Raising Seed Capital or Licensing a Formula

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.

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.

How to Reinvent Your Business

Rules for reinventing your boring, poverty-inducing professional business.

My advice to a woman whose profession is no longer providing a decent living nor a passionate calling.

Think big, beyond your current profession. Ask how else can you apply your valuable skills.

Think concrete, beyond attractive generalities. Research specific opportunities with the orgs you listed.

Think now, not six months from now. Life is too short to spend another year on the poverty-inducing things you’ve moved past.

Think benefits you provide, beyond particular skills you have. People pay a pittance for skills; they pay well for the ability to produce desired results.

Fill in my Model of Success, pulling together the high demand skills you have. Where is the overlap of what you love doing, what you’re best at, and what big ambitious complex projects demand and will pay for?

Think big projects, where there’s plenty of money for you to get paid well. No more little projects

Think essential roles, big projects where your input is essential and will be well paid, not things where someone can say, Thanks, now go away.

Think lucrative. No more pro bono, or helping those who need you but can’t pay much, at least until you are on sound financial footing yourself.

Think partnering and piggybacking with others, so you’re not trying to create it alone.

Think hard-headed, so you don’t get talked out of good pay for value.

Think high rates, because people don’t value what they don’t pay for.

And never ever subsidize anybody wealthier than you are!

Zuckerberg’s Lessons for Entrepreneurs

Ask yourself how Mark Zuckerberg’s five principles for guiding Facebook’s growth apply to your entrepreneurial business.

In his IPO letter to potential investors, Zuckerberg stated 5 principles that have guided Facebook. These apply to any entrepreneurial business. I suggest you read these and ask how you can apply them to your own business.

The two that the most small business owners neglect are “Move fast” and “Be bold.” Too often we limit ourselves to growing organically, perhaps for fear of going into debt, and thus move slowly and timidly. Then we watch others pass us by.

Focus on Impact

If we want to have the biggest impact, the best way to do this is to make sure we always focus on solving the most important problems. It sounds simple, but we think most companies do this poorly and waste a lot of time. We expect everyone at Facebook to be good at finding the biggest problems to work on.

Move Fast

Moving fast enables us to build more things and learn faster. However, as most companies grow, they slow down too much because they’re more afraid of making mistakes than they are of losing opportunities by moving too slowly. We have a saying: “Move fast and break things.” The idea is that if you never break anything, you’re probably not moving fast enough.

Be Bold

Building great things means taking risks. This can be scary and prevents most companies from doing the bold things they should. However, in a world that’s changing so quickly, you’re guaranteed to fail if you don’t take any risks. We have another saying: “The riskiest thing is to take no risks.” We encourage everyone to make bold decisions, even if that means being wrong some of the time.

Be Open

We believe that a more open world is a better world because people with more information can make better decisions and have a greater impact. That goes for running our company as well. We work hard to make sure everyone at Facebook has access to as much information as possible about every part of the company so they can make the best decisions and have the greatest impact.

Build Social Value

Once again, Facebook exists to make the world more open and connected, and not just to build a company. We expect everyone at Facebook to focus every day on how to build real value for the world in everything they do.

Are There “Meaningless Innovations?”

Make sure your innovations are well-targeted and well-marketed. Don’t bet the farm on a “disruptive innovation” that turns “meaningless” when nobody buys it.

My answer to LinkedIn question by Terrell L. McTyer

If you are a small player, say a consultant or other solopreneur, you’d better steer clear of “meaningless innovations,” because they could pull you under.

I’ve done a talk to consultants’ groups called “Innovate or Die,” where I stress how important it is to make sure that your efforts at innovation are well-targeted, and that you know how to market them once created. Not all of us can afford to bet the farm on a potential “disruptive innovation” that turns “meaningless” when nobody buys it.

TMcT: “But don’t you have to take risks to make it big?”

Yes, you have to take risks, but how big and with whose money? Entrepreneurs take PRUDENT risks. Two things:

— There’s a risk/reward calculation. The bigger the potential reward, the greater risk is justified. BUT it’s easy to fool yourself. “This is foolproof. We have no competitors.” I just lost $25k investing in one of these.

— OPM. This is why we have VCs and angels. They can afford to lose your investment. Of course, their price is high.

— There’s an absolute ceiling on risk you should take. Despite the image of the “all in” player, are you going to bet your own house? Your kids’ college funds?

Maybe you will. I know many who have. Some lost, and they started over. Or the wife went back to work. (Why is it that men are more likely to bet the farm than are women entrepreneurs?)

I guess the biggest error is not going for it due to fear of the above. You regret it forever.

The second biggest error is going for it, but NOT going in big and fast. Prudent, organic investment in innovation, then your better capitalized competitors whiz past you, leaving you stunted. This has happened to me.