Your quest is finally complete. After hundreds of hours of effort, thousands of dollars, and innumerable worries of failure, you’ve finally succeeded. Your idea has become a reality, with riches and fame just around the corner. With the hard work done – envisioning, developing, and protecting your invention – you approach potential investors and buyers for capital to manufacture and sell your product. In the process, you discover one or more of the following:
- the majority of people don’t understand the value of your invention or have no interest in it
- some claim it is their idea
- others try to steal it
- those who see its potential want to pay a pittance for the product and leave you standing on the sidelines
Such is life for an inventor. From the years 2002 to 2012, more than 4.6 million patent applications were made and 2.2 million patents issued according to the U.S. Patent and Trademark Office. Yet, only a small proportion of the products covered by the issued patents become commercial successes.
Inventors and entrepreneurs should understand that ideas alone will rarely attract significant capital or serious investors. Ideas are a dime a dozen, but value comes from a plan that will make an idea reality. Before seeking capital, inventors need to take their idea to the point where it can be a successful product and is reasonably likely to repay an investment with a profit.
Trevor Lambert of licensing agency Lambert & Lambert proposed a three-way relationship between the elements required to have a licensable product. These same elements affect a potential investor’s interest in an invention or product:
1. Product Protection
According to Eric W. Guttag, “Most companies, including small ones, may not want to talk to you about your invention unless you have some form of ‘exclusivity’ in it.” At the same time, some companies (particularly big retail chains) have no qualms about copying a non-protected product, arranging overseas production at a lower cost than the inventor is likely to obtain, and adding the product to their sales channel. They know most inventors lack the financial base to sustain a long, drawn-out court battle to prove and collect damages.
For these reasons, protecting your intellectual property and establishing it as your own, whether by a confidentiality or non-disclosure agreement, a provisional patent application, or an issued patent is critical if you intend to approach potential investors. This would include related trademarks, copyrights, and domain names. Procuring the advice of an experienced intellectual property attorney is recommended before seeking any outside investment.
2. Marketing Potential
To get a sense of the market for their product and prepare for the rigor of investor analysis, inventors must ask themselves a few questions:
- “Who would want to buy my product?”
- “What need does it satisfy?”
- “What alternatives currently exist for my product?”
Since most problems have multiple solutions, the likelihood of a single product dominating an existing market is low. Investors will compare your product to similar products already in the marketplace to estimate market prices for your invention and project how much market share it is likely to capture. They will look at potential and existing competitors and predict what their reaction is likely to be when your product is introduced. Investors will also consider the viability and costs of exploiting multiple market channels to determine which ones would be most effective for your product.
To raise money to get your product to market, you must be able to logically show that it will generate sales volume in the short-term and survive competitor reactions to a new market entrant. A marketing plan is a critical component of your business plan and illustrates to investors that you are a practical businessperson who understands that a good, even superior product is only the first, and not necessarily the most important, component of a successful product launch.
3. Commercially Feasibility
Investors are interested in only one thing when they consider a potential investment: Will I make money? To attract capital you need to convince a potential investor that your invention has a market and that it can be produced and delivered to a consumer for a lower cost than the consumer will pay. As a consequence, you must consider who will manufacture your product and the costs of the various components that go into manufacture as well as how it will be sold, who will sell it, and the cost of marketing and sales. Projecting those costs, the market price, and the sales volume of the invention allows a potential investor to estimate the commercial viability of your invention.Some inventors elect to produce and sell their products on a small scale to prove the existence of a ready market which can be exploited on a large scale. Though the per item cost is higher than it would be in full production mode, the financial risks in new inventions are not normally the costs of production, but whether there is a ready market. Establishing actual sales eliminates some of the marketing uncertainty and reduces the risk for potential investors.
One way to accomplish this is to outsource essential functions, such as production, logistics, marketing, and customer service to others for a fee. While adding to the variable costs of a product, this practice avoids the need for large capital investment, at least initially. Moreover, existing manufacturers and marketing firms have assets in place to quickly get a product to market. Plus, moving functions in-house and capturing margins previously paid to contract manufacturers and marketers is always possible in the future.
When the Stars Align
The George Foreman Grill (US Patent 5,606,905) , an indoor, electrically heated grill that made grilling of food and cleanup more convenient, was initially invented by Michael Boehm and Robert Johnson. The inventors contracted with the boxer Foreman for marketing pizazz and took the idea to Salton Inc. for manufacturing and marketing expertise. As Mr. Boehm stated in a 2004 interview, “The concept was valid, the marketing strategy was on target, the product worked, solved two problems and incorporated some ‘marketing magic’.”
About the Author
Michael Lewis is a former business executive and writer for the financial resource, Money Crashers.