It’s just possible your wonderful idea will make you rich. It’s almost certain that it will make you poor first.
- Innovation and ideation
- Case study: Big fish, bigger ambition
- Early stage business planning
- Case study: Think BIC
- Early IP management
- Early stage brand development
- Case study: Design power
- Market validation
- Case study: Got a tough problem?
- Prototyping and testing
If you want a quiet life with a steady income, where you always know where the next pay cheque is coming from, commercialising ideas is probably not for you. If you are ready to risk it, talk to an accountant. You’ll need a sound business plan and financial structures that are robust enough to cope with tight times—or rapid success. And there are some important tax and liability issues that can be devastating if overlooked.
You need someone who can look beyond the numbers to help you realise the full potential of what you have. Auckland-based chartered accountant Hayes Knight prides itself on its bespoke services for innovative companies. Matthew Bellingham, business improvement director, says, “You need an accountant to be involved in the whole process. Someone who has entrepreneurial skills and a background in advising companies on strategy and growth solutions.”
Commercialising your idea requires a continuous financial balancing act. The Hyperfactory is now a $10 million-a-year company and recently sold a multimillion-dollar 19.9% stake to US media conglomerate Meredith Corporation, but CEO and co-founder Derek Handley vividly remembers his days of watching the pennies.
“The first barrier is always cashflow,” he says. “You are always running out of money, because debtors take too long to pay, or you have a slow couple of months or the revenue is lumpy. Cashflow is nerve-wracking because it’s the lifeblood of the organisation. In the early days we never had a good buffer of cash. When you are under a lot of cashflow stress, it can be hard to see past the next 90 days.”
“Unfortunately, people tend to underestimate every cost,” says Bellingham. “The projects always seem to take longer than budgeted and cost more than expected, as things change and develop through the project. The key is to have contingency funds available, and to ensure that appropriate funding is in place to complete the project.”
There is very little you can do without spending money. And you are ‘spending’ rather than ‘investing’. Until you have gone a good way through the commercialisation process, you have nothing to sell so there is nothing to invest in.
Aaron Wallace, another Hayes Knight business improvement director, says this time lag can often be overlooked and businesses can focus too much on desperately trying to fill their financial pockets with income, without checking whether there are gigantic expenditure holes in them.
“The government helped us a lot right from day one. If you haven’t figured out how to get the government to help you, you are an idiot”
“The intangible cost that is always underestimated is time and energy,” he adds. “Too often an unrealistic or impractical approach to launching and operating the innovative idea is projected and to cope with this, strong governance, best practice, good systems and a pragmatic business plan must be employed.”
You also don’t want to reach out for serious investment half-cocked and lose your credibility. Ideas that have been hocked round the investment market and banks for too long start to smell a bit stale.
Many entrepreneurs get round this by getting initial seed funding from personal borrowing. This can be from lines of credit they already have available, which can be expensive and risky, or from an assortment of family, friends and fools—the Three Fs—that they can cajole into coming along for the ride. There is also enough government money around to support innovation, through entities like New Zealand Trade and Enterprise, that it’s certainly worth investigating.
“Innovations are very high risk and at the extreme end of anybody’s portfolio. Investors want to see entrepreneurs mortgaged up to the hilt. That way, they know you need it to work”
Handley says: “The government helped us a lot right from day one. If there is one thing to be said about the past five or six years of government options, it’s if you haven’t figured out how to get the government to help you, you are an idiot. There are so many ways that they will help you, if you are credible and you have a good story. If you add them all up there’s about $1 million of help they have given us. It’s crazy money.”
Once your idea is focused and tested enough to attract some real value, a new balance has to be struck. This is comes down to how much of your sacred cow you are going to end up with at the market, and how much you can carve off on the way while still keeping it alive.
One of the most effective ways to get money is to team up with a larger company that already has lots of it. Say, for example, you create a device that makes laptop batteries last five times longer. You can try to set up the whole manufacturing, marketing and distribution system for this as an upgrade, along with all the required legal and administrative infrastructure. Then you will probably watch as Apple, Asus, Sony, Dell and every other major player creates something remarkably similar, bulldozes you out of the way within a few months and waits to see how much legal muscle you can afford.
If you are very lucky, and are ready to spend a fortune in legal bills, you may emerge years later with a big payout from them for infringing your intellectual property. Or you can simply do a deal with one of the big players in the first place and get on with your life.
Time to visit the bank manager
‘My bank manager will never understand this!’ you may be thinking but you’d be surprised. Banks have come a long way from just dishing out chequebooks and credit cards. Bankers do a lot of big money deals and most know a good idea when they see one.
BNZ Partners gives clients a one-to-one service designed to analyse, understand and support your business. “We talk about the idea first,” says managing partner Richard Ede. “What banks do best is identify and assess risk. We have a lot of knowledge about what works and what doesn’t. A banker can sanity-check your idea and the type of operating model you have.”
These days it’s not just about number crunching, even for banks. But there is some homework to do. These aren’t the glory days when you could get a loan worth four or five times your assets from some scribbles on the back of an envelope and hoping for the best.
““What banks do best is identify and assess risk. We have a lot of knowledge about what works and what doesn’t … but ultimately, the innovator has to decide whether they want to risk it””
Ede says: “If you have seen your lawyers and your accountant, and have the figures ready, you will always get a better deal. If the idea makes commercial sense, we look at the numbers, the cashflow versus debt, and whether you can service it.
“We need to see clear evidence of cashflow to repay us. But ultimately, the innovator has to decide whether they really want to risk it. Every banker sees companies that have geared up, it hasn’t worked and they are now in a really difficult situation.”
If you think the bank is tough, you may find investors tougher. You will need at least as much information as for the banks. Jonathan Kirkpatrick, chief executive officer of AUT’s Business Innovation Centre, says you may also need a certain wild, steely look in your eyes.
“This is a punt,” he says. “Innovations are very high risk and so will be at the extreme end of anybody’s portfolio. Investors want to see entrepreneurs mortgaged up to the hilt. That way they know you need it to work. It’s called ‘skin in the game’. It has to be hurting you, and you have to throw everything at it.”
Wayne Hudson from specialist intellectual property lawyers Hudson Gavin Martin warns that you can’t let short-term desperation cloud your judgement on who to go to bed with.
“Look for smart capital,” he says. “If you need to raise money to bring your invention to market, choose your investors carefully. If possible, get an investor who has ‘been there, done that’ in the same space as your business. Conversely, beware of investors who have made their money in a different sector, as their experience may not necessarily be portable to your business sector.”
You will need to be clear on how much of your company you are ready to part with. Be ready to offer a lot. There’s seldom any need for worrying about losing control completely. If people invest, it’s almost certainly because they think you know what you are doing, so they want you to keep doing it. They already have the money, and you have all the hard work—why would they trade places?
Bellingham describes the process: “A professional investor may insist on a place on the board, which can add a huge amount of value not only through their expertise, but also through their contact network. The downside with this option is that you sell a significant portion of your business—potentially up to 50 percent. Further downsides are that if you require more capital in the future and cannot afford to match the investor yourself, then it is possible there will be a further watering down of your stake.”
The deal is, if you are going to commercialise your idea, you have to sell it sooner or later. And all our experts, and every successful business person you ever meet, will agree that it’s a whole lot better to end up owning a small part of something massive than all of nothing.