From Idea to Capitalization
I’ve been working on an idea over the last few weeks to develop a new product along with several other people. As the instigator of this project, I have been learning a lot about how an idea moves from concept to production, from burning money to profitability, from unheard of to world famous.
I have also been reading several questions on a variety of sites posed by people in a similar situation to myself – they have an idea, but no money to bring it to fruition in the real world. The questions tend to focus on team building and raising capital. The questions also indicate a lack of information on the process by which many start-ups have become successful. I am fortunate to be working with a colleague who has past experience in this field, and has been guiding me as I develop my own idea into a profitable business.
In light of the information I now have, I thought I would put up a basic checklist of steps to go through when developing a new product or service:
- You think of a new idea for a product or service, so you write it down. Talk it over with someone else (be careful about confidentiality, and have that person sign an NDA if you think it is warranted) to make sure that you get an objective opinion about your idea.
- Write down a short description of your idea. Explain what it is, who wants it, and who will pay for it. Do some basic market research to figure out what alternatives are currently available, and how much they are charging. What are people saying about your [potential] competitors? Briefly describe the business model for your new business (how will your business generate revenue). The entire description as outlined here can be short, perhaps a mere page or two.
- Figure out what it will take to build your product or develop your service. Determine what the bare minimum is that you will need. Remember that if you believe in your idea, you should be prepared to take a risk, in that you will not be getting paid until your idea earns money. You don’t need a fancy office, or top-of-the-line equipment from day 1. This can be ramped up later. Work from your home on the old Pentium 2 that you never bothered throwing out. Buy equipment used when you need to.
You need to remember that anyone investing in your idea will expect you to be responsible with the money, to save it when you can, and shop around for the best prices. You need to keep accurate records of your expenses and revenues. If you need some expertise that you personally don’t have (i.e. to hire someone) see if you can trade them equity to help you with the work, or accept a deferred payment.
- Start building the product. Start writing a business plan (this can take over 100 hours to complete, and you will need it if you look to borrow money from the bank, or talk to an angel investor).
- When you reach the point at which you need outside funds (for example, you have a legal bill for $5000 to incorporate your business and to handle your copyrights and patents, plus a $25,000 bill for equipment that is absolutely required, plus a $15,000 bill for marketing about to be incurred), figure out how much money you absolutely need, and add 20% as a contingency. Then use the following guideline to figure out who to talk to:
- $0 – $50K: Talk to your bank, family, friends. Can you get a loan, or a line of credit? This will likely be the easiest and most cost-effective way to raise these funds. Beware of mixing family and business when borrowing from friends and family, though. You will be really unpopular if you borrow money from a friend and then your business collapses.
- $50K – $500K: Look for an angel investor. You will have to give up equity in your business for this, and be prepared to have someone looking over your shoulder constantly to see how you’re spending the money. Also remember that this is the first round of investing. If you give up too high a stake in your company at this stage, you may face difficulties later on when trying to raise more money.
- $500K+: You have entered the world of venture capital, and will need to read more detailed information on how to work with a VC. There are many excellent resources available online for the uninitiated.
- Now that you have the money you need, finish the development, launch your product or service, and market it. Initially, take the revenues earned (all of them) and use them to develop your idea further, to improve your product, to increase your visibility in the market. Once you have a steady revenue stream, you can then think about hiring yourself to do more work on the idea, paying out a divided (which implies profitability) or upgrading your public appearance with fancy offices. However, before you do that, if you owe money for a loan or line of credit, make sure you pay that back first.
By no means are these steps to be taken as a bible. However, you may find this useful if you are thinking about starting your own business, or have an idea that you think might be viable as a means of earning money.