The Value of an Idea

This past week on Dragons’ Den, there were several entrepreneurs who presented their ideas on the show, only to discover that their valuation was completely off. In some cases, that was precisely the reason they did not get a deal, in others, it was merely a contributing factor.

What is fascinating, though, is the number of people who come on the show and clearly have no idea how to value their company. Watch a single episode and you will hear the question posed to nearly every pitch – what were your sales last year, and what are you anticipating for the current year? The reason this question is important is because it shows whether or not you’ve managed to make the first (and possibly most difficult) sales, and whether your growth is of a significant size. Additionally, sales are often the basis for valuation – that is, the value of a company is a function of the assets it owns, and the income it generates.

Many entrepreneurs, though, make the mistake of putting value on their ideas themselves. Sometimes this is valid, sometimes it is not, but it nearly always is over-priced.

If the idea is not protected by any patent or trademark, then it has next to no value. The fact that it is protected would give it the value of that protection, or about $10-20K.

Additionally, if work has been done which would be necessary to build the company, then the time to duplicate that work would also give the idea some value. For example, if the entrepreneur designs a gadget, and the design and construction of the prototype would take about 1 month to duplicate (that is, if someone were to see the product and try to duplicate it, how much time would it take), then the company would have an asset worth about a month of time.

The short version of all this is that if all you have is an idea and a prototype, you’re going to have a hard time getting a valuation over $50,000. Even that valuation would be considered generous in most cases.

Trying to bank on the potential future value of an idea is just a waste of time. An investment is made on the value it holds today, with the hope that in the future, it will be worth more. To pay the value of the future today would not be an investment – it would be an interest-free loan.