Setting up an innovation start-up

A novel idea is the starting point of every innovative business. An innovation business plan will help you to:

• validate the feasibility of that idea
• evaluate the market potential
• verify that there is a real demand for your product

It can also help provide your innovation start-up with credibility and focus, which is vital if you want to attract investors for your innovation start-up.

Innovative business plan - key elements

Your business plan for innovation should show:

• how you will develop and exploit your invention
• the capability and experience of your team
• how you will finance costs
• how investors will be able to realise their profits

Other key questions that your innovative 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?

For more information on finance and funding, see funding for innovation start-ups and exit strategies for innovation start-ups.

How to structure a business plan for innovation?

A sample business plan structure for innovation start-ups may involve:

• executive summary
• description of a business idea or your business statement
• product or service description, including how you will exploit any new technology or IP
• market analysis, including trends, needs and growth projections
• competitor analysis - looking at their strength and weaknesses, and opportunities
• marketing plan and strategies
• management and operations, including your business' legal and organisational structure
• financial planning and resource requirements
• risk management, covering business, technology or financial risks

Detailed guidance is available on how to prepare a business plan and tailor your business plan to secure funding.

When setting up any new business, you should consider what your assets may be, how you can use them and ways to protect them.

Your core assets can be split into:

• financial assets
• tangible assets
• intangible assets

Tangible assets could include premises and equipment related to production or delivery. You can have these assets valued to provide an accurate description of what they are worth. You can buy and sell, borrow against, and use these tangible assets to back other financial instruments.

More important to an innovation start-up, however, are intangible assets. These can include less measurable things, such as:

• knowledge or 'know-how'
• unique business methodologies
• customer lists
• goodwill
• company's reputation
• service or supply contracts
• trade secrets
• intellectual property (IP), such as trade marks, designs, copyright or patents

By nature, intangible assets are nonphysical and nonmonetary. They can be difficult to quantify or covert to cash, but you may be able to use some of the intangible assets to raise funds. It is, therefore, worth protecting them.

Advantages of intangible assets

Intangible assets are an important source of strong competitive advantage for business and central to creating customer value, as well as shareholder/stakeholder value. For example:

• patents help businesses to protect their inventions from unauthorised exploitation
• business' reputation, often measured by goodwill and brand recognition, is crucial for promoting sales, building trust, and increasing customer loyalty
• business' knowledge, skills and processes are critical for creating long-term value

Often, intangible assets are more valuable to a business than their tangible assets. Their worth may vary from business to business.

Raising finance against intangible assets

The easiest way for companies to raise funds using their intangible assets is through:

• sales - which provides the business with immediate payment
• licensing - which creates future revenue

You can also use some intangible assets - such as IP – as collateral in a traditional asset-based loan. This happens when a lender extends credit to a company based on an assessment of disposal value of their IP in the event the company defaults on their loan repayments.

Read more about selling your intellectual property and find out how to make money from trade marks.

Because there is value in IP, protecting it could be vital to your future success. It is important to understand the law, your rights and the rights of other IP holders.

See how to carry out business asset valuation and read about the importance of assets in business.

Finding funding for a new business or idea is often challenging. Banks are reluctant to lend money to innovation start-ups, especially those without significant tangible assets such as premises and equipment.

Sources of innovation funding

In the absence of bank loans and finance, sources of innovation funding may include:

• equity finance, including business angels and venture capital
• crowdfunding
• family and friends' loans
• government grants and incentives

You may also be able to use your own funds or any existing business funds to finance innovation. You may be able to sell some assets to get cash for your business or use others to get collateral in order to get a bank loan.

Your intangible assets may also offer an opportunity to raise finance for your business – see the significance of intangible assets to innovation.

Equity finance for innovation

Equity investors can provide the necessary capital in return for a share of your business. Experienced investors are often a popular source of finance, since they can also provide help with contacts, strategy and management.

You can get small to medium-sized investments through:

• business angels - privately wealthy individuals
• corporate venturers - big businesses interested in the development of new technologies
• seed venture funds - locally based funds, often linked with regional strategies

Larger sums - ie over £1 million - are usually offered by venture capitalists and trusts.

Equity investors will only receive a return on their investment when your business succeeds, so you will not have to repay debts if your business fails. This also 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. Read more about equity finance.

Crowdfunding for innovation

Crowdfunding involves raising money for a project or a business from a large number of people, often via crowdfunding websites. It also allows you to market test a product that may only be in the planning phase. See more on crowdfunding.

Government grants for innovation

You can get grants to fund your innovation start-up from publicly funded bodies for a variety of purposes and industries. The eligibility criteria, amount of funds available, funding conditions and activities may differ from grant to grant.

Read more about innovation, research and development grants or use the Northern Ireland Business Support Finder to search for publicly-funded sources of assistance.

Innovation Vouchers

If you need external expertise to help with an innovation project, you can apply for Invest Northern Ireland's Innovation Vouchers. The vouchers are worth up to £5000 and allow you to access skills and expertise from one of the 39 registered knowledge providers (eg universities and colleges) through the island of Ireland.

In the video below, Ian Hawthorne - the owner of Hawthorne Crafts - explains how his business benefited from an Innovation Voucher.

For many innovation start-ups, exit is the ultimate goal. The term 'exit' refers to the method by which you (or your investors) get a return on the money invested in your business. This generally happens after several years.

What does it mean to exit a start-up?

In relation to start-up funding, exiting usually means:

• selling the entire business
• selling just the investors' shares in it, so that they can realise the value of their investment

Ideally, you will want to develop an exit strategy in your initial business plan before you actually go into business. Often, you won't be able to raise money from outside investors without an exit strategy.

See exit strategy: key considerations when starting a business.

Common types of start-up exits

For many start-ups, the most obvious exit is via acquisition. This is when another company buys all or most of your own business and takes over control of it.

Read more about business exit strategy: selling your business.

There are other types of exits too, including:

• refinancing - selling to a different investor, such as a venture capital company
• merger - uniting two companies into a new one to gain market share or expand reach
• initial public offering (IPO) - first time selling shares to the public 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.

What is a good exit strategy for an innovation start-up?

A good exit strategy will give you a way to either:

• cash out the investors
• decrease or discharge your stake in a business and make profit
• limit your losses, if the business is not successful

It's never too early to start planning your exit strategy. Your strategy will direct many of the business decisions you make, including:

• how you run your company
• which partnerships you pursue
• how you establish your financial reporting system
• what funding choices you make

While exiting most often refers to money, you may need to decide on an exit route for yourself as well. For example, you may want to exit the business:

• to realise the capital you have built up in it
• to start a new venture with a new idea
• because you may not be the right person to take the business forward

For more information, consider your exit strategy when starting up.