Berberian's Blog

How much is an idea worth?

So I met this guy – let's call him Mr. G – and he has this cool idea for a new energy beverage. While the idea is cool, what's even cooler is the market for energy drinks is red hot and this idea allows you to position yourself unlike all the other brands out there – you get to outflank the completion. Now Mr. G is a college student and has done some work on the idea. He has hired a chemist to create the formulation (about $400 total cost; the drink is simple to make), conducted a survey with 100 college kids about the idea, came up with a couple of good names, and written a business plan for a business class. I met Mr. G while speaking to his class. He approached me a few days later asking for some advice on his idea – lots of kids do so it was nothing new. I liked the idea for the reasons above and explored his desire and ability to turn this into a real business. Mr. G would love to start this company and become an entrepreneur. Unfortunately, Mr. G has promised to help an uncle for a while after graduation and he won't really have the time to commit to another business. I thought that was a shame. So I asked him if he'd mind if I ran with it for a while – at worst he'd get some exposure on how to filter an idea at best maybe we'd start a company and he'd get some equity for his idea.

It turns out that we felt we needed to test the concept to make sure the market will accept the product – good idea before you really launch a business (if you can, sometimes you can't). For this idea, it was pretty easy to test the market. The product name is tentatively called FLIGHT, and the energy drink is a mix – one shot to a cocktail and you get all the boost of a multivitamin and a cup of espresso – no taste, zero calories. In order to do that we had to a bunch of stuff: create a company, create a bank account and put some cash into the company, finalize the formula for consumption and stability, create a logo, set up a landing page, get some bar/club owners to let us come in and test the product, start the trademark process, make some samples and get some "talent" to promote the product in the bars. Now I took on these actions while Mr. G was focused on graduating from college. We'd exchange emails, but I took the lead since it was obvious that if this was going to go anywhere, it would require someone to run the business. On top of that, Mr. G was planning a one-month vacation to Brazil departing on June 4^th. Everything was hunky dory until I decided we needed to take care of some legal stuff – namely the corporation we formed needed to own the idea, which meant Mr. G needed to assign his interests to the company.

Now in the past I've been trying to mentor this young fellow on various items and I told him that he could get somewhere between 5% and 10% of the company and then dilute if we finance. I also said that if he could be a small owner in a big idea while others are trying to build a business, he could learn quite a bit while potentially make a few bucks. He was concerned with ownership after we finance. I said that he would be diluted accordingly but in reality a commitment on ownership post financing would be best (since this deal goes no where without funding) and he could expect a small amount (never talked about percentages).

So things are moving fast – I lined up two trials in local Denver clubs for June 7^th and 8^th. I also did all the other stuff above (spent about $4K). On June 3^rd we got our legal stuff together and emailed the docs to Mr. G. He called on the evening of June 3^rd and said he'd like to get on the phone with his uncle (an attorney) – his uncle was unavailable at the time. On June 4^th he shows up at my office and is wishy washy on the deal. He asks if he should delay his trip – I said it's up to him but we can handle it without his presence. He decides to leave. We have 90 minutes to get him to sign the stuff. If he doesn't sign, we get into an awkward position where the idea is jointly owned and it makes it hard to do much going forward. Time is ticking, he's got questions, we provide answers and eventually get to the deal where we would offer him 1% of the company post fundraising(if we decide to go forward), give him or his family the opportunity to invest, and promise to assign all rights back to him if we don't fund the company in 8 months. I feel like this is a smoking deal – there is no risk for him. The clock is ticking and he freezes. He doesn't know what to ask for, he doesn't know what is fair, he hasn't done any research and his plane is leaving in a few hours. The only thing he mumbles is "What about 5% to 10%?" Words were exchanged (not all that pretty) and he leaves.

Now I've got ten folks lined up to do this trial – cases of this stuff, stickers, and buttons and all kinds of shit and this cloud surrounding the idea. We do the trial because the missiles were already launched – it was a success (there are issues but addressable) – and now we are frozen. It would be stupid to start a company with this sort of ambiguity around the ownership of the idea. So now, we wait. Meanwhile I am losing interest in the concept, continually finding flaws with the idea and by the time Mr. G comes around there is a good chance I'll have moved on to something else.

Ideas aren't worth much. Simple once are worth even less. If you have real IP (software, patents, trademarks, distribution, etc…) – which this doesn't – maybe it's worth a couple of percentage points. All businesses live and die by execution. Real people, with real money working hard to turn an idea into product or service people want to buy. Unfortunately, it takes years to figure this out. Most young entrepreneurs don't get this. They think an idea can make them millions – it can't. Guess what - very few people have truly original thoughts – the successful entrepreneurs are those that work hard – writing a term paper/business plan isn't real work, it's step one of a 1000. Brad Feld loves to send me press releases about companies that raised money on ideas I pitched him in the past – they executed, I didn't – good luck to them.

We'll see what happens when Mr. G comes around – at least I had fun running with the idea.

For now: Enjoy your FLIGHT:

Outflank the competition

I hate competitors – they mess up my best ideas. They steal my would-be customers and rob me of my money. Unfortunately, all of my businesses seem to have competitors. My solution: I always try to find a sales or marketing approach to out-maneuver the inferior competitor. Don't get me wrong, the products have to great but I long ago realized that unless we're creating a truly "change the world" type product, the sales and marketing angles will determine our success. At Raindance, I wanted to move away from a direct sales force and try to sell web conferencing over the web (we were spending $20M a year on a sales force that was adding only $10M in new sales – this was a declining market issue more so than a people issue). Since we had little revenue from our web line of business and the sales force really wasn't selling much of our technically superior product, I figured we should take on the competition (WebEx) by attacking their direct sales model. We could isolate our business – have the sales force focus on audio conferencing since that is what they were doing anyways and sell the web conferencing stuff over the web at a much lower price point. I had a few case studies that showed this might be a good idea (namely J2 Communications). WebEx had an expensive sales force and a high priced product – if we sold over the web, we could hit them at both the revenue and expense lines. This was a gamble and a rather dramatic outflanking maneuver for the industry. We had $40M cash to make this happen; unfortunately, it never did due to circumstances beyond my control (i.e. car accident). After I left, it was deemed too bold of an attack and too risky for the company to embrace. It may have been a bad idea, but at least it was different than attacking the competitor head on.

The two business ideas I am working on now both rely on different sales and marketing approaches. The bottle idea we've decided to sell only through web channels and by invitation only. This may be stupid – but it is different and if it works, it will set a trend that I'm sure many will copy. The other idea I'm not going to share because it's not really baked. I spend most of my time now thinking of ways to attack the market differently than the incumbents – I believe the product will always be good enough and get better – everyone loves to work on the product. Sales and marketing tends to either start crappy and get worse or start pretty good and get better. I want to make sure I start right (meaning different) with these ideas – it's hard changing once you've executed your maneuver.

Six-fingered Glove

Sometimes an idea fits like a six-fingered glove. It covers your hand but something is odd about it. You like it, it keeps your hand warm, it looks good at certain angles, but it has this extra finger.

I've been working on a couple of ideas for a few months. While people may say, "Cool" little do they know I've been struggling with making these ideas fit. As a storyteller (that's what you are when you're in raising money mode), I always present the angle that only shows the five fingers. Only I know about the dastardly, sixth, troublesome finger.

As I look at the companies that hit home runs, their ideas all start tight and just get better. I think it is hard lopping of fingers post launch; it's much easier to go through the sometimes-agonizing process of refinement before you really commit to an idea. That's what I'm doing now; and I'll continue doing it until I lose patience or get it right.

Most people don't know our history at Raindance, but we started out as Intellistat Media Research. We were building a company to compete with Nielsen Media – we were building a better way to track what people watch on TV. That was a six fingered glove that after eight months of refinement we decided it was time to move on to another idea. We knew very early on that we had several huge issues. Had we really thought about it, we had enough information to kill it months earlier, but we already had employees working on the concept and we just figured it would get better. It didn't.

In my experience, if I don't believe the idea is just right, then I have to keep refining before really committing. Even if I believe in an idea, it can still fail, but at least I'll think I'm wearing a nice, good looking, five-fingered glove.

Spinning

Yes I like spinning classes – but that is not what this is about.

We've been at it now for just about 3 months and we've made some steady progress. We've had several focus groups and zeroed in our market – pre college teenage girls that are active users of social network web sites. This is a huge accomplishment; at Raindance I don't think we ever really figured this out. We decided that the manufacturing of these has to be made part in China and part in the US – and we're still not there just yet. The formula still needs work – we have to lower the freezing temperature of the bottle so we can ship these in the winter – and my one semester as a chemistry major isn't really helping. We've created a dozen plus colors that are all very cool and much better than the original stuff I made when I was a kid. There seems to be some early buzz on the idea – we've stopped having focus groups because it feels like we might be peaking early. We started to hear of requests on how to get a bottle from people outside of our control group – this is cool but it's too early to promote Spiderman 4 – we need to know what the hell we're doing first.

The spinning part is trying to write down our strategy in a fashion that is compelling, simple and believable. I have seven executive summaries all talking about this business in some different way. They all have a common theme – a bottle tied to an online experience. So what is that online experience? Well maybe version eight we'll get it right. For now I'm afraid my Word might break soon with all the "file new" action – I feel like I'm back in college writing term papers. One thing is for certain – this gig is starting to feel real and if done right it can be huge.

Step one of creating a fad

Step 1: Create a cool product that everyone wants.  Check (I hope).

Our product – Product X (I’ve got the domain name but we’re still doing some trademark work) – is a toy sort of like a “liquid kaleidoscope” crossed with a Lava Lamp – but not really.  It’s a very unique bottle with a swirling potion inside that is absolutely mesmerizing.  Shaking the bottle creates the swirls – looking at the swirls is fun.  That’s it – pretty simple.  See pictures of prototypes.

How do we know people want them – because when I first made them in 3rd grade every kid in the elementary and middle school wanted one – and when my daughter sold them at her school she had a similar experience – in both cases (separated by 25 years and 1000 miles) the schools forbid the further sale of Product X mainly due to safety reasons (made of glass) and their ability to disrupt recess (kids clamoring to get one before they were gone).  More research is needed obviously – but it’s a start.  Of course the product needs more refinement.

Orange bottle not swirling and swirling.

 

Purple bottle swirling.

Fad

How are fads created?  Nobody really knows for sure – there is no formula however Malcolm Gladwell did try to dissect the key elements of social epidemics which, a fad is an example in his book The Tipping Point.  The problem with reading about various events and products is we’re always looking at the concept in the rearview mirror. Most people associated with fads never predicted their results.  They typically look back in disbelief and then point to key decisions that they made along the way. I want to look through the windshield.

My goal is to create a fad –a flash, in the pan of success.  Why?  I want a business based purely on marketing – that is one where the product is essentially a novelty of sorts and the success of the business is largely around marketing execution.  Seems odd for me – but I’m fascinated with simple ideas that make money – remember the Pet Rock?

Can we do it – can we pull it off – or will we fail miserably and rue the day we founded the company?  At this juncture there is a high likelihood we will fail – but I believe.

Blind Doubt

On February 26th I co-founded a new business with by my partner Steve Tomsic.  We’ve each started numerous companies in the past – this is my 5th.  That said – this one is different, it’s a physical product in a new industry – basically it’s a toy / novelty item.  Our goal is to create a fad.  Ambitious – yes; likely – no; totally unpredictable behavior for me – absolutely.

Right now I’m in the phase of “blind doubt”  It’s a cross of blind faith in the idea and self doubt in my ability to execute. Blind faith is absolutely necessary for me to make the big leap to invest time and money and launch a new idea. Self-doubt is a hypodermic injection of reality.  I actually like this phase and I’m surprised more entrepreneurs don’t spend more time dealing with these awkward feelings.

Blind-doubt thoughts than run through my head:

Our product will sell and it’s cool.
I can’t make a toy.
I can create the market hype I’m dreaming about.
Our toy may suck compared to others. 
I can learn the toy industry and kick ass.
If we do sell a gazillion of them I can’t finance the manufacturing.
I can finance this easy.
I don’t know how to sell it.
I will make millions off this idea.
I will lose lots of hard earned money on this crazy concept.
I believe I can do this – no I don’t.

It’s not a lack of confidence – it’s more risk mitigation.  These alternating emotional states actually help drive my activities and really test some premises about the idea.  It forces me to live with the product and obsess about it – refine it, test it and get comfortable with its value.  It essentially helps me identify roadblocks very early in the process.

Having observed many entrepreneurs in the moment of founding – there is typically nothing more but belief in the idea – they’ve made their first sale – to themselves.  Having sold myself now I’m trying to figure out if I want what I bought.  Actually everyday for the first few months I will have to resell myself on the idea.  I will identify a problem and either solve it or live with it.  If I end up living with too many problems I may have to bag the idea.  Right now – Friday afternoon – everything is OK – but there are issues as expected.

Air Force Academy Visit

Yesterday I had the opportunity to speak at the Air Force Academy.  I gave the same talk to four different classes of management majors – each 50 minutes in length.  While you’re tired at the end of it – it was really fun to reconnect with the professors – many were just getting their USAF career going when I was a cadet.  The fact that some are now retired military and are continuing on as civilian professors means I’m getting old.

Every time I go and present I come back feeling pretty pumped up – the folks in the department of management do a great job making you feel special (even though your just one of dozens of speakers throughout the year – it’s good to be king for a day).

The royal treatment was great but interacting with the cadets was the highlight of my visit.  They were attentive, engaged, genuinely interested in business, had creative ideas, asked thoughtful questions and basically made me feel special knowing that I once sat in those same chairs.   I believe the caliber of the students has gone up markedly since my time at the zoo, and cadets today are much more focused on what’s next after the Air Force.  Several cadets have emailed me with business ideas and surprisingly they’re all good. These business plans weren’t just simple ideas taken from someone else – like opening an ice cream store in a new location (which isn’t a bad idea just a simple one) – these ideas are all derived from personal experiences and have been thoroughly researched and developed (some even had prototype products). 

Ben Casnocha accompanied me on my visit Monday. I should have given him time to present; his message would’ve really resonated with the cadets. Ben has accomplished the impossible in their eyes, he founded a business while he was a high school student and has turned it into successful software company managed by a group of professionals.  Ben now is enjoying the fruits of his entrepreneurship, traveling the world, writing a book and getting to meet all kinds of new people as he takes one year off before he starts college. Every would be cadet entrepreneur would love to figure out how to start a company while having a full time job.  Starting a company when that is all you have to do is hard – but doing it while you’re doing something else is simply unimaginable. It was great getting to spend time with Ben and to see the Academy through his eyes – I hope our paths cross again.

My Startup Process

Since August I’ve been trying to figure out my next business.  I’ve started four other companies in my life – why should it be that hard for number five?  I’ve looked at over 40 ideas. I spent anywhere from a few hours to several days researching each idea.  They all suck for some reason or another but generally because they don’t fit in my box of constraints.  (I will share some of those ideas in future posts.)

Monday I’m a guest speaker at the USAFA.  I’m going to talk to the seniors in the management major about “How to pick the right business for you.” Since I’m living that dream everyday, and I need to prepare for my speech, I thought I’d try to put some structure around my activities.  Here is how I evaluate a business:

First are the constraints; questions I ask myself – the answers may be different for each idea:

•    Skills/Team – What am I good at?  Who can I recruit and what are they good at?  Skills and team are the same – you assemble a team to augment your skillset.  You can recruit folks after founding the business but I think to start a company you need to have a meaningful amount of talent on the founding team.
•    Commitment – What is my level of commitment in terms of time, personal resources and mental stamina to make the business a success?  This seems like a simple thing for most to answer, but when you dig in and really dissect the issue by asking probative questions, you’ll uncover vast differences between team members.  Whenever you see founders with conflict between themselves and / or employees – it’s largely the level of commitment is different.
•    Funding – Can I raise money for this idea?  This needs to be examined from two perspectives.  The idea may be good but as a founder you may not be able to raise money for it; that is you have no credibility in the space.  The flip side is, you may be totally backable as an entrepreneur but the idea is weak.
•    Passion – Do I love the idea (product/service)? Do I love the business of executing on that idea?  Passion for the product I believe is largely optional - most businesses sell boring stuff (unless your Apple or Victoria’s Secret – that may get boring too, I don’t know I just like the ads).  The passion that is critical to have is for executing on that idea.  You don’t have to like all the stuff about building a company, but you have to want to achieve some goal that allows you to endure the things you don’t like.  It’s different for every business but you need to identify the key activities that will drive success.  I’ve seen many more successful companies where the CEO doesn’t really “love” the product but they are absolutely hell bent on building a company to <x> in revenue or selling it for <y> millions or some other goal. That said it’s best to be passionate about both – it makes what you do more fun.
•    Other – Other stuff that’s important like: moving, time away from home, moral constraints (some people may have a problem running a strip joint others may not), desired money in the bank when it’s over, spouse’s opinion, and whatever else…

So that’s the box I create for every idea and see if it works.  If it does, then I take it to the next step, which is to build a quick and dirty business model – I’ll talk about that in another post