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.

Tell A Story

One of the keys to landing some investment capital is to approach investors with a story. While some have taken this to mean that they should write a story (for example, Cindy Pichette and Kris Whiffing of Clean Stay who appeared on Dragons’ Den, Season 5 Episode 4 which aired October 13, 2010), this is about more than catching the interest of potential investors, but about catching your own interest.

The story is about the need your business or product solves. That is, you don’t want to be like Andrea Ross, Dan Giercke andScott Gullion of Gurutropolis, who spent their pitch talking at length without actually saying anything. You want to have a tangible reason for existence, and a story helps you do that.

Some stories are long and complex, others are short and simple. Ideally, you should be able to illustrate your point within 30 seconds, if you can get it down to 15 seconds, even better. It should help you connect to your [potential] audience, to the point where they can visualize themselves as the subject of the story.

Stories have the tendency to answer several crucial questions about the business – why does anyone care, what problem does it solve, how does it solve that problem. Everything else is fluff.

This is, perhaps, one of the reasons that businesses have slogans and mission statements – they help everyone in and around the business see the values of the business, and the reasons for its existence. If you and your business do not have that, perhaps you need to take a step back and evaluate why your business does exist, and see if you can rephrase that reasoning into a simple statement.

Subtle Signs of Success Waiting to Happen

After having watched several seasons of Dragons’ Den and examining the pitches that landed deals, I started to notice a pattern. That was compounded with my involvement with various social network sites which target entrepreneurs and small businesses, and I started to realize that there are certain patterns in the successful businesses.

That’s not, of course, to say that every business has to have all, or even any, of these factors. These are just the patterns I’ve noticed.

Motivation

First, the people involved in the business are motivated to succeed. They have a burning desire to see the business do well, and are pushing hard to make things work. They are, in general, fairly motivated people – at least when it comes to something that interests them.

Ego

The people in the business are very much self-aware, in that they know both their strengths and their weaknesses, and exploit both to the advantage of all around them.

Questions

Successful people look for answers to their questions, and aren’t afraid to say they don’t know. They are constantly learning as they encounter new and changing circumstances.

Adaptation

Life is constantly evolving, and successful businesses are likewise changing over time. A business that cannot adapt to changes will eventually become obsolete, especially in the area of technology, which is evolving at an incredibly rapid rate.

Pride

If you want to be successful, you have to be proud of what you’re doing. You have to know how to toot your own horn without sounding arrogant, how to show off your accomplishments without foisting them on reluctant audiences.

What do you have in your business? Are there other subtle signs that you’ve noticed? I’d love to hear about them!

You Have to Love What You Do

I was giving some career advice to my brother, who is thinking of starting his own business so that he could be in control of his own destiny. Since he wasn’t sure what type of business he would like to start, I suggested that he find something he loves, and see if he can turn that into a career. Within minutes, he came up with working out, and I suggested he look into becoming a Personal Trainer, and find out what it would take to become successful on that path.

However, at a more fundamental level, what’s important is that you love what you do, and the reason is that when you’re running your own business, it isn’t always a smooth road. Sometimes things go well, and everyone is happy. Clients get the service or products they need, employees are being treated nicely, vendors are aligned with your own goals.

Sometimes, though, the road is rough. While the ending may be sunny, you need some motivation to make you stick with it. You need something (other than cash) to convince you that it’s worth running along this road. If you love the work you do, then the motivation is the fact that while you may not enjoy this particular period of time, you do in fact enjoy the bigger picture of the work you’re involved in.

I love what I do. Not every day, and I have certainly had my share of sleepless nights wondering whether my business will survive one crisis or another. But what pushes me to persevere is that I know that ultimately the crisis will be water under the bridge, I’ll have learned how to deal with yet another situation, and my business will be stronger for it.

And at the same time, I do, in fact, love the work I do.

Where Does Your Loyalty Lie?

I was reading the expose in the Wall Street Journal on how Facebook applications have been discovered to be sharing more information about the users of those applications than people may have realized. This is not the first time, and I suspect not the last time, that the giant social networking site will be criticized for its poor handling of user data.

Perhaps the reason for this is that the loyalty of Facebook is not placed where users of the site would like it to be. While one may dispute whether or not the slogan is accurate, the Google slogan:

Do no evil.

it is nonetheless indicative that the company claims, at least, to have the best interests of its users in mind. That is, decisions are presumably being made on the basis of how that decision could be perceived in a negative light, and whether or not that is an acceptable means of handling the situation.

Other companies, though, place their loyalty in the almighty dollar. As such, the implications they look at are relatively short-term, as they pursue increases in profits. Another way of looking at this loyalty is as a loyalty to the shareholders, who are generally concerned with the value of their holdings in the company.

The result of this loyalty perspective is that people in the company become aware of what might or might not be acceptable practice. This has downstream implications that even the people in the company may not be aware of until it’s too late. As an example, I don’t believe that Mark Zuckerberg is trying to abuse the data which users have entrusted to his site’s care. However, the fact that he (or more precisely, his company) has allowed such abuse to occur repeatedly in a variety of manners indicates the lack of importance that such trust occupies.

In other words, Facebook has indicated repeatedly that it only cares about its users data, and the protection of people’s privacy, only to the extent that they have been mandated to do so. The Canadian Privacy Commission required certain changes, and they were made. However, other violations of people’s privacy continued to occur, and until they were caught, they remained unfixed.

When your loyalty does not lie with your customers, then the trust they should place in you should generally be limited to the value that the item entrusted is valuable to the person or entity with whom the company’s loyalty does lie.

Are you placing your loyalty in your customers, or in someone else? Are the people around you aware of where your loyalties lie?

Step Away from your Business

This week’s article in response to Dragons’ Den has to do with a deal that was offered, and then turned down. Since the editing this season makes it difficult to determine the exact nature of the business and the terms of any deals offered, though, I will not discuss the deal in particular, but rather the lesson that every business owner needs to learn at some point.

There are times when the best thing you can do for your business is to step away from it. That’s not to say you’re shutting it down, but rather, handing over the reigns to someone else who is better suited to running the business to new levels.

Naturally, this is a difficult concept for some people. After having invested their sweat equity in their business, they find it difficult to hand over control to someone without that kind of emotional investment in the business. Often, this will mean that their own future in the business is limited, though other times they will find themselves in a position of reporting to their new manager.

However, if the business is to succeed, then that may be exactly what the owner needs to do. When talking investments, it may be required by the investor, who now has their own money on the line. They have a different vision for how the company will grow, and have decided that the owners, for whatever reason, are not suited to bringing the company there. As such, they may require sufficient control of the company, whether in shares or in seats on the board of directors, so that they can exert sufficient influence on the growth and development of the company.

Can you step away from your business? It would depend on whether or not you could see the benefit. If you are operating a business that nets a million dollars annually in profit, can you see relinquishing control of that same company, along with 51% of the company, so that it could bring in a hundred times that amount?

A true entrepreneur recognizes both their own strengths and weaknesses. When their weakness stands in the way of the growth of their business, rather than insist that they are best suited for the job, they hand over that responsibility to someone better equiped to do that work.

Sometimes, that position is the CEO of the company. Such is the life of an entrepreneur.

Work With the Rules

A website that I am heavily involved in has a restriction on it – they are not allowed to offer their services within the US, based on the nature of their industry and the licensing restrictions imposed by their governing body. This is, from a strictly technical point of view, a fairly trivial issue to deal with – check the IP address of the visitor, and if it’s in the US, redirect them to another site. When a user tries to register, if they enter their country of residence as the US, we inform them that we currently do not service the US market.

However, we were thrown a twist when we realized that the site was not being indexed by Google. This was because the search engine was using spiders with US IP addresses, and so they were being rerouted as well. Not only was this not our intention, we were being penalized for following the rules.

Since the site is undergoing a rebuild at the moment, we decided to bypass the issue for the current version of the site, as it would take a significant amount of work to cope with it. However, we looked at the long-term plans for the site, and found a solution.

While we have no intention of defying the regulations, we took a closer look at what those regulations are. As they stand, while the site cannot service US-based users, it can inform them of the service. The solution was therefore to not redirect users, but to inform all users whom we believe to be located in the US that they cannot register with the site, nor can they log in (thereby preventing them from having friends outside the country create accounts on their behalf), but they can browse as guests.

What this achieves is that the search engines, which are not trying to register or actually make use of the service, can now browse the site. Additionally, changes in the regulations would result in a relatively trivial change on the site, with their marketing and promotions already present in the US.

However, the real lesson here is that when faced with a rule or regulation that seems to pose difficulties to your business, remember to read the fine print. You will often find that even without violating the rules, you can still solve the problem you face as a side effect of a random regulation.

Lesson in Commitment from the Chilean Miners’ Rescue

I stayed up late on Tuesday evening to watch as the first few miners were rescued from their underground cavern after having spent 68 days trapped. I was amazed by the ability we have to watch, in real-time, as the rescue took place, the positive attitudes that could be felt through the video, the happiness as families were being reunited.

There was also some amazement at how well the rescue was managed. I remembered the rescue team saying they hoped to have the miners out in time for Christmas, and, once they reached the miners, that the trips in the capsule would take about 20 minutes to reach the surface. Yet, watching the miners come to the surface over 2 months earlier than hoped, in a trip that took 15 minutes rather than 20, made me realize that the rescue team really did know what it was doing, and not just in terms of getting the people out, but in managing hopes and expectations.

The team had under-promised in order to avoid creating a false sense of hope. They had then over-delivered, thereby increasing the happiness of those involved.

When you run your business, you should be doing the same. Yes, you could have promised what you can deliver, but then what if you’re wrong? What if things don’t go according to the best-case scenario, or even the average-case scenario? If you had promised worst-case scenario, then you know that you will be able to at least meet the expectations that are being set, and likely exceed them if and when your fears of delays and complications fail to materialize.