If You Build It...
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.
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:
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.
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.
Adapted from Entrepreneur magazine's Startup Guide #1813,Bringing Your Product to Market, by Don Debelak