Many inventors run out of money early in the invention process. This is often because they wait too long to take on investors. Experienced inventors know it is best to take on investors from the earliest stages of inventing so they don't run out of money later on. Once you run out of money, finding investors can be difficult because you will look like a poor planner. So take the right steps, right from the beginning.
Early Investments
These are the investments that help you finalize your concept, create a prototype, execute a patent strategy, make initial contact in your market and set up your business operations.
Initial Seed Money
This money is needed to evaluate your idea. It typically involves a preliminary patent search, some initial market analysis, verification of the idea's premise and possibly attendance of trade shows to see other products and meet industry people.
This stage is typically self funded. Your goal is to evaluate your idea, determine if it has potential and gather information to create a presentation for potential investors about your idea and its potential in the market. In an upcoming article, we will deal with how to craft that presentation.
The costs for this stage usually run less than $1,000 and can be funded by savings, credit cards or the sale of personal property.
Feeling Out the Market
As you develop your product and further investigate market potential, you will need to attend trade shows, industry events and association meetings, plus subscribe to industry literature. Your goal is to learn about the market and to network both with people who can help you with your product, either as advisors or as investors, and with people who may end up being customers. You will use the presentation you prepared using your initial seed money to explain your product to industry contacts and potential investors.
Before you start, you will want to look into applying for a provisional patent to give you a patent pending status. Although many inventors submit provisional patent applications themselves, you will probably want to talk to an experienced person to see if this will work for you. For instance, provisional patents don't apply if you will later be applying for a design patent. It is better to have a patent pending status than to ask people to sign Non-Disclosure Agreements since some companies don't sign Non-Disclosure Agreements.
Also before you start attending events, you will need to prepare a sample brochure. Make sure your brochure includes your contact information so people can get in touch with you later.
This is a great stage to take on your first investors. You may not need them yet since this stage often costs less that $2,000, but if you lined up three investors to each give $500, you will have some funds to help you along and also three more people interested in your success. Because of this interest, these investors will also be more inclined to invest in the future. You want to tell them that you need to prepare a brochure and attend trade shows to make industry insider contacts that you can rely on during your invention process.
Models, Prototypes and Patents
Once you are sure that your product will sell, you will want to make a high quality prototype to both verify that your product will actually work as you envision it and to prepare for the next stages of your product's introduction. If your product works well as you envisioned, then it is also time to implement your patent strategy. You want to make sure your product is just right before applying for a patent, otherwise any changes you make could take your product outside of your patent protection.
With your high quality prototype, also create packaging and another brochure using the product's picture. With these tools, you can attempt to land a licensing, private label or join-venture agreement. Your prototype needs to show your product will work and your packaging and brochure need to show that your product has a good sales pitch.
Depending on the complexity of your product and your patent strategy, this stage can be expensive. Patents alone can cost from $5,000 to $25,000 and up. But if you are looking into starting your own company, this stage is not expensive compared to setting up manufacturing. Hopefully you have already brought on some investors and you should approach them about investing in this again. Most investors understand how important this stage is and will invest again. Especially if you are starting your own company, try to approach many investors for a small investment now. It will be easier to get small investments and then it sets these people up to invest in your business later on.
Another possible source of funding for prototypes is from manufacturers. If you have met some manufacturing contacts in the previous step, you can sometimes set up a deal with them to have their in-house engineering staff do the prototype (they are being paid anyway and if the manufacturer doesn't have enough work this can be attractive for them) in return for you using them as a contract manufacturer when you start production.
Next Steps
After this step, your product development can take many different paths and you will need to choose your business model at this point. But in this article we will mention one more step that most inventors forget to plan for.
Setting Up Company Operations
If you set up some kind of company operations you will have a variety of expenses, which may include: operating capital, buying office supplies (computers, printers, fax machine, desks, file cabinets, etc.), setting up phone systems, hiring an accountant and paying legal fees. These expenses will greatly vary depending on whether or not you run your company out of your house, if you need to hire employees and many other factors.
Make sure you consider these expenses in advance so you can create a presentation on your needs for current and potential investors.
Look for our next article about many of the different funding sources, for instance: angel investors, bank loans, deals with manufacturers and many others.
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