One way to raise money for your business is through gap funding. Gap funding is when a business asks for money to cover the “gap” between its current position and the amount of money they need to reach their next milestone. This can be a very effective way to approach raising money, especially if other sources of risk capital and development partners are scarce.
What is gap funding?
Have you ever heard of gap funding before? You’re not alone if the answer is no. Gap funding is a type of financing that is often used in startup companies and small businesses. But what exactly is it? And more importantly, how can you get your hands on some? Read on to find out.
Gap funding is a term used in the business world to describe funds that are available to a company or individual for a specific purpose, usually to cover a shortfall or bridge a gap in cash flow. The source of this money can be hard to come by. Private investors, corporate innovation teams, venture capitalists, supporting institutions, or government grants often have programs that address this upstream, early-stage development. Gap funding can be extremely helpful for startups that are just starting out and need capital to get off the ground, especially those that may require extensive technology development and validation, such as those that come from university, hospitals, and labs.
These research institutions and partners have created technology and startup gap funding and accelerator support programs as a capital and innovation support mechanism. These programs are uniquely positioned to address critical elements of technology development and startup formation from research institutions.
Over the past 20 years, gap fund programs have evolved from simple vehicles for injections of money into sophisticated programs that match much- needed capital with a full suite of accelerator support programs to evaluate and develop tech and startups.
innovosource, the leading source of information related to these university gap fund and accelerator programs, releases the The Mind the Gap Report, now in its fifth iteration, that has tracked the evolution of translational research, proof of concept, startup, and venture gap funding programs associated with these leading research institutions over the past 15 years.
The Report now includes 176 gap funding programs affiliated with 97 research institutions and details their sources and sustainability, processes and management, focus and intent, and ultimately, their impact on the innovation community and its capabilities.
How to identify gaps in your business model that can be filled with gap funding?
Whether an early stage startup, a technology under development, or a growing business, it’s important to identify gaps in your business model that can be filled with gap funding. You first need to assess your current financial situation. Take a close look at your income and expenses, and needs to meet the next development milestones, to see where you may be falling short. These are areas where gap funding could make a big difference.
Once you’ve identified potential areas for improvement, you can start to put together a gap funding strategy and approach viable sources of capital and development support. This should include information on your business model, your current financial situation, and your goals for the future. You’ll also need to explain why you believe gap funding is the best option for your company. Be sure to include information on how the funds will be used and what investors will get in return for their investment.
How can gap funding be used to raise money for your business?
Gap funding can be used to raise money for your business in a few different ways. One way is by using it to cover the gap between your current cash on hand and the amount of money you need to reach your next milestone. This can be a very effective way to raise money, especially if the company has already raised some money from other investors. Another way to use gap funding is to raise money for a specific project or initiative that your company is working on. This can be a great way to get additional funding for a project that you may not have been able to raise money for otherwise. Finally, gap funding can also be used to help you expand your business into new markets or to help you grow your business in general. If you are looking for ways to raise money for your business, gap funding may be a great option for you.
How to identify gaps in your business model that can be filled with gap funding?
When it comes to gap funding, it’s important to identify any gaps in your business model that can be filled with this type of investment. Raising money through gap funding can be a great way to close the gaps in your business model. By following these tips below, you can increase your chances of success.
- Make a list of your company’s current strengths and weaknesses.
- Identify the areas where you need the most help.
- Find investors who specialize in gap funding.
- Make a pitch that highlights your company’s potential and why they should invest in you.
- Be prepared to answer any questions the investors may have.
- Follow up after your meeting and keep the investors updated on your progress.
For more in-depth knowledge about gap funding connect with Jacob Johnson on LinkedIn, who is the founder of innovosource and advocate for university proof of concept | startup | venture | gap fund & accelerator programs + Corporate Innovation & Venture Capital.
3 Things to keep in mind if you’re considering gap funding
If you’re considering gap funding for your business, there are a few things to keep in mind.
First, make sure you have a clear plan for how the money will be used. Investors will want to know how you plan to use the funds and what impact they will have on your business.
Second, be prepared to demonstrate how the gap funding will help you reach your next milestone. These development steps should be verified by corporate, investor, and customer feedback.
Third, remember that gap funding is typically used for a near-term need often early in the development of your tech or startup. You’ll need to develop a clear, longer-term view and have a plan in place for how you’ll include the investors in that vision. Also, how will you repay the funds or include the investors in ownership?
There are many different types of gap funding available to entrepreneurs. The type that is right for you depends on your business and your specific needs.
Here’s a look at some of the most common types of gap funding, and what they can do for your business.
1. Proof of concept grants (non-dilutive or loans):
Small grants to demonstrate the value, and generally derisk (or perception of risk) the project to commercial partners or investors. Achievements like prototypes and commercial assessment help to identify and secure a route to commercialization, if one exists. POC funds also identify weakness in the technology for further development or avoid downstream costs. Many organizations, like research institutions or private accelerators, support POC programs to aid early-stage technology development and assessment.
1. Convertible notes/SAFE:
A convertible note is a type of loan that can be converted into equity. This is often used by startups that are not yet ready to issue equity, but need funding to reach their next milestone. Simple Agreements for Future Equity (SAFE) notes are also viable options for some opportunities or assets.
2. Seed/Early-stage Venture Capital funding (dilutive):
Seed funding is typically the first round of funding for a startup. This type of funding can be used to help a company get off the ground, and often comes from angel investors, venture capitalists, or accelerator programming. Generally, these investors will require a clear business vision and a significantly de-risked opportunity.
Assessing your startups or business for gap funding
There are several key metrics that you will need to track in order to make a successful request for gap funding. You will also need to provide a detailed explanation of why investors should invest in your company and what the potential return on investment could be. Finally, you will need to set a realistic goal for how much money you are looking to raise and explain how you plan to use the funds.
<h2>Preparing for questions from investors about your business</h2>
– What is your market size?
– Who are your competitors?
– How did you come up with your pricing?
– Why should investors invest in your company?
– What is the potential return on investment for investors?
– How much money are you looking to raise?
– What is the use of funds?
– Regulatory route (if applicable)?
– How soon do you need the funds?
– What are the risks and uncertainties associated with your business?
– What are your key milestones?
– When do you expect to achieve profitability?
– Intellectual Property (IP) and patent considerations?
– How have you been funded to date?
– What is your burn rate?
– How much runway do you have?
– What are your most important costs?
– Describe your sales and marketing strategy.
– What are your customer acquisition channels?
– How do you measure customer lifetime value?
– Describe your product or service.
– How is your product or service different from your competitors?
– What is your technology stack?
– What are your key intellectual property assets?
– Describe your team.
– Who are your advisors?
– Describe your business model.
– How do you generate revenue?
– What are your gross margins?
– What are your customer acquisition costs?
– Describe your go-to-market strategy.
– When did you launch?
– What is your expected growth rate?
– How have you performed to date?
– What are your monthly/quarterly/annual revenue numbers?
– How many customers do you have?