This issue begins a series of four articles that will focus on converting your invention into a revenue-generating business, the critical information you need to gather to get started, and how to put together the two initial documents to gather funding to start your business: financial projections and your investor pitch.
Now that you have your idea and you’ve proven you can get it to work in a lab setting, how do you make money with it, get the recognition you deserve, or build the sustaining ability to keep designing new inventions? No matter what your ultimate goal, getting money to pay for the value of your invention has some critical steps. We’re going to identify those first critical steps and guide you on the path to getting started. First we’ll help you gather critical business information you need. Second, we’ll walk you through the financial projections you need to put together, and then finally help you assemble your presentation for investors.
When I was a student at MIT, I often heard fellow engineers say about a technology, “that’s really elegant.” It is great to get that recognition from one’s peers, but the first step to your business is to recognize that “elegant” doesn’t drive business success, and therefore, is not likely to get you funding or investors.
Three Phases of a Business
To help us orient ourselves, let’s group the many processes of creating a business into three phases an engineer can appreciate: the invention, product prototyping, and scaling the business. Many other publications have similar names, and more phases, but this is simple and clear enough to support our discussion.
The invention phase. Your invention/innovation is the cornerstone of the product, solution, or service. During this phase, the focus is on proving the feasibility of the technology. You are focused on the proof of concept, defining the solution, and the market that it serves, patents or IP protection, and defining the customer benefit different from what the market offers today.
Building a product prototype. In this phase, you’ll focus on developing the user interface, ensuring against unwanted side effects (electrical shock, for example) and building a reliable configuration that the widest range of skills can effectively use. At this point, you really need to develop “lighthouse” customers, who can not only help you refine the product, but also help you test the viability of your benefits. This is as important for engineering as it is for marketing and investor attraction, because it can validate your business model.
Production. Scaling a solution for production is the next phase, and has the full range of challenges: production engineering, gathering more financing, setting up a scalable business, production, scaling sales and marketing, and international distribution.
While there are many things that are needed to grow your business, the driving function is the ability to raise money for your business. And last, before you begin this long road, you need to answer a question: You’ve been working as an engineer or scientist to develop this idea. Do you want to focus on being a manager of people and finances, or continue hands-on inventing/engineering? The answer will drive you to choose whether to be the CTO, Chief Engineer, or President, or perhaps pursue a strategy such as licensing the technology.
Defining Your Market
The first step to building the communications to get funding is describing the business benefit to a specific set of customers. As you think about those benefits, think about whether to build a company or license technology to an existing company. To do that, ask yourself these basic questions to determine your strategy: How big is this market? Are there any companies that hold more than 15% of the market share? Do you see a family of products coming from this? Is this a new way of doing something in an existing market or a whole new market? What competitors, alternatives, or status quo methods exist that customers could choose instead of your product? Are there any partners or complementary technologies necessary for someone to use your product? How do you plan to arrange for them to participate? What will your partners provide (e.g. technology, production, marketing, finance, sales, distribution)? What does your product do that would convince people to choose it over an alternative, a competitor, or just doing things the same as before? How many units do you think you can make and sell in the first three years, and what percentage of the market is that?
One caveat to remember: You are defining the market of people and/or businesses that have the problem, not people who will solely buy your product. To illustrate, I had a conversation with a group of engineers about the market and what we offered. When I asked them to define the market, the answer was “people who buy our products.” That answer is circular, and won’t help you gain credibility with potential investors.
So let’s break this down. If you envision that your offering will be sold to businesses, ask yourself what industries and size of companies have this problem. What do they currently do in each industry? If you will sell your offering to consumers, ask yourself the age range, gender, and occupation(s) of the people that have this problem. Where do they live? When they try to solve their problem, where do they get their current solution(s) and who do they go to for advice?
If you don’t have all the answers now, you’ll need to answer these questions in order to be able to describe how the offering will solve the customer’s needs, and how you’ll inform them, sell to them, and distribute your product to them. Answering these questions with quantitative estimates of market, business revenue, and business benefit is the most important foundation to building a viable, sustainable business model. It will take time, lots of conversations with others in the market, venture investors, angels, and customers, as well as industry analysts and industry press, and some money for product and market research. But it will be money well spent to avoid the disaster of unasked market questions, which in our experience, is the leading cause of premature business demise.
Once you have drafted answers to these questions, you will be ready to move on to the next step: estimating the events, revenue, and size and costs of the business — the focus of next month’s article.
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