Starting your own business venture

If you've tried and failed to get a licensing deal with a company, a good positive move is to consider starting your own business, making and selling the product of your idea. That means you’re no longer an inventor waiting for something to happen; you’re an entrepreneur making things happen. For many inventors this shift in thinking and behaving is the key to success. Starting your own business venture needn’t mean giving up your existing job, and it certainly doesn’t mean abandoning your goal of a licensing agreement. If companies say ‘We like the idea but don’t think it will sell’, all it may take to change their minds is some proof of sales. For many products that involves setting up only a very small business that you can run in your spare time from home. But for anyone running any business, survival has to be the number one priority. Entrepreneurs may be risk-takers, but good entrepreneurs limit their risk as much as they can. One, who started his business in a chicken shed and is now a multi-millionaire, says: ‘If you want to be successful you must first avoid failure. You can’t hope to get it right if you don’t first reduce your chances of getting it wrong.’
Your initial goal should therefore be to operate a business for only as long as it takes to find out if your product sells. You’re out to prove a point, not make a profit. And if the product doesn’t sell, you must be able to get out fast with minimal loss.

You can start on your own, work with partners or develop as a joint venture with another company

A large company might help develop your product so that they can better assess it, but if they then don’t see enough profit potential they may dump it. A more meaningful joint venture is likely to be with a smaller company, who might want your idea more but be reluctant to take the plunge into full, expensive commitment. Your willingness to lighten their load could make all the difference. For example, if you can handle marketing they save thousands of pounds immediately. If you get such a joint venture opportunity, consider it very seriously. A company’s involvement can dramatically increase your product’s market potential AND reduce your exposure to risk.

Basics

The golden rule is: the lower the risk to an investor, the better your chances of getting investment
One way of reducing risk and raising capital is to provide hard information of your prospects.
It’s therefore vital to have a business plan to convince potential backers that:
Your product can succeed, Your business aims are achievable, You’ll spend their money wisely. and you can show you know the market.

Another way of reducing risk is to have firm orders or letters of intent from customers, so try to win at least some orders even if you haven’t yet got a product, or have only a few prototypes to sell. Evidence of even a small number of sales is far more reassuring than a glowing report on technical performance but no sales. It tells a potential backer that the product will sell, though how well remains to be seen.

You won’t get any help from banks. They’ll never help a high risk start-up unless their lending is guaranteed in full.

How much?

Depending on the nature of your product, you might only need a small amount to market it rather than a large amount to make it. Given enough advance orders you might be able to launch your product at a cost you can afford or raise much more easily. You could generate these by offering an inducement that makes customers happy to wait for delivery, such as a big discount on bulk orders placed by a certain date. On that date you trigger production of orders received plus a sensible surplus for stock, secure in the knowledge that the money to pay for it all is in the bag. All you may then need is a short-term bank loan or overdraft to tide you over until the cheques roll in.

Sources of funding

For a small business venture based on a new product and run by a novice the basic sources of funding are: Personal, Family and friends, Business angels.

Raising finance on your assets such as your home, existing business, etc is one way of generating capital.

At the start, when all you know is that there might be a market for the product, you can probably forget all but family and friends. But they can be a potent source of start-up capital, as the inventors of Trivial Pursuit discovered. When every company rejected it and they’d spent all their own money, they sold 500 shares to friends and associates and raised enough to launch it themselves. The rest is history. People will often happily gamble a bearable amount in return for a small but worthwhile stake - for example one per cent per £1000 invested - if the idea appeals and is presented convincingly.

Business angels are private individuals with money to invest, usually in the five-figure range that is hard to find elsewhere. Most are successful business people who look primarily for effective management. If you’re found wanting here, many won’t invest no matter how good the product and its prospect.

Business partners

You might find a business partner prepared to invest in your venture, but a partnership is often a dispute waiting to happen so first sign a joint legal agreement that defines the division of responsibility and the sharing of spoils.
A possible way of avoiding partnership problems is to form two separate businesses: one to manufacture, one to market. You own most of one; your partner owns most of the other. If the partnership fails, you keep control of the part of the business that concerns you most.
A company might invest not just money but resources and personnel. There are clear advantages in joint ventures but don’t give away more control than the deal is worth. Getting professional advice is essential.

Public funds

Government grants, Local and regional enterprise grants and support from universities are all sources that offer assistance rather than investment, but can cut your need for investment to a level where you’re more likely to get it.

The DTI offers a range of grants to small companies or individuals with funding typically a generous percentage of eligible costs.
Local authority help for enterprise varies from area to area, so shop around; it may be worth locating your business away from home. But there’s no free lunch, so look for hidden traps in any offer. Many for example involve 2-3 year tenancies during which rents have been known to rise steeply.

Universities are worth trying as a source of cost-reducing help. Options range from free or low-cost student projects in market research or product design to Government-funded innovation schemes based on academic and business partnership.

Venture capital

Available only to businesses run by experienced managers. Fund managers will barely glance at a novice project, no matter how good the product. But if you can get a hearing they might usefully redirect you through their network of contacts.

Licensing Agent

A licensing executive or licensing agent can be indispensable in helping you to land a licensing deal. They’re usually individuals with deep specialist experience of particular markets who can speed up the process of finding and negotiating with the right company. Your patent agent or a Business Link adviser should be able to recommend someone.

Publicity

A ‘wild card’ route to possible funding. Showing off a protected invention in the right environment - a competition or exhibition, or on the internet - can generate business interest, especially if you help the process along by sending out news releases.

Commercial invention agencies

They offer to place your invention for a hefty fee. They advertise widely - often calling themselves ‘product developers’ - but may contact you directly via the address on your patent application. All make large claims about what they can do, but if they do anything at all it may be no more than send brief details of your invention indiscriminately to companies, most of whom will treat it as junk mail. Some offer a genuine service but it still might not amount to anything you couldn’t do yourself at far less cost.
Those based overseas, particularly in the USA, seem to be the worst. Tactics include flattering you into an ‘urgent’ meeting, usually at a hotel or some other temporary address where you’re pressured into signing an agreement and parting with cash, typically thousands of pounds. Others start by charging you a few hundred pounds for a market assessment, which is always positive, followed by a request for several thousand pounds to place your idea.

The best advice is not to deal with any of them. Second-best advice is:

Before any meeting:

• Check that their address exists and is permanent.
• Make them disclose in writing their fees and what you get for your money.
• Ask for documented proof of their success.
• Run a business credit check on them.

During a meeting:

• Be prepared for a great deal of ‘friendly’ pressure.
• Never hand over money, even a deposit.
• If handed an agreement to sign on the spot, refuse. Insist on time to think and take it to a patent agent or solicitor for an opinion.

Consultants

Watch out too for self-styled business or marketing consultants who offer help for fees typically in the £200-500 per day bracket. Many small businesses have been ruined by them. You do not need them, use the free services of Business Link or other agencies.
‘Consultant’ has been cynically defined as someone who borrows your watch to tell you the time, but a bad one will tell you the wrong time and then keep your watch. Consultancy can be a last resort of redundant managers; when established companies won’t touch them with a barge pole they may end up ‘advising’ start-up businesses in environments where by rights you ought to be safe.

Until you know your way around it can be difficult to tell good, bad and indifferent consultants apart, though the good ones will usually be too busy with larger clients to approach you. They’ll all say you’ve got what they can cure: an IT specialist will prescribe an expensive computer system, a marketing specialist an expensive ad campaign, and so on. Those who offer to get grants for you are not miracle workers; they go through channels open to anyone, but a risk is that they may spice up the application with false information that could severely compromise you later.

Your best strategy is not to get into a position where you need someone whose contribution you can’t assess or control. Take small steps you understand rather than big ones you don’t; progress might be slower but it’ll be a lot safer. As a general rule: if anyone with what seems like the right stuff wants to pal up with you as associate, consultant or whatever:

• Ask yourself why; what can possibly be in it for them?
• Ask yourself what you stand to lose.
• Contact the businesses they mention and ask if they know or can recommend that person.
• Look for signs of a serious need for money - debt, divorce, drink etc.
• Ask him or her to do something small but useful. Does it happen?

If this all sounds a mite paranoid, remember that a business venture fronted by a raw enthusiastic beginner, and perhaps with a decent pot of start-up funding in the bank, is precisely the easy target some opportunists look for and all too often find.

Note:

This fact sheet is mainly based on the NESTA Inventors' Handbook, http://www.nesta.org.uk/ which is copyright to © 1999 Peter Bissell and Graham Barker (ex staff member). We highly recommend this site and their book, "The Business of Invention" (ISBN 0951 3856 31) to any inventor, as it is the best we can find relating to turning inventions into a business in the UK. This copyrighted material should not be used for commercial gain without the prior permission of the copyright owners being sought.