Posted September 20th, 2009 by admin
There are many good articles about patents, so I just want to address what I think is the biggest misconception I’ve heard from entrepreneurs. It is:
Once I get a patent, nobody else can sell my product.
Would that the world were so simple. A lot of entrepreneurs have unrealistic expectations surrounding patents.
One fine day I was looking through a catalog that had my patented product featured on page 12. On page 18 there was an identical knock-off of my product that was selling for half the price. How could they do it? I had a patent for Pete’s sake.
The company that had knocked off my product was called, let’s say “Rat Bastards.” I called them and asked what they were doing. They replied that they had engineered their product to have one difference with our patent application specs. We said that we didn’t think it was a sufficient difference, and that we would likely sue them. We also said that we’d tell the catalogs that they had infringed on our patent, and that the catalogs should stop selling the knock-off due to potential legal concerns. At that point Company X told us that they would sue us for making false accusations!
We consulted with several intellectual property attorneys. Even though they were “contingency based,” they all wanted significant deposits. The bottom line was that Rat Bastards had cleverly engineered around a design issue. We’d likely eventually prevail in court, but like most things, it wasn’t about right and wrong, it was about what made sense.
And that wouldn’t have been the end of the legal costs. There isn’t a magic Patent Fairy who magically stops all infringing products when they arrive in port. First you have to know when they’re arriving, and then be present to have a hearing in that jurisdiction to stop them from being imported.
Then of course we had to consider the ramifications of a lawsuit that we’d bring against another company in a major catalog, with whom it was critical for us to maintain a good relationship.
After considering all the costs, hassles, and potential damage to our distributor relationships, we decided not to sue. Instead, we went back to the catalog, and told them that since we had just reduced our costs, we could pass along a lower price, and asked if they’d help us out, since we were the original. They agreed to drop the other product.
In the end, it didn’t matter that we had a patent. Indeed, we learned that Rat Bastards’ strategy was to find cool products, research the patents, then take advantage of any design modifications that companies had done in the two years since they filed for the patent, and then design their own knock-off to exploit the difference! So in our case, having a patent granted actually created a competitor.
Does having a patent help? Most of the time, absolutely. And being able to tout “patent pending” in your marketing materials always helps. But simply getting the patent doesn’t mean your new address is Easy Street.
Posted July 30th, 2009 by admin
You have a hot shot attorney. The kind that can get the major players in your industry on the phone. He/she knows the basic terms of the most recent industry deals, and is a fearless negotiator. Folks aren’t happy to get letters from them on the fancy letterhead with all the partner names. So when the time comes for you to make a deal, you should let sick your big gun on it, right?
Not for my money.
Don’t get me wrong, this article is not about lawyer bashing.
But there’s a time and place for lawyering, and negotiating ain’t it. Lawyers, as smart as they usually are, aren’t business people. That’s what negotiations are about. Business.
You should determine the terms you want / will accept, as well as the tone that should be used throughout the negotiations. It’s fine to hand things over to your attorney once you’ve decided what needs to be done, but letting them run that show usually isn’t a good idea.
Lawyers are trained to have a very different mentality. They anticipate problems, consider contingencies, etc. All too often, they feel like they’re earning their keep by being the tough cop who tells the other party no. On the other hand, since they’re paid by the hour, some lawyers have been known to manufacture problems to actually draw out negotiations because that’s where they earn their money.
The best course is for you to decide what you want from an ongoing relationship and current negotiation. What I like to do is take the initiative and make a bullet point term sheet, as it helps steer the negotiations. Then have the other party draft the first pass at a contract, and save on your legal fees. Then have your lawyer review it.
I always have attorneys review contracts, but I don’t let them drive the bus.
If you do it this way, you’ll likely not only save the money, but often enough, the deal itself.
Posted July 27th, 2009 by admin
How many times have you seen (or written!) something like the following:
“Based on our revolutionary technology that offers five times the current industry standard performance at one tenth the average price, we predict that by Year 3, we will capture 20% of the $2 billion worldwide market.”
This is what I call the “If we only get 2% of China” fallacy. And it’s an obvious “tell” that your business plan assumptions are either naive or glossing over exactly how you’re going to get your customers.
Yes, if you have better technology at a better price – and have the ready access to distribution, you may well capture 20% or more of a given market. The point, though, is that this magic 20% is not just going to fall into your lap. You have to fight for each and every sale, and what’s more, the more of the market you capture, the harder your existing, and future competition, will fight to regain it. This is “top down” forecasting.
Far more effective are “bottom up” projections.
Describe how you’re going to get each sale, what your revenue is, and what your costs associated with each sale are. Then address issues of scaling – meaning as you ramp up to greater and greater volumes, will you have capacity issues of personnel, equipment, bandwidth, etc. That’s what a business model is.
Use overall market size to show how attractive your industry is, and what the potential ceiling for your revenues might be, then a granular business model analysis to show how you’ll get your customers.
Nobody really cares what percentage of the market you have, just how many profitable customers. So instead of focusing on a percentage of the market, focus instead on a percentage increases you’ll have in terms of sales, then convince investors that you’ll hit your targets. Start from the bottom and go up, and you’ll have a better chance of making your bottom line.
Posted July 13th, 2009 by admin
I’ve seen umpteen business plans / prospectuses / PPMS and the like where the Use of Proceeds earmarks a full competitive salary for the entrepreneur(s) and also repays them what they’ve put into the business so far. Ask the entrepreneur about this, and they’ll usually say something along the lines of “I’m taking so much risk already not working for a large company, I can’t afford to take a hair cut on my salary when I have a mortgage and kids.”
The world doesn’t care about your expenses – but investors do.
Unless you’ve already been so successful in the past that investors are beating a path to your door, you’re not doing investors a “favor” by “allowing” them to participate in your business. And if you do have investors clamoring to get in on your new opportunity, chances are that you’ve already made so much money that you don’t need investors, and choose to not have them to begin with.
Your new company is not you, and it doesn’t owe you more than the lesser of:
1. What you’re worth
2. What the company can afford
You don’t start a new company for security, you start it because you’re confident that before long your hunch will be proved right in the form of a rapidly growing list of happy customers.
If you don’t have your own skin in the game – what’s to stop you from stopping when the going gets tough? You can simply walk away at any time, no worse for the wear. And where’s your commitment? If you don’t believe so much in what you’re doing to go without salary, bloat up your credit cards, take out a second mortgage, drive a beater car, etc. etc. then why should anyone else?
The best signal you can send to investors, employees, and partners, is that you yourself are personally financially committed to your new business. You tell people that you’re committed, but they hear that all the time and tune it out. Show people that you’re truly committed – that you’ve burned your ship after landing on the island, that you’re the pig whose bacon shows commitment in the breakfast as opposed to the chicken whose eggs shows involvement – choose your metaphor, and you’re halfway home.
Posted June 17th, 2009 by admin
I’ve been involved in lots of start-ups, and seen many more over the years. From my successful and tragic experiences, I’ve decided that if I can do without three things in particular, I’m off to a good start.
No Partners
If you’ve had a business partnership go south, you know just how bad it can get. Shouting matches, competition for clients, lawsuits, you name it, they all happen when a partnership blows up. It can be worse than a messy divorce, because unlike most divorces, it’s your income that unravels.
But even if you get along fine with your partner, and you trust them, they work hard, and they’re a credit to your business – even with all that, you can easily have an honest disagreement about where to take the company. That can be the most frustrating situation of all. Everything is perfect except for your goals.
No Investors
You’ll never have a better relationship with an investor than on the day they invest. After that, their primary thought is not on growing the business, but exiting the business. And unless they invest more money, they’re now a constant weight on your honor and company reputation. They can launch shareholder suits in bad times, and in good times, be a frequent distraction from your core business by making you create reports, hold meetings, etc. And that doesn’t count all the time it takes before they actually write you a check.
No Products
If you haven’t dealt yet with Chinese factories, cargo ships, customs inspections, distributors, retail returns, etc. and you’re about to – go in with your eyes open. Having done this, I know all too well many of the pitfalls that can happen at any stage. Maybe your factory announces in the middle of a production run that your cost has just doubled. Or you’ve missed your ship date and you’ll be late by three weeks. Perhaps in your arrival port you finally discover that your units are faulty. Or your big box store’s return rate is just high enough for them to send you back all your remaining units – in boxes marked for them. I’ve had these, and many other problems, happen to me. And there are plenty more.
What Does That Leave?
What kind of business has no partners, no financing, and no products? Service companies that you grow slowly. Websites. Software. Many others. If you can possibly avoid the biggest business nightmares which are caused by partners, investors, and products – you’ll never know just how fortunate you are.
What If I Need Partners, Investors, and/or Products?
Sometimes you can’t help it, because that’s just how your business is. Here are some ways to mitigate common problems:
Partners: Spell out clearly, and put down in legal agreements, the percentages of ownership, responsibilities, authority, work load, work hours, etc. Get impartial Board members. Have explicitly stated procedures upon dissolution, and death of one of the partners. Agree to what the company is about, and specifically, how you will allocate resources over the next year, so that on a daily basis, it’s not about one partner effectively changing the company, but simply about execution.
Investors: Set reasonable expectations for the company’s performance. Discuss how and when you plan to get the investor their money back, and what kind of return is expected. Most entrepreneurs have little idea how to repay investors. Have clear bylaws as to what rights investors have, and conduct regular Board meetings.
Products: If possible, go with a product that you can put 100 of on your kitchen table – small and light. Research patent prior art thoroughly. Have a back-up factory lined up in case your primary factory goes out of business or becomes impossible to work with.
Easier said than done, I know. But nobody said that buying that private island in the Pacific was going to be easy. Thousands of people succeed in new businesses every year with partners, investors, and products – sometimes they get lucky and things work out really well, other times they just have to work harder.
Posted May 22nd, 2009 by admin
In case you haven’t heard the phrase “done deal,” it’s used to mean that an agreement with someone, written or otherwise, is all but signed or shook on. (For now, let’s assume that “signed” also means agreed upon formally when there is no written agreement, as verbal agreements can be binding.) It implies that the agreement will in fact occur, and it’s now just a formality, there’s nothing to worry about whatsoever.
When people believe it to be the case, they’ll start acting like the contract is signed. They’ll start purchasing equipment, hiring employees, putting out press releases, making travel plans, buying houses, etc.
There’s only one problem – there is no such thing as a done deal. There are but two kinds of deals in this world:
1. Signed
2. Nothing
Far too many times have I seen deals that were “99.99%” locked up, with contracts agreed to and everyone on board still go haywire at the last minute because a company is bought out, someone resigns, someone else wants more money, an investor’s accountant changes the investor’s mind, the other bidder ponied up more money, some technology stopped working right, etc. etc. etc.
That’s why signing the contract isn’t the last little bit of formality, it’s the only thing that matters, because without it, nothing else counts. Don’t count on any deal until it’s signed. Even then lots of signed deals go south, so until you get the money, you just never know. The one thing I do know is that when someone tells me it’s a “done deal,” all it means is that they haven’t been burned – yet.
Posted April 27th, 2009 by admin
I came across this on Guy Kawasaki’s blog, which is another great free resource – http://blog.guykawasaki.com.
It’s a free utility that wizards you through a bunch, and I mean a bunch of questions, then just when you’re about to give up on it, it spits out a free custom Term Sheet for you, in Microsoft Word or other formats.
If you’re not familiar with Term Sheets, and by extension, venture financing, it’s a great tutorial. If you are savvy to them, you’ll appreciate just how robust this free service is.
Go to www.wsgr.com and you’ll see it on the home page.
Pretty cool.
Posted April 16th, 2009 by admin
Getting investment in your start-up may be absolutely necessary to grow your business. But unless you’re getting “dumb” money from family and friends who won’t ask too many questions, going for investment too early can prove disastrous. Here’s why.
You never want to get investment to pay daily operating expenses, because that means you’re in bad financial shape, and perhaps your business just isn’t that solid. Hey – if you can’t be more critical and honest about your company than anyone else, you’re already in trouble. Furthermore, any kind of sophisticated investor will be able to immediately sniff our your precarious situation, and either because of the large amount of risk, and/or because they know they have you in a tough place, they’ll squeeze you for really tough terms.
If you then start doing much better, you’ll regret the terms at which you made the investment.
Finally, most investors won’t consider investing in a company in tough shape to begin with, so more likely than not, even if you’re willing to accept one-sided terms, you probably still won’t even be able to get them.
If at all possible, boot-strap yourself to the point where you prove your business model. This includes, but is not limited to your ability to:
Product Companies
-Reliably source your units with acceptable quality and in acceptable time frames
-Warehouse if needed, and ship as desired by your clients
-Make sufficient margin on the unit sales to not only cover your cost of goods but to defray adequate general overhead as well
-Demonstrate that you can obtain enough additional customers at a similar cost to make the business viable
Service Companies
-Reliably obtain and train the necessary number of people needed to provide your service to the first batches of clients
-Make sufficient margin on the unit sales to not only cover your cost of sales but to defray adequate general overhead as well
-Demonstrate that you can obtain enough additional customers at a similar cost to make the business viable
Once you have proven that your business can work, investment, and debt become appropriate and viable methods of financing. Now you’re not asking the world to help prove that you were right, because the world will invariably charge dearly for that. That’s your job, you’re the one who said you could do it. Get investment after you’ve shown that you’re on to something – investors will be happy to give you money to grow, or scale your business, and will also give you terms that you won’t laugh / cry at.
So eat that risk, and then you’ll reap a far greater reward.
Posted April 6th, 2009 by admin
William Goldman, the famous Hollywood screenwriter, got so tired of people coming up to him and telling him they had a great idea for a movie. When a doctor at a party said “I have a wonderful movie idea. Someone just has to write it,” he replied “That’s funny, I have a great idea for a surgery, someone just has to do the cutting.”
Ideas aren’t worth much.
Yes, that’s right, ideas are worth next to nothing. I know, it seems crazy – as ideas are what innovation is all about.
Sort of. Everything starts with an idea, but unless you put the idea into practice, it’s just an idea. And ideas by themselves don’t go anywhere. Think about how many times you’ve had a great idea, did nothing about it, then saw later that someone else had done it.
Almost every company has changed and adapted from its original idea. The world is about change. It’s great if your company starts off with a killer idea. But unless you have a good management, or unless you’re incredibly lucky, the business will fail, plain and simple. Business isn’t a one time shot, it’s daily execution.
So don’t wait to start your business until you have the best business idea of all time, because you’ll be waiting a long time. A bad team will drive a good idea into the ground. Start with a good idea, and get the best team you can. Strong management will adapt an ok or a bad idea over time, and make it work. They’ll commit to making the business work, not the idea. They’ll adapt as necessary. The real value isn’t in what you provide as a business, it’s the customer problems you solve. Customer problems have a funny way of changing too.
A partner of mine once described a strong idea as “basic with a twist.” That’s about right – don’t be too far ahead of the world, like FedEx was with Zap Mail in the 1980s. Do something that other companies already do, just do it a little better. Don’t focus on what you do, but how you do it.
Now that’s a good idea.
Posted March 9th, 2009 by admin
I’m a big believer in the open movement. It’s both inevitable and beneficial.
Open Source EZ Numbers? I’m working on it.
Meanwhile, the paper I wrote on how Open Science, juiced up with Prizes, can serve as a valuable addition to patents for innovation in medical research (and beyond) has now been published by Rejuvenation Research.
There are a lot of people advocating that we scrap medical research patents, but as I argue, that’s both impossible and ill-advised. Yes, big pharma has backed themselves into a “blockbuster” revenue model corner, and price their drugs beyond the means of millions of people who need them, but they are a powerful innovative force nonetheless and we don’t want to disenfranchise pharmaceutical companies altogether.
The beauty of the open movement in regards to patents is that you don’t even need to disallow patents. All you need to do is disclose information, and then patents will, to the extent that justice isn’t subverted, either not be issued or revoked.
Just as in academia, it’s the same with intellectual property in patents – the more information is disseminated, the more valuable it is. If you publish techniques on, for example, how to use turmeric as a wound healing agent, nobody can then patent it, and you’ll protect such indigenous knowledge from exploitation. (Now without some twists and turns, as I detail about turmeric.)
Here’s the abstract:
The largest industry in America is increasingly incapable of serving its customers. Over-fencing of the information commons has led to unaffordable medicine, for want of which millions of Americans and people around the world go without lifesaving treatments. Eliminating patent distribution exclusivity altogether, however, is not feasible, given the entrenched nature of the health-care industry. This paper proposes a program of voluntary Open Science Prizes that would draw large numbers of new players, who would in turn produce much new medical innovation, provide academic priority recognition, and develop a growing body of patent-beating prior art that would serve as public domain firewalls on a new supranational Hyper-Commons.
If you’re interested, you can download the paper here: www.hypercommons.org.
