsecured loans – eg from family or friends
- government grants focused on helping and supporting new start-up businesses
You may be able to use any existing business funds to finance further innovation.
Equity investment for innovation start-ups
Equity investors can provide the necessary capital in return for a share of your business. They are often a popular source of finance for innovation start-ups. As experienced investors they may also provide help with contacts, strategy and management.
You can obtain small to medium-sized investments through:
- business angels – privately wealthy individuals
- corporate venturers – big businesses interested in the development of new technologies
Larger sums – ie over £1 million – are usually offered by venture capitalists and trusts.
Equity investors will only receive a return on their investment if and when your business succeeds, so you will not have to repay debts if your business fails. This means that the investors have a vested interest in the success of the business, and may offer follow-up funding in stages to help it grow.
However, raising equity can be a costly and time-consuming process. You should be aware that in giving away a share of your business’ ownership, you will lose some power in making decisions.
Attracting equity investors
In order for equity investors to consider investing in your idea, you must persuade them that:
- you fully believe in and are committed to your innovation
- you have a credible plan to run the business and succeed, shown in your business plan
- the potential reward is in line with the business risks
Exit routes for your innovation business
Investors in start-up ventures will usually expect a return on their investment between five to seven years after investment. This is usually achieved by selling either the entire business or just the investors’ shares in it so that they can realise the value of their investment. These could include:
- trade sale – selling to a trading company
- refinancing – selling to a different investor, such as a venture capital company
- initial public offering – listing or floating shares on the London Stock Exchange or Alternative Investment Market
- management buyout – selling to the company’s existing management
The ideal timing for these events will depend on the success of the venture, the need for more finance, investor requirements and market conditions.
Once your business is established, you may benefit from having a clear exit route for yourself. As the business grows, you may want the opportunity to realise the capital you have built up in the business. You may want the option to pass the business to someone else in order to take it forward.