Should you start a business based on your invention? The pros of
starting your own business are that you can have greater control
over your product's success and greater potential for making
more money. You'll also be better positioned to introduce a
series of products, respond quickly to market changes and maximize
your creativity in all aspects of the business.
The cons? This route is the most expensive and usually requires
dealing with investors. It means you have to learn how to run a
company, and it often obliges you to plow all your earnings back
into your company to fuel its growth. If you're still
interested in starting a company based on your invention, pay
attention to the following keys to startup.
Money Matters
Financing is a major ongoing concern for an inventor looking to
build a company. You'll have to fund the beginning stages of
the company yourself or with the help of investors, friends or a
contract manufacturer. Then you usually need to cover operating
costs as well as initial marketing and manufacturing costs.
Basically, you'll have to fund these four stages of
development:
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1. Concept stage: This includes developing the idea and
its market potential, and building models or prototypes. Funding
sources for this and the next stage include yourself, family and
friends, a contract manufacturer, or a person in the industry.
2. Verification stage: This includes selling
preproduction or pilot production runs to actual customers in a
small market. If that's too expensive, this stage should at
least include either trade-show attendance or interviews with 10 to
15 potential customers in the distribution network.
3. Initial production runs: Typically, new entrepreneurs
are more worried about losing a lot of money on their product than
they are about having a low profit margin on their initial
production run. Frequently, inventors will use low-cost, temporary
tooling for their initial run. Temporary tooling costs only 15
percent to 20 percent as much as permanent tooling. It might only
last one or two runs, but it allows the company to determine if the
product will definitely sell. Funding sources include outside or
industry investors, contract manufacturers, or possible
distributors of your product. You might also get investments from
family and friends, although they'll need significant financial
resources to back this stage of growth.
4. Full-scale production: Once you have proved through
several trials that the product will sell, you can get more
traditional funding for full-scale production.
Inventors divide their growth into these four stages for two
reasons: It's easier to get investments in small chunks while
you prove how your product will sell, and it allows you to keep a
controlling interest in your company. Your business becomes much
more valuable to investors as you complete each step. Investors are
going to demand a substantial portion of the company if you ask for
money before you've made any discernible progress in the
market. Funding sources include banks and SBA loans, venture
capitalists, larger investors, and contract manufacturers.
Do Your Research
You'll want to conduct thorough research as you're
developing your invention, not only to ensure that you're not
wasting your money or time, but also to present a strong case to
your potential investors. Your research should start before you
spend any money and continue until the product is introduced to the
market. You can expect to go through these stages:
- Initial research: Before starting out,
validate your premise, and verify that your product is meeting a
primary customer need. People express many desires, but they
generally won't buy something unless they actually need
it.
- Prototype research: Make sure the product
does what people want and performs well enough for people to buy
it. Also, be sure your product has all the features end users want.
Let them try out the product, and get their reactions.
You should make a prototype for both mechanical testing and for
market research. Do this no matter how sure you are that the
product will sell. Most inventions must go through three or four
prototypes before they are perfected from both a manufacturing and
a marketing point of view. In the long run, making those prototypes
saves you lots of money and allows you to produce the best possible
product.
- Preproduction-model testing: This stage
verifies once again that the product works well enough for people
to buy it and that people believe your product is worth the price
you're charging. Do this even if you had good research results
with your prototype. You may have since made changes that seem
minor to you but are important to the end user.
When starting out, most inventors should use a contract
manufacturer and concentrate their energies on marketing the
product. Tooling and other startup manufacturing costs are very
high, and manufacturing can be a complex process. Don't dilute
your efforts as you're beginning to sell the product. Once you
get your sales going, you can take over the manufacturing process
if you choose.
It's Who You Know
Unless you're very well-financed, your most important contacts
are people who can help you raise money. Your second-most important
contacts are industry insiders who are in the distribution channel
and can help you launch the product. Your third-most important
contacts are end users or distributors who can give or help you
make a big sale.
Many companies get initial funding from angel investors-people
who might invest $25,000 to $50,000 to help get a product off the
ground. Angels are more interested in helping new businesses than
in making tons of money for themselves. Some of these investors,
especially retired ones, are also willing to mentor you throughout
the product-introduction process. Make contacts in the industry
first, and find one or two people who will help you learn the
market. Then look for an angel investor to join your team.
Need a lifeline?
Try some of these helpful resources for inventors:
- Entrepreneurship courses at local colleges:
These courses can introduce you to all the legal requirements and
ramifications of starting a business and help you set up your
administrative functions. Many colleges have special programs for
businesspeople. Your local Small Business Development Center will
know about the courses in your area. Visit www.sba.gov/sbdc to
find the closest center.
- Inventors clubs: Go to www.uiausa.com to find
a club in your area. Seek an organization that lists local
engineers, industrial designers and prototype builders who will
help you for below-market rates.
- Manufacturers' Agents National
Association: MANA is your source for manufacturers' sales
reps who may want to carry your product. See www.manaonline.org,
or contact them at (877) 626-2776.
- The Office of the Independent Inventor:
This division of the U.S. Patent and Trademark Office publishes
information to help inventors better understand and access the
Patent Office. See www.uspto.gov.
- Trade publications: Check out the Gale
Directory of Publications and Broadcast Media for a list of
trade magazines, or find trade shows near you with Trade Shows
Worldwide. For more information, see www.gale.com, or call
(800) 877-4253.
Security System
As an inventor building a company, you're probably investing
years of your life and much, if not all, of your personal assets in
your product. So you'd be foolish not to get every ounce of
patent, trademark and copyright protection you can afford. Before
proceeding very far, investigate the type of protection you can
obtain. Investors frequently get a patent attorney's opinion
about the strength of a patent before investing. You should also
get an opinion from a patent attorney about just how strong your
patent protection can be. If your attorney feels you'll only be
able to get narrow protection, consider either a private-label
sales agreement or a joint-venture introduction to cut your risks.
Or you may have to come up with another product for which broader
patent protection can be obtained.