Invention – Investment

So you’ve had an idea, developed it into a prototype, completed market research then figured out how to manufacture it. Can you afford it? If you can afford it then business becomes easy. Make a business plan, build a business then run the business. If you can’t afford it then you need to reduce startup costs. If that can’t be done then you need investment.

The biggest barrier to most businesses is getting started. It usually requires a large initial upfront investment. Thankfully there are methods around some of this, particularly for low quantity manufacturing. First you can outsource it all and assemble it yourself. You can even outsource everything, including assembly and packaging, but that also has an up-front cost. You can also design it for low volume, for example with resin casted parts instead of injection molded parts. The cost of resin polymers is higher than injection mold plastic, but the upfront cost is lower. These are factors to consider when figuring out manufacturing.

The first investment option is crowdfunding. Crowdfunding can be considered a marketing and pre-order system. You post your project on a crowdfunding website and people have the option of pre-purchasing units. You first calculate the initial or startup costs, such as cost for injection molds, electronics certification, etc. Calculate the per-unit costs then a reasonable sell cost. Include packaging, shipping, taxes and any fees, including the crowdfunding site fees. Then it’s a simple equation to tell where sales meet costs. Anything above that is profit. Crowdfunding is a good way forward because it saves a lot of time and money. There are some sectors where market research is next to impossible, such as with a new type of product. Crowdfunding sites act as market research and sales in one. If you don’t meet your target then the site refunds the customers and you move onto another project. Good projects can easily exceed their targets, which is great because that increases your profit. After the crowd funding campaign finishes, you can sell the product with no additional startup costs.

If your invention isn’t suitable for crowd funding then you can look for investors. With investors there are no hard rules. Investors are human just like everyone else, so some will invest what others refuse to touch. The general rule of thumb is that they won’t touch ideas. Investors know that most ideas, even those that seem good, fail in the market. So if you approach an investor with an idea, expect them to reject it. They want their money to grow and they want to be able to retrieve their original investment if needed. If you can’t offer that then they won’t invest.

When approaching any investor, be honest. If they ask a question and you don’t know the answer, just say that. If they ask a question with an uncomfortable answer then say it plainly. Investors deal with people and most of them are great at smelling problems. The moment you lie or distort truth is the moment they lose all interest.

The next rule is don’t waste time. Everyone is busy and everyone hates it when someone wastes their time. Do everything you can to speed up the process. Make a short presentation with the bare essential facts. Have a business plan on a single sheet of paper. If an investor wants more information then they’ll ask. Have more details ready if they want it but respect their time.

Investors are generally businessmen. They have a good feel for business and for your product. Any good businessman knows that low barrier to entry means a lot of competition. They don’t want to invest in a company that will have to drop its rates to compete. If there’s a large barrier to entry then that discourages competition. So if your business requires a lot of startup capital, don’t be afraid to ask for that. Again, be honest about the costs.

Investors want return on their investment. They want a relatively secure investment and a return on it. This security can take many forms, from capital assets to intellectual assets. Patents are good assets too, but should you invest in patents right away? The answer is no. Patents are expensive and only one out of twenty patents make it to market. However, when dealing with investors, a bit of security is nice. This is where provisional patents come in. A provisional patent is patent insurance and they are cheap. After you file a provisional patent, that patent is locked for a year. Only you are able to file that patent later, should you decide to. With a provisional patent, you can freely share your design without worry. It also shows that the design is patentable, which investors like.

Investors look at products and businesses, but they also look at people. If you approach an investor with a new product and an existing small business that produces it, you have proven that you can invent something new and bring it to market. This is surprisingly rare, which makes your skills valuable. If you’ve done this multiple times then it will attract investors. You’ve proven that you have valuable talents, which means investors are happy to invest in you and your work. So while you present the product, keep in mind that you are presenting yourself as well as the product. Investors will judge both.

If an investor chooses to invest, he wants to ensure the business is properly run. This is normal but often uncomfortable for the inventor. This will happen regardless of how you feel so get used to it. They will invest for a portion of the company, which means they have a say in how it’s run. If this is too much then you can arrange other things. For example, you can arrange to have the investors run the business. You train the initial employees and are on-call support if they need it. This will give you more time to invent new things, if that’s your goal. Since you do less work in the business, it means you’ll make less from it. Many inventors prefer the art of inventing rather than dealing with mundane problems.

Attracting investors can be difficult and many will refuse. This is normal and part of the process, so get used to it. If there’s one rule here, never burn bridges. Don’t put the investor on the spot or ask why they aren’t investing. Instead, thank him for his time and ask for advice. Many investors are business experts, and experts generally enjoy mentoring. They will happily provide advice and it’s often extremely good advice.

If an investor is interested then this leads to negotiation. You need to enter the negotiations prepared. You need to know how much your business is worth and how much you are willing to sign over for an investment. If you haven’t studied it yet, then study negotiation. Read books like Never Split the Difference, by Chris Voss. Negotiating is normal in business, so it’s a required skill. As an inventor you probably haven’t had to negotiate so it’s uncomfortable. Once you start learning it, you’ll realize that most interactions in life are a negotiation. There are methods of negotiating where both sides end up better off. You also have to be willing to walk away from a negotiation. Learning more about it will teach you all the tricks.

You may fail to find investment, and again that’s normal. However that isn’t the end of the line. If you feel the product is good and will make money then change your approach. Redesign the manufacturing method so you can do it yourself. Figure out how to build it in a spare room or garage. If you can get off the ground then grow naturally, it will lead to a business with a strong foundation.

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