Invent It, Sell It, Bank It!: Make Your Million-Dollar Idea Into a Reality (15 page)

Establish that people will buy your product.

Have a good idea of what the market will bear.

Set a suggested retail price.

5

HOW TO GET FUNDING

“All of our dreams can come true if we have the courage to pursue them.”

—W
ALT
D
ISNEY

Inventing your way to success and wealth doesn’t come cheap. Maybe you started working out of your garage and built your first model out of odds and ends at home, but once you decide to move from occasional hobbyist to full-time entrepreneur, you’ll be amazed at how much money you’ll spend before you even make your first pitch. First, there’s the money you’ll spend on your prototype. Then, once your market research confirms there is interest and demand for your invention, you’ll need to start spending money to manufacture your product. You may also file a patent, which can sometimes be another hefty investment.

Together these expenditures can add up to anywhere from a few thousand dollars to tens of thousands of dollars, and that’s before a single unit has been made. And chances are you didn’t
think to start a fund ahead of time to finance this endeavor. How could you? If you’re like most people, your great idea hit you like a bolt out of the blue. And once you recognized its potential, you also realized that you would have to move lightning fast if you wanted to ensure that no one beat you to it. So now you suddenly need cash, and lots of it. Unless you’ve already built and sold a business, or are otherwise in an extremely comfortable financial position, you’re probably going to have to borrow money to follow through with getting your invention to market.

How much will you need? The best way to figure that out is to draw up a solid business plan. This is where you put into writing a detailed explanation of what your business is, how it will operate, and how you intend to make it grow. If you’ve gotten this far, you’ve probably already gathered a lot of the information you need. The market research you’ve completed to determine your invention’s market demand, competition, customer demographics, and price will be the foundation for your plan.

In contrast to your elevator pitch, which boils your idea or business down to a couple of sentences that can explain and excite even a stranger about your idea, a business plan is a very detailed document. It’s required if you’re going to ask a bank or venture capital (VC) firm for money, but it should be written even if you are going to self-fund your company. You’ll learn a lot by doing it, and it is something to follow when times get tough. You can and should even publish it for your key employees so you know everyone is on the same page.

A
business plan
is a multi-page document that should explain to an investor or stranger who has no prior knowledge of your product or business exactly what your product or service is, how and where you are going to make it, how you’re going to sell it, your assessment of the competition and why yours is better, and how much money you are going to need to start it
and run it in the near and long term. Each type of business is different, but for a basic product-invention business, these are the minimums:

  1. Executive Summary (1–2 paragraphs)

  2. Company Summary (1 paragraph)

  3. Market Description (1 paragraph)

  4. Products (1 paragraph)

  5. Manufacturing or Procurement (1 paragraph)

  6. Sales Strategy (1 paragraph)

  7. Fulfillment (1 paragraph)

  8. Marketing and PR Campaign (1 paragraph)

  9. Management Team (1 paragraph)

10. Patent and Trademarks (1 paragraph)

11. Sales Projections (1 page)

12. Operating Costs (1 page)

13. Five-Year Projected Financial Statements including a Breakeven Analysis (1–2 pages)

14. Launch, Inventory, and First Steps (1 page)

15.
Financing—Equity Offering and/or Loans (1 paragraph)

16. Investment Opportunity (1 paragraph)

After reading your business plan, investors don’t have to be convinced to invest or not. They should understand the concept and be informed enough about the key issues and assumption that they can go out and research the parts they are concerned about on their own and come back to you for answers to their most important questions. Your management team should have a clear understanding of the goals and milestones they should be working toward.

Once you prepare your business plan, don’t just shelve it. You should update it often, even if you are the only employee. It will make you realize when you’ve missed deadlines and have overspent. It will remind you if you’ve gotten off track in your day-to-day operations, or have changed your focus, so you can decide if that is really a good or bad thing. If you did get investors, they will be expecting you to be following that original plan when it comes time for a board meeting. If you decide a course change is really for the best, they are going to need convincing; the updated business plan is about all that will give them confidence that you know what you’re doing and not just chasing the flavor of the month.

Putting together the business plan will ensure that you know your business inside and out, and you will be fully prepared for any questions a potential investor or lender might ask. These questions will differ across categories.

The main problem I often see in young entrepreneurs’ business plans is that they are naïve. They don’t understand the difference between a great idea and a great business. They write a business plan using all the information they have, but they fail to take into account the information they don’t have, meaning they don’t look far enough ahead and plan for the cost of growth. For example, entrepreneurs will usually know what it will cost to make their products, and what they will sell them for. They know their margins and use that number to calculate their profits based on how many units they can sell. They know which stores they are going to try to sell to, they predict that store sales will double or triple, and from those numbers they calculate their worth.

The problem is that these inventors completely forget that those additional sales are going to require additional infrastructure, like real estate and staff, especially if they land Walmart as a client. They don’t take into account the cost of all those adjustments. Additional sales also bring more risk of being stuck with overhead when things go slow or bad. You need to plan for that, too. Nothing sells forever, and sometimes items are a flash in the pan. Entrepreneurs tend to plot their sales in a continuing upward curve, ignoring the fact that even hugely popular products will see that that upward arc can eventually plateau, and then begin to fall.

So a good business plan should include some thought to how you’re going to keep the business growing through product extensions and new ideas. New ideas are the lifeblood of a business. Investors will love to hear about your great idea, and they love revolutionary concepts, but when they’re looking at your business plan, they’re looking for evidence that your business can survive beyond your single great idea. If they don’t see it, they know that if they want to invest in something that can make them
some money for the long term, they’re going to have to step in and help build the business themselves, using their own knowledge, connections, and infrastructure. So your business plan not only serves as your guide to keeping your business on track, it is the document that investors will read to determine whether you’re someone who is going to make them money or someone who is going to lose their money. Your business plan needs to indicate that you have thought ahead about all the potential costs for running a business, not just selling an idea.

There is no one-size-fits-all business plan; every business is different and thus has different necessary components and cash needs. But the reality is that at this stage you simply can’t know for sure how much money you’re going to need. Even the best planning and organizational skills can’t protect you from the unexpected, and there will inevitably be times when you have to back up and start over or head down another path. Whenever that happens, it will cost you time and materials, which of course means it will cost you money. Few entrepreneurs (no one I know) have ever come in under or exactly on budget. Every first-time entrepreneur has to learn along the way.

BUDGET FOR UNEXPECTED EXPENSES

Revisions

Very few prototypes are perfect on the first try. You’ll make an adjustment, and solve one problem and inadvertently create another. Your changes may double the cost of your sample. There goes money down the drain. I’ve had it happen to me.

Excessive Shipping Charges

To keep costs down, many inventors have their inventions, including their prototypes, made in Asia. But the cost of shipping
samples back and forth between here and China can cost three or four hundred dollars per package, depending on the weight and volume of your product. Of course, the more samples you send back and forth as you make adjustments, the higher the costs.

Compliance Issues

You need to be aware of government regulations and consumer product safety laws. If you manufacture your product and it fails to meet certain requirements, you’ll have to scrap your inventory and start anew.

The consequences for putting out a product that fails to comply can include everything from paying a fine to, in the worst-case scenario, its being recalled. It would be exceedingly difficult for a new entrepreneur to recover from a recall because not only would the entrepreneur lose a ton of money, it would hurt all of his or her relationships with retailers and customers.

Repacking and Reworking