Calling The Shots

Funding your invention - one step at a time.

In 1995, when Mike Mogadam was laid off from his third job in five years, he wasn't fazed. Understandably sick of the corporate world, the San Francisco engineer used his spare time to work on an idea he'd been brewing for awhile. A year earlier, a friend had lost his bar business because of bartender theft and challenged Mogadam to invent a system of liquor control for bars and restaurants. Intrigued, Mogadam used his engineering background to create the Barmate, a wireless point-of-sale system for liquor control. Now 32, he expects to hit $2 million in sales this year.

The Barmate, which is designed to prevent over-pouring or theft by bartenders, features a $125 spout that attaches to liquor bottles and pours a set amount of liquor into each drink. It also sends a wireless signal to the cash register to record the sale, and to a central computer to help management keep tabs on nightly sales volume and liquor-inventory levels. A system for a busy nightclub or bar could cost anywhere from $10,000 to $20,000.

Most inventors are reluctant to develop high-tech inventions like the Barmate because of the large cash investment required. The Barmate ultimately cost more than $375,000 to introduce, but Mogadam himself funded only about $18,000 of that. He was able to collect the rest in stages that accomplished specific goals. Here's a closer look at his five stages and what was involved:

1. Market research: Mogadam started his project by talking to local bar and nightclub owners. He wanted to see if others would be interested a liquor-control system, and also wanted to ensure the product's projected $12,000 to $15,000 price tag wasn't too high for nightclub owners to afford.

He quickly discovered bar and nightclub owners knew bartenders frequently dispensed too much alcohol, and that competitive systems with far fewer features than his proposed system sold for $15,000 to $20,000. The owners were willing to buy a liquor-control system--if it could pay for itself in less than a year.

2. Prototype: So far, all Mogadam had were an idea and a receptive market. Typically, those aren't enough to get an investor. The next step is to create a detailed description of the idea, prepare technical specifications and build a representative prototype that demonstrates the product will work. Mogadam worked with two engineer friends to build his prototype for $15,000. It took about four months, and most of the money went to pay the other two engineers. Mogadam himself worked on the project for free.

3. Verification: Mogadam had run up $15,000 on credit cards, but the next steps in the project--designing the product for production and testing it at a nightclub--were going to cost a lot more than he could put on plastic. He needed investors, and he needed to convince them the product would sell.

Mogadam had talked to his father and some family friends. They had money to invest but weren't confident the Barmate would succeed. So Mogadam decided to exhibit at the 1995 International Hotel, Motel and Restaurant Show in New York City. Despite a $3,000 fee, it turned out to be a great investment, as exhibiting at the show let Mogadam talk to dozens of potential customers who showed interest in the Barmate system. More important, his father and other potential investors came to the show. After talking to nightclub and hotel owners there, they went from being skeptics to enthusiastic supporters--and ultimately, willing investors.

4. Final engineering/beta testing: Mogadam's prototype had been pieced together with available components, and though it looked OK, it wasn't quite ready for production. After prototyping, the next step in any invention is to design the product for ease of manufacturing, durability, quality and cost control. Another consideration for the Barmate was ergonomics: The part that attached to the bottle had to be easy for bartenders to use.

Once the design is completed, the product should be sent to a site where it can be tested in actual conditions. This is usually called a beta test; the site where the test occurs is called a beta site. This step cost a total of $100,000, which was financed by Mogadam's father and other relatives. To avoid running out of money, "I conducted all my development and business functions from my apartment, and supplemented my budget [by working] as a part-time instructor at San Francisco State University," Mogadam says.

In almost every case, a new product has only one shot at introduction. If problems occur, you won't get a second chance. Sure, you're anxious to make money, but you could lose everything if you don't take the time to complete this step.

5. First production run: First production runs are expensive, since you have to pay for tooling, fixtures, inventory and packaging.

Most likely, you'll either have to take on some new investors or borrow from a bank. Mogadam received an SBA loan for $300,000. That paid for all the tooling, fixtures and inventory needed to build enough products for 15 installations. Using the income from those initial sales, Mogadam built up a cash position and continued making more product.

Mogadam did a great job launching an expensive, high-tech product. His engineering background certainly helped, but more important, he introduced his invention in stages. That way, he could demonstrate at each stage that his investments were being used for a tangible, achievable goal.

This approach works for anyone--not just a high-tech inventor. If your invention starts looking costly, stop worrying about how you'll complete the project and start working on completing it one step at a time. Using a step-by-step approach, you can successfully introduce virtually any type of product to the market.


Don Debelak (dondebelak@uswest.net) is a new-business marketing consultant who has introduced new products for more than 20 years. He is the author of Bringing Your Product to Market (John Wiley & Sons, $19.95, 800-225-5945).

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This article was originally published in the April 1999 print edition of Entrepreneur with the headline: Calling The Shots.

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