Archive for the ‘Finances’ Category

How to Go Broke Inventing

Thursday, September 25th, 2008

Did that headline grab your attention? We hope so! The all-too-unfortunate truth today is that many inventors waste tons of money on things that they A) do not need yet, B) could get cheaper, if they did their homework, or C) may not ever need at all. This is a major problem, for even inventors with market-busting ideas will probably not see a dime from their efforts if they go broke by making these types of mistakes first. That said, let’s cover some of the most common and not-so-common inventor debt sinkholes.

1) Applying for a patent too soon (or right away).

By far the biggest money-wasting mistake inventors make is to apply for a full utility patent too soon. Why is this a waste of money? A few reasons. The first is that patents are expensive. Really expensive. The cost of filing a patent (including attorney’s fees) ranges from $4,500 for a “relatively simple” invention to $15,000+ for a “highly complex” invention. Now, take a minute to reflect on those numbers and ask yourself, “Am I at all certain that my invention is going to do well enough to justify those fees?” If you’re just getting started, and you’re honest, the answer is probably “I’m not sure.” Don’t spend money on a patent until you are more sure than you are now. Talk to some trusted sources, do some market research, and see if your invention has legs before spending this kind of money.

2) Pouring your savings into a “really great” (but unresearched) idea.

A similar money-wasting mistake is when a starry-eyed, novice inventor dumps his life savings into creating “This really great idea” he thought of. The problem with this approach is the huge risk. Tragically few inventors take the time to do any kind of market research or in any way answer the question, “Does anyone but me think this invention is worthwhile?” But if you haven’t answered that question (and if the answer isn’t “yes”), you should not be spending a lot of money pursuing it. Of course, you’ll never be 100% sure your invention has a market. To paraphrase Perry Marshall, “If inventing were a color-by-numbers activity where you followed a blueprint and got a guaranteed result, it would be a job.” But still – do at least some homework before emptying your bank account on an invention.

3) Borrowing money to finance an invention with no repayment plan.

If you’ve avoided the two pitfalls above, congratulations! – but you’re not out of the woods yet. Even the most realistic inventor pursuing the most surefire idea can go broke by financing the invention without a repayment plan. By “repayment plan” we don’t necessarily mean a fixed, signed agreement to pay a set amount over a set time. Rather, we are just saying that you should have some rough idea of how and when you will repay what you borrow via a credit card, cash advance, or bank loan. Don’t rush into the first financing opportunity you think of if not repaying it on time gets a lien placed on your house. Try instead to approach the matter of financing your invention in a sensible, logical way, researching your best options and consciously planning how you will repay.

4) Agreeing to supply your invention to stores without enough inventory or capacity.

If you have persevered through the first three mistakes and actually have gotten your invention on store shelves, give yourself a pat on the back. You are savvier than most. But beware, for if you don’t take the proper precautions, you could soon become a victim of your own success. Many big-name retailers (and especially “catalog” companies) want you to have excessive amounts of inventory available to handle a sudden spike in demand for your products. If your invention becomes a hot seller, they need to know you can produce enough to keep up. If you can’t, you will either go under completely, or go into crushing debt to stay afloat. Neither of these are at all desirable, so make sure you can keep up!

If there’s a common thread in all of these mistakes, it’s lack of preparation and foresight. Luckily, these are skills you can learn and even master if you are truly committed to doing so. We can’t teach you everything about inventor planning, research, and risk management in one article. But you should continue doing this type of homework before spending money on an invention. (With IdeaBuyer or anyone else.)

To that end, we’ve put together a free, five-day e-mail course called “5 Secrets of Savvy, Successful Inventing” that will show you the ropes. It’s packed with common mistakes, examples of successful and unsuccessful inventions, and proven strategies you can apply to your invention today. If you’re at all serious about inventing something and making a profit (without losing your lunch in the process), sign up for the e-course and take its wisdom to heart. You’ll be glad you did.

About the author of this article:

Eric Corl is the President of Idea Buyer LLC, a new product development company and the parent company of IdeaBuyer.com. IdeaBuyer.com is a marketplace for new technology and products that gives inventors the opportunity to showcase their intellectual property to consumer product companies, entrepreneurs, retailers, and manufacturers.

Inventor How-To: Keeping Your Finances in Order

Saturday, March 8th, 2008

With all the invention-related things on an inventor’s mind, it is easy to overlook another important consideration: keeping your finances in order! The importance of a well-organized and documented financial life cannot be stressed enough. That being the case, it pays to take reasonable precautions and keep your finances in order.

How can this be done? The first step is a change in habits. Whenever you buy things relating to your invention – materials, postage, storage space, whatever the case may be – you need to save all receipts and paperwork that come with them. This is crucial so you can keep tidy books for your own reference, for future investors, and for your accountant. Many of the expenses you incur during the new product development stage may be able to be written off.

Another important step to take is establishing a filing cabinet for your finances. Too often, people stuff their receipts and records into random drawers, folders, and other miscellaneous hiding places. The problem comes down the road when you need to find a certain receipt or notice and have absolutely no idea where you put it. The way around this dilemma is having a small filing cabinet to put these things in. The other benefit of a filing cabinet is that not only are your records in one place, you can keep them in order. Nothing is more frustrating than digging through years and years of records when you need someone from one particular time. Fortunately, with a filing cabinet, this does not have to happen to you.

FinancialPlan.About.com offers some helpful guidance for how to go about doing this. They say that you can divide up your filing system into three categories:

  • Bills due
  • Important documents to keep
  • Items to throw away or shred

It really is that simple. Either you have a bill that needs to be paid, a receipt or document that should be saved, or something that can be discarded. It is up to you how you want to organize these items, but it can be as simple as using three individual folders labeled with the above information.

Then, whenever you get the mail or receive another financial document, take a moment to put it into the correct folder.

Beyond mere organization, you need to make sure you are in good financial standing at all times. The most easy-to-read gauge of this is your credit health. Do you know your credit score? Is it good? Do you even know what a good credit score is? These are all questions that you can and must answer. As an inventor, it is very likely that you will one day seek investors or loans or credit from stores that you are selling your product in. When that day comes, they will look long and hard at your credit health to decide whether you are a trustworthy person that they should be doing business with.

Not familiar with credit scores? Here is a brief description and link to more in-depth information from MyFico.com.

“When you apply for credit – whether for a credit card, a car loan, or a mortgage – lenders want to know what risk they’d take by loaning money to you. FICO® scores are the credit scores most lenders use to determine your credit risk. You have three FICO scores, one for each of the three credit bureaus: Experian, TransUnion, and Equifax. Each score is based on information the credit bureau keeps on file about you. As this information changes, your credit scores tend to change as well. Your 3 FICO scores affect both how much and what loan terms (interest rate, etc.) lenders will offer you at any given time. Taking steps to improve your FICO scores can help you qualify for better rates from lenders.”

SRC: http://www.myfico.com/CreditEducation/CreditScores.aspx

If your credit score isn’t perfect, don’t worry. There are steps you can take to improve it, and taking them is the important thing. Do some reading and, if necessary, rehabilitate your credit status! Your career as an inventor may depend on it.

While on the subject of your credit status, you should also aim to eliminate any consumer debt that you have. This will only harm your credit status and make you look risky to business partners you may meet down the road. You want to fit the profile of someone who pays his/her bills on time.

Above all, you should strive to be in control of your financial life. This means having an organized filing system with all important records and being aware of your financial standing. Accomplish these tasks and you will have gotten your finances in order!

How to Get The Right People Behind Your Invention

Wednesday, February 13th, 2008

All inventors have, at one time or another, pined for “the right people.” Be they investors, programmers, distributors, writers, architects, butchers, bakers, or candlestick makers, personnel is a crucial ingredient to the success of any invention. But getting the right people behind your invention is a road more easily mapped than traveled. In this article, we’ll walk you through finding and keeping the personnel you need to make your invention a hit. The task can essentially be divided into two categories: investors, and everybody else.

Investors (and how big a slice of future profits to give up for any personnel)

Some inventors are so desperate for investment capital or key personnel that they offer irrationally high percentages of future profits for those people to come aboard. In addition to advertising your desperation, this is a mistake for standard business reasons. John T. Reed, Harvard Business School graduate and real estate guru, explains why:

“At Harvard Business School, one of the lessons we learned was that one’s cost of capital was an indication of one’s competence as a businessperson. To put it briefly, if you are paying 50% interest or 50% of your profits to your silent partners, you are an incompetent businessman. Some successful investors would protest that was how they got their start. I don’t doubt it. I know some of them. But it was still a dumb move and the investors in question are lucky such terms did not blow up in their face and ruin their reputations before they got started.”

If you are a competent, accomplished person in your area of expertise, you should not be giving up half of your future profits for an investor to fund you. The same goes for other personnel you need. Unfortunately, many naïve or beginning inventors fall into this trap because they lack start-up capital or believe they must do whatever it takes to attract X person to their operation.

Instead, use a different approach. The best route is normally to forgo outside investors altogether and bootstrap your invention with savings or small loans from friends or relatives. However, if this cannot be done, you should approach investors after you have a proof-of-concept of your invention. If at all possible, you should try to get some cash flow going before seeking outside capital. Try to drum up some kind of sales or progress with whatever you have accomplished so far. The website AntiVentureCapital.com explains why this helps you to attract investors later:

Pretend for a moment that you are a venture capitalist or angel investor. Two founders visit you about separate deals. You ask them each what progress they have made in the 3 or 6 months that they have been working on their respective projects.

* One entrepreneur answers that he has been able to finish his business plan as well as find a means to generate cashflow which is being used to move the main project further along. Now he needs more money to fully capitalize on this developing opportunity.

* The other entrepreneur can only point to the “great” business plan he’s polished to perfection over the past 6 months and the “great” opportunity lying before him.

Which entrepreneur would you be more impressed by if you were the investor?

This demonstrates that you have something tangible. It also lets you keep your dignity when negotiating terms rather than begging them to accept half of your future profits.

Professionals with special skill sets

Of course, inventors don’t just need money to get their invention off the ground. They also need people with certain special skills to create the invention in the first place. So how do you bring such people into the fold?

The most common response is to promise the personnel in question a share of future profits. While this is acceptable practice (as long as it is not an egregiously high amount as discussed earlier), it is not the most effective way, either. The most effective way to get the right people behind your invention is to pay them to help you.

Not the answer you were looking for? Well, look at it from a realistic standpoint. Pretend that you are an experienced professional with a valuable skill. (If you are inventing things, you probably are such a person.) Now pretend that someone you don’t know is asking you to work on a project you’ve never heard of. That by itself is probably enough to make you a little uncertain. But then, to top it all off, they ask you to work for free, with no base pay, on the hopes that it someday pays off and you can collect when it does. At this point, your well-honed skepticism should kick in and dissuade you from doing the deal. Your time is simply too valuable.

However, imagine a different scenario. The inventor explains his idea to you in a way that sounds persuasive and enticing, and also offers to pay you! It might not be a huge amount, or even what you could get at a salaried job someplace else. But the sheer fact that you will be compensated for your labor will, naturally, make you more confident about the project and being a part of it. When a person sees someone put his own sweat, blood, and tears into something, it just feels easier to trust them.

Therefore, you should either save some money or use a small loan from friends or family to pay the personnel you want. Of course, you can still sweeten the deal by promising them future equity in addition to their base.

When you have some money saved up, it is time to place ads for the personnel you need. The industry you are in will dictate exactly how to go about doing this. If you are creating a new kind of garden hose, for example, you might want to advertise for engineers in a lawn and garden trade journal or magazine. You might try help-wanted ads in the paper, or even Internet resources like Craigslist.com

The idea is to offer something of tangible value to the people you want. This will go a long way toward getting the right people behind your invention.

Eric Corl is the Founder and CEO of IdeaBuyer.com, the online marketplace for intellectual property that gives inventors the opportunity to showcase their intellectual property to consumer product companies, entrepreneurs, retailers, and manufacturers. You can email him at EricCorl@IdeaBuyer.com.