I’ve been getting an increasing number of ideas over the transom over the last few weeks. It started before the radio interview last week, accelerated because of that, and tomorrow it seems I’m in the latest issue of Idealog.
It’s really good to receive them, and I enjoy helping out and even starting some businesses. However last week I’ve been a bit slow to reply to some of those messages – and I apologize for that. Some of them I’ve been checking out, others I’ve been thinking through and still others I have just left. I will get back to everyone eventually though.
But there is one problematic category of ideas, and it’s one where I want to give some very strong advice. The note or call I receive will go something like this:
I’ve got a great idea, I’m not going to tell you what it is (at least not without an NDA), but I am going to invest or have already invested a bunch of money into it.
I’ve seen everything from $5000 to close to half a million invested in or required for companies and products that you have never heard of or are not even described. I’m always willing to help people in these situations but they need to be more honest with themselves about the value of the idea. Holding it too close to your chest means the idea won’t be as good, the speed of execution will be much slower and the amount of money invested will be much higher.
Instead here is my take on what to do once you have that wonderful idea for the next big thing.
Before you start
- Check the competition – If it is a great idea then it may well be done already. Get online and search for the product – and be very persistent. Check different channels to make sure it isn’t being sold already, and make sure also that there isn’t a close substitute. Be very thorough in this and, importantly, keep doing it forever.
- Share and improve the idea – Shop it around your friends and family, talk to potential customers, experts in the field and determine that it is a good idea. Along the way you’ll hopefully find some people that you respect and that are energised by the concept. Ask them to help. Your idea may be good, but with the assistance of others you can make it great.
Be flexible with the idea and tweak it as you learn new things. Write it down in a structured manner – and have very crisp and consistent descriptions for the product or business, why it is better and will sell and your path to develop it.
- Estimate the size of the opportunity, and be tough. This means numbers – how many widgets will you sell, at what price and what margin. It’s important to test your projections against the real world – what does 1000 sales per day really mean per sales outlet, will people actually pay the retail price, what are the wholesale margins in the channel you are using and and so on. Track your business against these numbers.
- Focus on the few. What few things do you need to believe, what do you need to do and and what results do you need to see before you can truly prove that the business will succeed. Write them down. Then spend your time focusing on those things, trying to get to them in the cheapest, fastest way. If you cannot prove something then you may need a leap of faith, but if you disprove something then change tack or move to the next idea.
- Pay with equity – have some partners and pay them with equity. It’s the best way to save on start-up costs, it means better results as people have genuine interest in seeing the business succeed and it’s a heck of a lot more fun. Stay well away from large suppliers that deal mainly with corporate customers – their fees are far too high and you are a low priority for them. If you are struggling to find the right partners that will work for equity then perhaps there is a hint there, and your idea isn’t The One. Note that you generally need to pay for actual purchases (like raw materials) but work performed in the early stages should be for equity.
- Don’t spend anything material until you know you will get a return. Great entrepreneurship has very little financial risk, so be miserly until you know it will succeed. Put very little money down at the start, investing only in the critical raw materials or services that you need, and focus on investing your and your partners’ time. Wait for revenues – if the idea and execution is good then there will be plenty of money later.
- Be prepared to stop, and stop fast if at any stage it is clear the business will not succeed. You are passionate about your idea, but you also need to be dispassionate enough to exit before you waste too much money. An informal or formal board can help a lot here. If you have already sunk money into a business that isn’t proven, then treat it as such – sunk money that is gone forever. Don’t fool yourself into thinking your new venture is valued at the amount of total investment – look instead at what the profits are and will be.
- Go full time – a full time CEO is the only way to really drive a business forward. Once you know the idea has legs then quit your other pursuits and focus on growing this business. Or perhaps you are not the right person to be the CEO, so find someone who is and cut them in. Don’t be distracted by the next business idea – that’s pointless until you’ve either made this one work or killed it.
- Spend as little as possible – don’t pay your self (or anybody for that matter) any more than you need to live – and live frugally. Wait until the business is sustainably making money and then start increasing the salaries of the contributors, eventually to market rates.
Nice post Lance,
One thing I’d love to see you write about is finding people to cover your areas of weakness. For example you say if you are not cut out to be CEO find someone who is. How would someone go about doing this if they do not know that person already? It’s not something you can effectively place a job advert for if you are a small company I’m guessing.
Regarding point 1 – it’s probably worse to have no competitors than it is to have a similar product already available. If nobody else is doing something then there may well be a very good reason they are not.
Also, if you can take something that is already out there and make some improvements then all the better. I wouldn’t have thought retail power could be a more saturated market but the whole internet purchasing gives it a spin that makes something as generic as electricity interesting to some people again.
@Marshall Talk to Lance :-) He is connected with a lot of people and can help in building a team.
I would like to echo Lance’s point about keeping things secret, NDA’s and all of that. If you don’t trust the person to start with then why bother pitching them in the first place? The idea early on is to test your idea with a few people and see if others get excited by it. I’ve had a bunch of ideas that I’ve toiled away on myself and nothing has come of them yet and no one has really got excited about them. The latest idea I’ve pitched did get some people excited and it is coming along quite nicely. The difference in execution is like night and day, we have a focus, a clear vision and hopefully soon a product.
Man, I hate idea guys that want NDA’s. If the leak of your idea to random other people will material reduce it’s value, then you are already stuffed. If you need to ask the people that are potential for investors for an NDA, either a) They are not to be trusted anyway; b) You have no idea what you are doing or c) The event of an inadvertent leak will materially damage your future business. Usually it is b).
Lance, great article. I am open about ideas when talking with others. I agree, that requiring someone to sign an NDA is a put off, as Rod Drury already mentioned in his blog last year (2008). I can probably see why some people are protective about their ideas and one thing that comes to mind is that it is easily reproduced by anyone, ie, one doesn’t need sophisticated knowledge to reproduce the idea. Any bunch of developers can develop the idea with no hassle at all and I think that this is why some people are paranoia about their ideas being stolen by someone else.
Great comments guys.
What we are all getting at is that there is a wide gulf between a great idea and a sustainable, growing business. Ideas are not actually worth that much on their own.
If, as in Falafulu’s case, the idea is difficult to execute, then you need to assemble the team of eggheads to get it done. Taggle uses some crazy technology to track items cheaply and though the idea itself is easy to understand, it’s taken a few really smart and highly experienced guys to make it work. This is also in the face of existing very well funded competition.
If the idea is easy to replicate, like Cannla or Trade Me, then the keys are to be early to the market, and more importantly, to stay the best in the market. That means forming a great team, understanding the evolving customer needs and continuously improving the customer experience.
Glen’s idea (I’m part of his new venture) fell into this second category, and so we had to ask ourselves why will we win? I believe that the answers lie in the make-up of the team, with each adding something to an equation that collectively cover the critical factors for success.
Great post! And comments (was that *the* Sam Morgan?). Three quick thoughts:
1) I think in the case of Trade Me it was all about being early to market in a niche where the intra-niche network effects far outweighed the global network effects, so by the time eBay decided to target the NZ niche (who remembers Jonah Lomu’s boots?) it was too late.
2) Check out Rands’ friendda.org and/or google FrieNDA/FiendDA.
3) If you’ve got to the point where you want to pitch your idea to people who aren’t your friends (yet), you might want to think about a provisional patent. They’re very cheap if you self-file, and from that point you’ve got a year before you have to turn it into a complete filing, at which point you really want a Patent Attorney to help you write the claims and generally tidy it up.
Not all great ideas are patentable, the patent itself may well turn out to be worthless even if it does get granted, and the whole patent system, particularly as applied to software, is generally broken, but a provisional filing is a cheap form of protection that doesn’t require asking anyone to sign an NDA.
Also note that in NZ (and most of the world), if you have been telling people your idea without at least a FriendDA in place and preferably an actual NDA, your idea is no longer protectable by patent. The Americans do it differently, and I think it gives them an edge.
Two points. The most successful retail startups begin with a clear mission statement that carefully defines the niche you want to command, and a strategy built around the shared passion between retailer and customer. It’s not enough anymore to just sell stuff, you need to also offer customers a memorable shopping experience, infused with passion. Passion creates buzz, and buzz creates customers!
Second, don’t be afraid of getting help. It’s highly unlikely that you’ll know everything you’ll need to know going in, and what you don’t know can kill you. Know what you don’t know, and hire or retain the experienced, professional assistance that you need to complement what you do know. Having a good coach to fall back on will make the process much less stressful and much more successful.
I like the old expression –
“The biggest threat to a big idea is a another big idea.”
So many times I have seen people who have set out to implement an idea only to move onto developing something else 6 months later.
I never sign NDAs. Anyone who won’t trust me with details about their idea, free from an NDA, is someone who hasn’t done their homework and can’t be trusted to do it.
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