A high level tour d'horizon

Here are highlights of the things you’ll need to know and do to get a company off the ground and a physical product to market.

The idea

At the beginning was the idea. You think of something new, innovative, never done before, and super importantly, that excites you. The next step is to validate it.

• Are you solving a real problem? Will your invention relieve customers from a pain so great that they will pay?
• Is your solution really great? Are you 10x better than all existing alternatives?
• Is the market BIG? Generally (but not always), a big problem means a big market. The point here is that you will work so hard on your startup regardless of the market size, so you might as well ensure you have make the biggest impact possible.
• Is the market growing? That’s what will make investors tick.
• It is protectable? That keeps them ticking.

The team

Since it’s your first company, you’re better off teaming up with others to found the company. That’s generally better than going-it alone 1) because brainstorming decisions improves their quality and 2) to share the enormous amount of work.

Startups are a bit like marriages, so picking the right co-founders is incredibly important. Here’s what I think should be your considerations, in order of priority:

• Trust. You need to know in your heart of hearts that you can trust them completely.
• Excellence. They should be superb at their skill.
• Complementarity. e.g. product + technical + business
• Very nice to have: a rainmaker. Someone who has the experience and connections to get you customers and/or funding. Jump on the opportunity.

Prototype

You need to build it to validate the idea for yourself, and it’s a must-have to get investors, customers, or other companies to work with you. Just do it.

Early Financing

There are a million ways to do it, but generally the first funds come from FFF (Friends, Family and Fools). You should stretch this money as much as possible, so do not take a salary beyond what you need for food and a roof.

A great way is to start while in school and build the prototype as a class project.

A more recent and really good alternative is to join an incubator. Do some research to find out if they have reach within the investor community, and if yes, do it. Don’t fret about their equity stake, the business advice alone is worth it, and they offer much more.

The next stage is to get money from angel investors. These are wealthy individuals who invest semi-professionally. You’ll have enough to get to market.

Market Validation

This is the most difficult, expensive, and important aspect of any business. Which is why having a product sense is so important. You will want to gain as keen a sense as possible as to whether people will buy the product before you invest colossal amounts in manufacturing and marketing it.

Luckily for consumer products, crowdfunding allows you get an early read on the cheap. Not only do you test the market demand, but you hopefully raise enough cash to offset inventory costs. And you get some marketing buzz to boot!

For business to business (B2B) products, you’ll have to engage customers early to assess demand. If demand is high, try to have them pay to test your prototype or commit in writing to future orders. This will be a testament to their seriousness.

Manufacturing

This is a big job. Your manufacturer should be your biggest partner. If they’re great, you’ll sleep sound. Pay the price of a world-class manufacturer, it’s worth every penny.

Start working with the manufacturer early. They have the experience to make products and they become your greatest R&D resource.

This said, you’ll have to quickly up your game at production time. You’ll need to have identified the market really well, defined the product in minute detail, documented all specifications, and generally sharpened your professionalism to comply with the manufacturing processes that allow them to deliver on time, quality and cost.

Your manufacturer can also be your bank. Your biggest win is to have them accept production terms that allow you to get paid before you have to pay them. If the terms aren’t quite that dream-like, you can still manage by way of discounting purchase orders or factoring receivables. We’ll talk about these elsewhere.

Sales

Know the sales cycle of your industry, as it drives the schedule for product development and manufacturing. For seasonal consumer industries such as toys, the cycle is about 12 months long. That is, buyers want a first peek at the product a year before it will land on their shelves.

This means you’ll need to show them a prototype, tell a compelling story about why it will sell, and present the accompanying marketing assets (packaging, promotions, advertisement plan, etc.). This takes about 9 months to prepare, so you’re looking at an 18-24-month lead time for a consumer product.

Typically, you will have to attend trade shows to present to customers. At these shows you’ll have to up your marketing profile so you would be taken seriously by the big boys. Budget time and cash accordingly.

Distribution

Three ways to get your products in people’s hands.

The distributor model

You sell to a distributor who then sells to retailers. The distributor is therefore a middle person who will take a cut of the pie. I strongly recommend going this route at first. Why?

• Distributors take the inventory risk
• They pay for promoting your product, which often costs more than making it in the first place
• They pay you on delivery - no need to finance production!
• They figure out the sauce that sells your product: price, channels, promotion, etc. They’re doing your market test at their dime
• They are already vendors of record with retailers, so you avoid the tedious work of getting setup as a vendor yourself
• They handle customer service

For all these benefits, they get a portion of your profit. But by then, you would have proven that the product works and that your business is viable, so it’s worth it.

Direct to market

Here, you’re selling directly to retailers. It’s a riskier model because:

• If the product doesn’t sell, the retailer will ask you to take some of it back or contribute to marking down the price. Either will cost you millions and you can’t afford it
• If you refuse to take it back or pay, which is your contractual right, they won’t buy from you ever again and you’re out of business
• If you want to maximize sales, you’ll have to own inventory. Red flag!
• They always buy on terms, meaning that you will have to pay the manufacturer before they pay you
• You have to manage pricing so that no one retailer is undercutting all the others. This takes know-how
• Customer service is on you

You typically want a sales agent helping you manage each retailer (e.g. pricing).

On the positive side, you cut the middle person out and make more money if the product works. You also get to control the brand, so you can leverage the success of your first product for your second.

Online sales

This is where you put your website to work. You’ll want to have the highest price of any retailers, so they don’t stop working with you.

The advantage is that you have no middle person, you keep all the profit.

However, the volume will be low. Amazon will easily outsell you by 10 or 100 times over.

And you will have to own some inventory and handle the fulfillment logistics (order processing, warehousing, shipping, etc.)

Marketing

This is the tail that wags the dog. For consumer products, you’ll spend more on promoting your product than on making it.

Getting people to know that your product exists is a first step. Generating the need to buy is marketing’s magic.

If you’re working through a distributor, they typically cover marketing costs. But you still have to generate the marketing assets and work with them on the promotional strategy.

Depending on the nature of your product, those assets may include TV advertising. Making the ad costs anywhere from $30K to $250K. Putting it on air costs no less than $1M in the US market. It’s a big boys’ game.

Packaging is another marketing tool. It has to sell the product in 5 seconds to a customer standing 5 meters away. Hire a professional firm to design it.

Intellectual Property

As a rule, don’t disclose publicly anything you want to protect without a patent application filed. You can disclose in private under a Non-Disclosure Agreement. If you do disclose publicly, then you can still file in the US within a year, but not in the rest of the world.

A first filing can be fast and cheap - take the US provisional patent route. Basically, document everything you want to disclose, including a technical description (no need for legal wording), blueprints, sketches, pictures, etc. File it on the USPTO website as a Provisional Application. It costs less than $150, remains confidential, and gives you the freedom to disclose and a year to file a full utility application.

Filing a utility application costs about $10K. You likely want to file internationally first (a PCT application) and choose specific territories later.

Insurance

You’ll need liability insurance before you can sell. Just in case your product hurts someone. The cost depends on sales volume. Budget $50K.

Growth financing

Once you’ve succeeded with your first product, you’ll want to scale your business. For that, you’ll need to raise an institutional round of investment, typically from venture capitalists (VCs).

You’ll want an introduction to the VC at the right level of seniority so there are as few barriers as possible to the decision makers. Your incubator will do that.

It’s generally a good idea to see multiple VCs in a short period of time so you can compare their offers.

You don’t need a conventional business plan document anymore, a presentation is now accepted practice.

Hiring

They all say it and it’s true. Hire only insanely great people. Use yourself as the lower bar.

You can’t afford these people’s market salaries. Yet, they’ll take a pay cut to join you because they’re passionate about what you’re doing. Reward them with stock options.

Equity to employees

Make every employee an owner. They’ll be working crazy hours and sharing the risk, it’s the right thing to do.

Advice #

Ask for help

If you’re not talking to people because you’re worried about protecting your idea, you’re making a mistake. The gain from getting advice far outweighs the risk of disclosure.

In my experience, people will help you just if you ask, for nothing in return. Do it now, and give back once you’re successful.

Get a business mentor

Preferably a senior person who has been an entrepreneur.

Get a top business lawyer

The great ones become business advisors.

Get an accountant

Have them keep your books in good standing. It will save you a lot of work when going through due diligence with investors.

Agree on a file structure

Figure out a file structure for the entire company and stick to it. It will facilitate finding information as you grow.

File your documents (especially contracts) methodically. You’ll be relieved come diligence time.

Recommended Readings

• Nesheim, High Tech Start Up
• Moore, Crossing the Chasm
• Roseman (my business mentor), Outrageous Optimism