start up capital

Question on HighTable.com from Amar S. How do we find partners to help fund and license our concept? I am part of a two physician team that has a formula for an appetite-suppressing meal replacement bar. The concept allows us to take any soup and turn it into a bar. Our initial focus will be to produce vegan/vegetarian, allergy-free, low carb, low fat, high protein and kosher bars. We have a great idea, but we are having trouble finding established companies to partner with for development.

My answer. Amar, the farther along you can develop your idea, the easier it will be to attract interest from potential backers or licensees, and the more control you’ll be able to maintain. Very few established companies are interested in helping you develop such a product from an untested idea.

You say you have a formula, a concept. If I were an investor, I would be more interested if you had produced some initial batches, conducted tests with them, and tried them out with the kinds of people who would be your consumers. What did they like and not like? If it’s for weight loss, did they have any results? What about packaging and shelf life?

As a potential investor, I would want to see what processes you used, what equipment, how it would scale up, what sets it apart from similar products. How would the production costs pencil out against the likely retail price point, after backing out all the distribution channel costs? Does it require testing and approval from any regulatory agencies? How are the processes and products protectable? Are there pieces you can patent?

Where and how would it be sold? Would it be a grocery item? Health food or natural food stores? Sold online? How would it be marketed initially?

You’ve been in a service and consulting business. Now you’re looking at a manufacturing and distribution business. It takes a different mindset and skill set. You might say, “We just want to sell or license the concept to a big player, then wash our hands of it.” But even if you find a taker, you’ll realize the least return from this approach. You’ll lose control, and somebody else will make most of the money.

I’d look for three things first:

1. Raise some seed capital to do the things I outlined above. At the earliest stage, this money usually comes from your savings, family, or a true believer. (For example, a client of mine who produces gluten-free products has been approached by a VC who has celiac disease. BUT, she has been in operation for several years, and has a track record of growth.)

2. Partner with a person experienced in taking such products to market, with operational, marketing, fund raising experience. Not that he/she is an expert in all three areas, but has been there in the trenches

3. Find an attorney who can advise you how to protect your formulations and processes through patents, trademarks, etc.

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My wife needs financial help to restart her handmade soap business, hopefully a grant. We have the building, need to upgrade computer and software, get raw materials, build a web presence. Asked by Scott Coe on LinkedIn.

MVH: My first question: do people and stores want to buy her soaps? If so, can she hand-make some samples? Could she use the samples to make some sales, collect some deposits, then use that money to buy more raw materials and make the soap that was ordered? If she prices properly, she should have enough gross profit to buy the next batch of ingredients and make more soap.

This is customer financing and it’s not that unusual. It requires having buyers who believe in your products. But people may be more willing to do this than to loan or give her money.

This is pure bootstrapping, and you don’t want to do this if you can raise capital in any other way.

You didn’t say how much you need to raise, and that makes a big difference. But if you can’t even afford some raw materials, it seems premature to worry about upgrading your computer and software. Use pencil and paper. Spend no overhead before its time!

Websites can be put up very inexpensively–free here on WordPress, plus hosting for less than $100 per year. It just takes time and gumption. Or spend a few hundred on a virtual assistant to do the initial set up. Most internet and web things are time-intensive, not money-intensive, but hiring a dollop of skill helps a lot.

The more capital you raise, the faster you can grow.

The more you can demonstrate demand, the easier it is to attract capital.

So hit the pavement and make sales.

I’ve never seen anybody get enough money from a grant to launch a viable business. Just enough to go broke.

The likely sources of financing for this venture:

— Your own savings

— 2nd mortgage on your house

— Family, even though it’s very risky even asking them

— A bank loan with a personal guarantee

— A private backer who strongly believes in her skills and concept

A product like this might be a candidate for crowd funding. Google this.

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