Archive for valuation
I was reviewing some information from one Venture Capital firm that described their annual efforts. Far from the laid-back lifestyle that some people imagine, this successful VC firm spent much of their year traveling to meet with over 6,000 companies. A few hundred would be selected and screened more carefully, and then a dozen or so might be selected for funding. Whew, what an exhausting funnel. But they are looking for gems in the rubble of entrepreneurial activity, most of which is bound for failure.
The experience of skilled venture capitalists points to a few key issues that all of us can apply to increase the odds of success in our entrepreneurial efforts and help us be more selective and less fatigued in filling the limited funnels of our own innovation efforts. Mike Alder, one of my favorite gurus of start-up success, now head of the Technology Transfer Office at Brigham Young University, once told me that the most important thing in his experience was the management team. Great technology with a dysfunctional or incompetent team will go nowhere. It takes a good team and especially a good leader to have a serious chance of success. That’s been our experience also at Innovationedge, where we have worked with a number of start-ups to assist them in commercialization (though most of our focus is on helping larger companies with their new product and innovation efforts).
Inc. Magazine has a valuable little piece, “6 Thoughts Inside the Mind of a Venture Capitalist” by John Warrillow. Read the whole article, but here are the six key questions that many VC people consider when they hear a pitch. Even if you never deal with the VC community, you should be using most of these questions as you evaluate your own entrepreneurial activities and plans.
1. “Why you?” (Are you uniquely qualified to play in this space? Do you have the expertise it takes to have credibility and a chance to succeed?)
2. “Should your concept really be its own product?” (Or is it just a new feature for an existing product? If it’s the latter, you should be licensing your product to the existing players in the market, not launching a new one.)
3. “How much will it cost to get someone to buy your product?” (I’m often amazed at how many start-ups haven’t carefully considered this. Details of distributing the product, for example, are often neglected. Demand for the product is almost always wildly exaggerated.)
4. “Can I protect your idea?” (If you want to sell your company or license your invention and lack means to prevent direct copying, you’ve got an uphill battle. One VC leader told me that they are simply much more interested in technology with a patent, even if the patent isn’t rock solid. Of course, sometimes know-how from proprietary research can give you a hard-to-imitate-lead without a patent. Sometimes.)
5. “How much money do I need to invest before your company will be worth more than it is today?”
6. “Can I fill the holes on your management team?” (A related question: Are you located in a place that high-powered business leaders would never move to? Can I relocate you to a more interesting area?)
The questions begin and end with consideration of the qualifications of the team and its leader. If you sink in that area, the business isn’t going to float.
Screen your projects with the VC lens, and you’ll be less likely to plunge into futile innovation fatigue.
As part of my “Magic and Innovation” series, here is a 3-minute video blog, “Transforming Nickel Ideas to Dollar Innovations: The Danger of Excessive Valuation of an Invention.” In it, I discuss one of the innovation fatigue factors that stem from the innovators or inventors themselves when they think their early-stage invention or embryonic innovation is far more valuable than it really is. This brief lecture includes a sleight-of-hand effect in which a nickel coin is transformed to something more valuable. No trick photography is used.
It’s so easy for a prospective innovator with a great idea, an interesting product, a cool gadget, or a new software concept, to do some calculations and come up with gargantuan valuations. “Let’s see, everybody in the world eats bananas. If as few as 20% of the North America buys my new automatic banana peeler and slicer at $15 each, that’s $1 billion for North America alone! So all I want is $50 million and you can own my provisional patent application. And I’ll toss in my non-functioning plastic prototype for free. ” Inventors and entrepreneurs need to look through the same “Lens of Risk” that potential licensees or acquirers must use. Going from a nifty “nickel” concept to an innovation that succeeds in the market involves numerous risks that must be overcome for the transformation from nickel to dollars to occur. Until you help your prospective partner or licensee have a genuine reason to believe that success will come, the value of your brilliant concept will be painfully low. But there are things you can do to enhance its value and help overcome the hurdles to success. This includes building the diverse intellectual asset estate we discuss in the book, completing your “Circuit of Innovation™,” working with partners to overcome various hurdles, and making iterative changes to address feedback from the market place. It’s not easy, but when done right, you can greatly increase the odds of success and experience the magic of successful innovation.
From YouTube.com/magicinnovation (Jeff Lindsay’s Magic Innovation channel): “Magic and Innovation: Transforming Nickel Ideas to Dollar Innovations,” August 14, 2009. Recorded in Appleton, Wisconsin. All rights reserved.
Among the many barriers that we inventors, entrepreneurs and would-be innovators face is the one we can’t blame on others. Fatigue Factor #2 in our grid of fatigue factors is innovator deficiencies. It refers to the barriers we create for ourselves through excessive pride, unreasonably high valuation of the invention, arrogance, unwillingness to share or collaborate, stubbornness, unwillingness to delegate or gain the help of experts, and a host of other personal weaknesses. So many good ideas are killed by these personal flaws. They are painful to admit and recognize, but an awareness of our own weaknesses is not only the beginning of wisdom, it’s the beginning of innovation success.
The icon for this fatigue factor was designed by Mark Benyo, an artist in Appleton, Wisconsin (owner of Benyo Designs). It depicts a long chain (wrapping back and forth across the window of the icon) in which one of the links is replaced with a paperclip. The individual innovator/inventor in this case is the weak link in the cain of innovation. Unless that link is strengthened (perhaps with the help of strong allies or experienced guides), failure is likely. We offer more detail in the book, of course, and outline some steps that can be taken. Prospective innovators, take note. Look to yourself first to understand why your innovation goals are not being reached, and then find the right help to take you to the next level.
One of the most common innovator deficiencies involves excessive pride, which translates into unreasonable expectations regarding the value of an early-stage invention or concept. Valuation of inventions is always difficult. However, if you think your embryonic invention is worth many millions or even billions, chances are you’re way out of line at this point. An idea alone usually has very little marketable value. An idea converted into working prototypes and a valid patent has more value, but the real value comes only by addressing the many risks that potential licensees or acquirers face. Can it be produced economically? Is it safe? Does it meet unmet needs? Can it be marketed successfully? Will it sell in the marketplace? Can it withstand the competitive response? These risk factors take time and money to address. The idea may ultimately be worth billions, but no one is going to hand you a truck load of money for something that is just a twinkle in your eye and maybe a piece of government paper on your wall. Not yet. It will take time, diligence, and investment for the potential to be discovered. Until then, have reasonable expectations as you collaborate to bring your concept to the market place, so that ultimately you can enjoy a cut of the potential returns your innovation can bring.
Erratum in the book: An unfortunate but minor error in the printed book is that the icon for innovator deficiencies (shown at the left) is not at the beginning of the chapter on Fatigue Factor #2, as it should be. Instead the icon shown there is the one for Factor #5, “Flaws in Judgment and Decision Making.” Sorry about that! The icons in the fatigue factor grids are correctly displayed.