Start-up success stories - Question for Investors, Inventors, and Entrepreneurs

[Free Radical]

Perhaps this will sound familiar, and if you have overcome this barrier I'd love to know how.

So I have an idea, it seems a real seller, the market seems obvious. Initial primary research seems to confirm this. The market size for this product category is large, as is the potential return. Initial patent searches are encouraging, but the official IPO search follow tweaking by product designers. High St shops would love to stock such a product (assume for argument sake I've asked them, I plan to approach them shortly)

The following steps I can achieve myself before approaching investors. These steps are:

1. Professionally designed prototype
2. Feedback from professional users
3. Patent filing via patent attorney (assume the IPO accept as new and original).
4. Generally investing every bean to my name to prove own faith in the project.

This is the point I, and I assume others, have hit a brick wall. The project requires further funding at this point due to the escalating patent and manufacturing costs. But the problem is:

1. Investors want to see an experienced manager at the helm, not me. They want someone who's launched products before or worked in the industry to which the product relates. I'd love to have such experienced partners, but if one required experienced partners to get experienced partners then there's a problem.

2. They want to see proof of demand. They want to see orders so there's no risk whatsoever. Well, if I was at that stage, selling equity would be the last thing on my mind.

Frankly, I'm not after an investors money. I believe I can raise what I need on my lonesome though I'd be living like a beggar and the process would be riskier, stressful, and error prone. What I do need is an experienced partner.

If this sounded like you, how did you get your break, or did you just soldier on and persevere?

 

[PBDPConsulting]

Perhaps this will sound familiar, and if you have overcome this barrier I'd love to know how.

So I have an idea, it seems a real seller, the market seems obvious. Initial primary research seems to confirm this. The market size for this product category is large, as is the potential return. Initial patent searches are encouraging, but the official IPO search follow tweaking by product designers. High St shops would love to stock such a product (assume for argument sake I've asked them, I plan to approach them shortly)

The following steps I can achieve myself before approaching investors. These steps are:

1. Professionally designed prototype
2. Feedback from professional users
3. Patent filing via patent attorney (assume the IPO accept as new and original).
4. Generally investing every bean to my name to prove own faith in the project.

This is the point I, and I assume others, have hit a brick wall. The project requires further funding at this point due to the escalating patent and manufacturing costs. But the problem is:

1. Investors want to see an experienced manager at the helm, not me. They want someone who's launched products before or worked in the industry to which the product relates. I'd love to have such experienced partners, but if one required experienced partners to get experienced partners then there's a problem.

2. They want to see proof of demand. They want to see orders so there's no risk whatsoever. Well, if I was at that stage, selling equity would be the last thing on my mind.

Frankly, I'm not after an investors money. I believe I can raise what I need on my lonesome though I'd be living like a beggar and the process would be riskier, stressful, and error prone. What I do need is an experienced partner.

If this sounded like you, how did you get your break, or did you just soldier on and persevere?

I am not an entrepreneur or investor myself, but a client I coach is an investor in startups so we have worked on his decision-making process when investing in 10+ projects in the last 18 months.

You post gives some conflicting info. You say you have certain preparation actions to do before going to investors, but you seem already to have talked to them and your pitch has hit a brick wall. You say you don't want their money, but you need money to pay for patent and manufacturing costs. So where exactly are you in the process? And what do you really want?

From observing my client, he bases his decisions on:

1) whether he understands and likes the product/service or not - this is an emotional response, he doesn't like being involved with things he has no emotional attachment to. But, he tempers this with needing to understand the market demand. he doesn't look for 'proof,' just evidence that the originator has credible view of the market. 'Credible' is a matter of judgement - remember the story of Ken Olsen, hugely experienced and successful boss of DEC who said in 1977, jsut before the first PCs were produced, 'There is no reason for any individual to have a computer in his home.'

2) whether he trusts the originator and feels he can have a good working relationship - this is partly emotional (when he started he invested mainly with friends, which didn't always work) and partly an analysis of the originator's competencies. My client likes to ask innocuous questions to see how the originator responds. Like interviewing. This takes several discussions, some formal some casual, but he wants to know how the originator will be as a manager. Where he judges the originator to have good product and energy but little practical management skills, my client will propose to appoint a fixed-period financial director from his own team, to be paid through the start-up.

3) whether the financials are OK. Start-ups are notoriously difficult to budget for, and cash burn rates often get out of hand, so my client uses a risk approach which balances the potential upside and its probability, against the investment and potential loss and its probability. He will obviously try to set up the investment so his losses will be minimised, but he accepts that sometimes he will lose. He does not look for certainty. But he always wants to see a strong potential upside. If you have been speaking with people who want absolute certainty, I suggest you now look elsewhere.

4) whether there is a way out. My client likes to have an exit strategy after 3-5 years in place, preferably some options like a management buyout, selling the business, or an IPO. (I have another client who is much more of a strategic investor who is quite happy to let his investment grow with the company long-term. But I think he is less usual.)

I hope this helps.

PBDPConsulting
People and Business Development for Performance

 

[Free Radical]

Thanks PBDPConsulting your mail was enlightening and encouraging.

I haven't pitched to investors but I have researched the option so I haven't hit the brick wall but I can see it coming.

Where am I in the process? I have a couple of product designers working on the specifics on the design right now and I'm awaiting the costs of the prototyping & manufacturing. I have a patent attorney lined up to file, so this could still all blow up in my face if IPO searches find problem patents we haven't. I have a ballpark figure of these costs which I may be able to finance independently.

I might be able to get away without funding from an angel, so that's not my primary concern. If I was being self critical, my main problem is my own lack of managerial experience. I'm therefore in need of a partner/financial director that has gone through the motions before. From your information it seems an Angel may well provide this experience if we click and have that emotional response.

I'm inclined to think that my accountant is the person I could use as a financial consultant; though this route could prove costly and he would not be available on a day to day basis. Still, this seems the way forward to get early stage budgeting as accurate as possible.

 

[PBDPConsulting]

Thanks PBDPConsulting your mail was enlightening and encouraging.

. . . . . .

From your information it seems an Angel may well provide this experience if we click and have that emotional response.

I'm inclined to think that my accountant is the person I could use as a financial consultant; though this route could prove costly and he would not be available on a day to day basis. Still, this seems the way forward to get early stage budgeting as accurate as possible.

Glad to help.

All businesses are led by teams, not one person. Even sole-traders need the support of others - their accountant, their trade journal, family and friends for emotional support, etc. So, you are now thinking more about using a team to implement your ideas. This will allow you to do what you do best (you don't need to expert at everything yourself).

Now all you need to do is to find the right people to be in your team (and it should be your team) and find the right way to interact with them -as employees, as close partners, as sleeping partners, as advisers, as sub-contractors, etc.

I suggest you sit down and do a 'role-set' analysis. You can find advice on this through Google but briefly:

1) Put yourself in a circle in the middle of a sheet of paper.

2) Around you, write the names of all the people (or groups of people) you interact with or will interaact with on your project.

3) For each person, write what you want from them and what they want from you. Be as detailed as possible. Treat this as an evolving process - you may update it over days/weeks as new thoughts come to mind.

4) Identify a) conflicts and b) lack of understanding or clarity.

5) Develop a plan of action a) to resolve conflicts, b) clarify or change relationship expectations c) change the person.

When you meet investors, having a clear view of what you want from them will be very helpful - you will be selecting them as much as they select you. And, yes, picking the investor who is prepared to bring management experience to the table will be very beneficial - as long as that management experience is offered in a way that does not stifle you. A good investor will act more like a coach/mentor/consultant.

Also, I came across a book, new to me, last week - 'The plan-as-you-go business plan' by Tim Berry. There are many business planning books, but I like this one for its action orientation - I think it would be suitable for a start-up like yours.

Finally, you may already be an expert in this, I am not, but I went to a talk some time back on 'rapid prototyping' - this and Berry's planning seem to be a way to bring tech ideas to market.

Good luck! It is always great to see people with new ideas, enthusiasm and drive.

www.pbdpconsulting.com
People and Business Development for Performance

 

[Free Radical]

[FONT='Verdana','sans-serif'] [/FONT]
[FONT='Verdana','sans-serif']I see, I'll draw up a role set analysis tonight. It's just occurred to me thought that I'll be using Microsoft Word to do this, but surely there are programs that are invaluable for planning.[/FONT]
[FONT='Verdana','sans-serif'] [/FONT]
[FONT='Verdana','sans-serif']Word and excel are givens. Actually, perhaps I should start by learning all the features on Excel. Invaluable tips and tricks that you wish you had known of earlier.... I'm going to stop myself here as this is a tangent that needs a thread of its own. [/FONT]
[FONT='Verdana','sans-serif'] [/FONT]
[FONT='Verdana','sans-serif']Thanks again for all this, you've given me plenty of homework and I'm very grateful for it too [/FONT]

 

[Free Radical]

I've had an interesting development that's left me stumped.

My product designer has asked to be made a non executive director. Remuneration for this to be 1% of my start-up company plus 1% each year to a maximum of 4%. He would charge a day rate for his time with a view of being salaried if all goes to plan. Further he has suggested I make this offer to other key people/experts in order to form a non exec board of directors.

On the one hand, I will be getting the expertise I was taking about in my OP and hence it seems attractive and workable. One the other hand I'll be literally giving away equity in my company and receive no cash investment for it.

What I've said is I'll offer 1% max of net profits resulting from the product we are creating as an incentive on top of his professional fees (for the time being). I would be more than happy for him to join the board but at a later time when the company has some IP and I can expect some cash investment on his part. Does this seem reasonable to you?

 

[PBDPConsulting]

I am surpised there have been no replies to this from the forum. I am sure there people experienced in precisely this issue who can give advice from their experience. As I am not best qualified to give 'answers', I will limit myself to questions:

On what basis did you pay the product designer originally? Do you have a contract or understanding? Who owns the IP? Was there an offer of royalty payments of some sort? What expectations did the product designer have, and what now? What would happen if your relationship broke down or was soured over this?

What future need do you think you might have of the product designer's input? What might he bring to the party if he was 'inside' the company and not just a service provider? Do you want to keep him close? Might you want other product designers?

If you offer equity (to him or anyone), does it have to be for cash? Or can it be for knowledge and further input?

Putting aside any sense of indignation, what are the practical pros and cons for you of paying 1% net profits for the product designer's input versus giving him 4% equity? There are financial pros and cons which you can calculate for different future earnings scenarios, but what other pros and cons are there? What might change in the future situation for the 1% to become more or less attractive to you than the 4%?

Why is the question of (a relatively small amount?) equity so important to you? Do you think you might lose something (control, profit) by sharing the equity with key 'partners?' i.e. people who are critical to your success? Do you think there is something unfair about giving equity? What does this say about your attitude to partners in the future? What would make you feel more comfortable about giving up some limited equity to partners?

Either of your suggestions can be made to work. There is no single answer that is right for everyone here, just an answer that is right for you in your situation and only you, with some reflection, know what the answer is.

People and Business Development for Performance

 

[Free Radical]

this message is not showing correctly so will post later

 

[David Warrilow]

Hi Free Radical

I'm a patent attorney at London IP.

Obviously everyone's situation is different, but have you considered the pure licensing route? i.e. file a patent and then try to license it so that you don't have to invest in product development etc.

This can put you to minimal financial exposure (around £800 to £3000 for filing a patent application depending on complexity).

If it is as good a product as you think it is then it might be easy to license.

Once you file a UK patent application you have 12 months to file corresponding foreign applications. Over this time you could try as hard as possible to find a licensee (talking to them under confidentiality agreements).

If you don't have success in the first 12 months then you could pay for any international protection yourself, or only pursue protection in the UK, or withdraw the application and file it again to start a new 12 month period.

I think this can be a very good option for lone inventors.

Cheers

David

 

[Free Radical]

To answer PCB Consulting’s questions…

I'll be hiring my product designer on day rates, and I would hold exclusive IP. Assuming the product design goes well, there is a very large market in the waiting so any royalties are potentially very lucrative.

About our long term relationship, well that's the 64k question. At this stage I don't know what he will deliver, what if I achieve IP using his services but require another product design firm at some point, say for product adaption expertise (adding value)?

The logical trail seems to lead to some sort of legal agreement that offers royalties for products directly developed by him.

As for what I get in return for equity, well his offer was that the 1% would be an incentive. To put it crudely, the quality of work would be that much higher. Not that he intends on doing second rate work on fees alone, rather that he would be willing to go that extra mile.

I guess this is not how I envisaged partners to come on board. It's all far too vague. I do want to be positive towards potential partners, but my concern is what is their commitment? I could keep giving away 1% to every professional I meet for free, and technically they are not obliged to do anything beyond what I'm paying them in professional fees. If I ever need to switch consultants I am left will various shareholders playing no part in the business.

Actually just talking this through has helped me to think clearly about what exactly my problem is with this offer. And the answer is for any potential partner to state explicitly, and under legal agreement, what they will be offering in the way of time and or investment.

Thanks PBC consulting for the constructive questioning.

To David

My objective is to construct water tight IP through the design process. In so doing I should be able to put a stronger argument to Licensees. Another more profitable option would be to attract investors and manufacture myself and hence sell to everyone and anyone I want.

Surly David, as a patent attorney, you must see many inventions that achieve IP which then fail to make it to market. I am trying to create a prototype that can be sold in the shops before approaching investors and high st stores as a way of reducing risk.

 

[David Warrilow]

Free Radical

I don't know the product, so I don't know whether or not the design process is important to creating watertight IP.

If the inventive concept is not going to change through the design process then you are in a position to create as watertight IP as possible. i.e. If all you are doing is putting finishing touches to the design, not making developments that might relate to patentability then further design is not necessary to file a decent patent application.

I have indeed seen many people file patent applications and fail to successfully commercialize them, but in my opinion this is not necessarily related to having gone through a design process or not.

It seems to mostly be whether or not the product is commercially viable. Does it actually solve a real problem? Will people buy it? (no matter what the final design is).

For extreme example, if we were to file a patent application for a teleporter that worked, it wouldn't matter particularly what it looked like or the fine detail of construction. The priniciple behind its operation would hold up a very very lucrative patent application. Once we know the principle of operation we can file for a patent, have the MOD design and it and accept an enjoyable license fee.

Thus, the question to ask is 'will the design process alter the inventive concept?'

If not, then the pure licensing approach might be a good one. Otherwise you might spend a lot of money on product development only to find that in reality there is no market for it (for some reason or other).

Evidently, as I don't know what the invention is I cannot provide any informed opinion or professional advice.

If you have considered the matter in detail and believe the approach you have adopted is the most appropriate then it may well be, and I wish you the best of luck.

Cheers

David

 

[Free Radical]

Hi David, yes I see where you are coming from now. We have identified existing IP barriers, it's not a teleporter I'm afraid, but we are confident that we can circumnavigate them via the design process.

Cheers for everyones contribution to this topic. The route ahead is becoming clearer

 

[davisonconsultancy]

First of all you need to be sure other people believe in the product, as I have come across so many people with ideas that when tested against the market do not stand up.
Before spending any large amounts of money on IP, manufacturing prototypes and marketing, I would invest time and some money in market research.
I tend to find that most ideas are out there already, in one form or another, so you need to understand why you are different. Market research should determine, what the consumer thinks to it, would they buy it, what value would they expect to pay for it? Based on that information, can you manufacture, distribute, and sell the product at a profit to everyone in the supply chain?
You could try a Business Angel that is an active investor, that way you get the funds, but just as important the business skills and contacts.

I wish you well, it's nice to hear from people who are still motivated in the current climate.

 

[David Warrilow]

Hi David, yes I see where you are coming from now. We have identified existing IP barriers, it's not a teleporter I'm afraid...

Damn... another inventor that hasn't solved the problem. I hope that one day someone walks through my door with that one.

Good luck with whatever it is.

David

 

[newlocs]

Hmmm..
This thread bears an uncanny resemblence to an experience I had a few months ago.
Will see how things pan out.

 

[Free Radical]

First of all you need to be sure other people believe in the product, as I have come across so many people with ideas that when tested against the market do not stand up.
Before spending any large amounts of money on IP, manufacturing prototypes and marketing, I would invest time and some money in market research.
I tend to find that most ideas are out there already, in one form or another, so you need to understand why you are different. Market research should determine, what the consumer thinks to it, would they buy it, what value would they expect to pay for it? Based on that information, can you manufacture, distribute, and sell the product at a profit to everyone in the supply chain?
You could try a Business Angel that is an active investor, that way you get the funds, but just as important the business skills and contacts.

I wish you well, it's nice to hear from people who are still motivated in the current climate.

Hi, I agree with the importance of market research, i.e. being market orientated, but being product orientated is also a legitimate approach. Take the extreme example of the teleporter above, would you spend valuable resources asking the market if this is a good idea, or do you patent asap and let the product do the talking?

Surely the approach must depend on the product in question. In our case we are conducting market research and product development so that we can then take it to buyers and gage the market. This is a risk but we believe it's a calculated and clear headed risk.

Thanks for the input davisonconsultancy