We first raised money for an invention way back in 1997 and had around 13 angel investors– way more than what we recommend now that we have learned through our years of professional experience as product designers and entrepreneurs. The two of us are cautious about raising capital via crowd funding because there is truly a lot of pressure in giving small pieces of your company to investors, and often times it does not necessarily go into the best interests of the business. From the perspective of inventors trying to build a company from the ground up, it is absolutely necessary for you to have complete legal compliance when it comes to documentation of your intellectual property, getting a great product or business plan presentation together, and to use systems in place that can help you track your progress. We will be talking about equity crowd funding, warnings about Kickstarter campaigns, important bits on Security and Exchange Commission compliance and many more to help you go through the motions of raising money for your business securely and efficiently.
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We’re going to be talking about early stage funding of your invention. Thanks for joining us. Early stage funding for your invention, this is a really important topic I think for all inventors and there are several options that are open to you in early stage, but we also want to talk about this because a lot of the rules have changed. We first started our first business that we raised money for an invention back in 1997. I think that was the first time we did that.
It was Angel investors that we got at the time and it didn’t matter how many of them we got investing, we had a dozen or so, but even if that’s a path you take, a dozen is too many. We had baker’s dozen, thirteen. We are cautious about raising capital. We’re cautious for a couple of reasons. One is that we’ve experienced the pressure of giving way even a small piece of your company with those thirteen investors. We really probably didn’t even give away a total of 20% of our company among those thirteen investors, but it felt like pressure all the time, to make decisions that were more short-term and returning to those investors, and not necessarily in the best long-term interest of our business and for us personally. We’re really cautious about that. In fact, this is one of the things where we’re heavily considering and been working on trying to decide the best path for us to go into our 3D print venture.
These are some of the things that we’ve been considering and that’s why we have some detailed information and we went and took a great course or I did. I took a great course at CEO Space International, which we are on the faculty, but we have great benefits in that we can attend some of the classes when we’re not teaching or mentoring. One of the things that they have is a capital weekend that is just amazing and it’s free to members so you don’t have to pay if you’re a member. I don’t think it’s terribly expensive. I think it’s a fraction of normal cost. I don’t know what it is, but anybody interested in that can message us on Facebook or if you have email address, email us and we’ll be happy to connect you with CEO Space if that’s what you’re interested in.
There isn’t any place right now that is teaching how to raise capital with the new SEC regulations that went into effect. Three of the guys were instrumental in forming it at the SEC and with the SEC. The regulations went into effect, but they’ve been in play for over a year. There are very few people who have as much detailed knowledge of these regulations and how they’ve done and how they’ve gone about, but because they’ve had a year from the time at which they still form the regular state regulations, by the time at which they take effect, they have a lot to teach us. That’s what I took. I took that class, plus I took a couple of deep dive classes with Marlon Paz, who is an incredible securities attorney in major firms on Wall Street. It’s critically important that we understand both the risks, the benefits, and what these things can do to you.
Let’s start with early seed funding. I want to do a primer on what your options are and what the things are out there. I want to be really careful here and we make a definition distinction. When we say crowdfunding, we’re not talking Kickstarter. We’ll say Kickstarter. It’s donation platform. It is not in terms of the federal government and how they have written the laws. Crowdfunding is legitimate way to solicit people to invest in your company that is entirely different from Kickstarter. In Kickstarter, people donate and as receiving those donations, you have very little obligations to those people that are donating their funds to that. If we’re talking about Kickstarter or Indiegogo, that’s what we’re talking about at the time, but if we say crowdfunding, it’s something entirely different. We’re going to define that here for you in this session.
Crowdfunding is equity, crowdfunding is what we’re talking about, where you’re going to give away a piece of your company in exchange for a capital. Most people don’t start that way when they have a new invention. They’re trying to build and make something out of it, whether they’re going to eventually try to license it or they’re going to build a company around it.
Seed Funding: Crowdfunding is legitimate way to solicit people to invest in your company that is entirely different from Kickstarter.
I want to clearly distinguish this. Today, even on Kickstarter funding model, you must spend money to make money. You are not allowed to be on Kickstarter with a rendering. You must have a working model. You must have photographs of people using your product. To think that you can just use these things to fund your idea is a mistake. That’s where we really want to start. You must find ways to take your idea to a certain level of proof of market traction, possibly that might be the case, and maybe a Kickstarter is a way to achieve that proof. If your product is for women, I highly disagree with that method, but we can talk about that a whole another subject.
The point is that you have to be thinking of ways to spend as little money as possible, but to get your idea proven, and we’ve talked about that before, market proof, how critically important that is. I can’t tell you how many lectures I give on that one and that’s probably my number one talk that I give out across the nation. It requires money. There’s just no way to get that. The average Kickstarter spends about $15,000 not on the product, not on the video, on marketing. If you’re not prepared to spend $15,000 marketing, then it’s highly unlikely unless you have a built-in user base already in a really large email list that you’re going to be successful in Kickstarter.
We’re talking about spending that money well before your campaign launches. This is about pre-launch marketing. Because what we’ve learned over a long time now is that if you did not get at least a third of the backers and the third of the money you’re seeking on Kickstarter within the first week, you are likely to not fund. It’s because of lack of exposure. Thinking you can put a product up on Kickstarter and Kickstarter is going to organically bringing enough backers to your project to make it successful, that is a serious misnomer. It is does not happen.
No matter how cool your video is, and is an expense too, you got to think about that. Video helps but it’s not near enough. It won’t do it alone. To think that out there, there are bloggers and PR people who will just promote and articles that can be written, it’s not going to happen. In fact, at Inc., we don’t write about Kickstarters unless they’re already successful because we don’t want to give an unreasonable boost to someone who may not or may or may not. I could write it before the Kickstarter. That’s where your soft launch and marketing comes in. These are things that you have to think about and so it’s going to cost you money. In the equity crowd funding world, from what I understand is between the marketing that is going to take the time that it’s going to take and the resources you need to build your strategy, your plan, your financials, the lawyers doing all the filing documents and everything you need there, the average spend is going to be somewhere around $150,000. 10X of that other of the Kickstarter amount. If you go into the equity crowdfunding realm, you can raise up to a million dollars in initial.
What is the difference about up to a million. Why is there a distinction? Equity crowdfunding is basically non-qualified investors. I think it varies, but it’s based on a percentage of your income, but you don’t have to go for full qualification and be a qualified investor. When you’re getting an investor, the investors is going to invest a significant amount of money in your businelss, they must qualify themselves. They must be approved. It must not be more than 10% of their income or their asset base essentially. The net worth will be the best way to describe that. In the equity crowdfunding, this new rule that just went into effect, you can basically raise from just about anyone in the public, but$1,500 is the average investment there.
Is there a limit to that person? Yes, there is a limit and I don’t remember the exact number. I’ll have to look through my notes here and see if it is. There’s a limit to the total number they can invest over the course of one year. In one year they’re allowed to do a certain dollar amount. These rules are in place to protect the investor? They’re there to protect the investor and but they’re also there to protect you as the crowd funder, as the company, from taking investment from people who may then just turn around and sue you because they were like, “You took advantage of me.” Which does is a concern.
We’re diving down the equity crowdfunding rabbit hole a little bit. It’s $2,000 or 5% of net worth. That’s if you have less than a $100,000 in income, or it can be if you have $100,000 in the more it can be up to 10% of your income. Equity crowd funding, I’ve learned a little bit about it. I’ve seen some of the presentations at CEO Space. The great thing about it, there are systems in place and there are website platforms that you can work with to go through all the SEC paperwork, things that you need to do to be able to try to raise equity, capital, and equity crowdfunding. These sites help protect you in terms of complying with all the laws. All the regulations and things of documentation and things.
We’re going to call that compliance. You have to be in legal compliance with things and that’s why you need to have a lawyer involved. You need to have a team involved. That’s why it costs money to do these funds because you have to do them the right way. Some of the platforms out there and the one we know, best is called Sprowtt.com. They’ve been running the regular equity funding, but the crowdfunding, I’m not sure that they’re live with the $1,000,000 raises yet or there are any live projects yet at this stage. It’s only a week old. They will be. They were most familiar with that platform because I’ve spent time taking it out and looking through that one. The point of being in extreme legal compliance is really to make sure, because these rules are so new and there’s gray area. Anywhere you can get into a situation where there might be risks with your investor base or with the idea that somebody could come back and take this capital that you’ve worked so hard to raise, that’s a scary prospect.
I think that’s really important. Obviously if you are an inventor that’s building a serious business from the get-go out of it, we’re going to talk about what happens if you’re not, because there’re other ways to fund your invention if you’re not, but we’re already talking about it so let’s go with this. I remember an example being told to me, a very real example of something that actually happened. It’s one of the reasons that these equity crowdfunding laws and rules have been put in place, is that it is possible for an investor after they’ve given you the money, months, even years down the road say, “You deceived me. You didn’t properly disclose everything about your plan and what you were doing and I want my money back.” They can sue you for that money and they can actually get it back if you don’t prove you properly disclosed everything.
I want to be really transparent about how that works. That is the case and that is exactly why some of these SEC rules had to go into place and part of it was that grandmothers and grandfathers didn’t get into their entire retirement funds, sucked up into someone’s, and they didn’t go tooth deep in with someone and then lose their entire security in that. That’s part of it, but the other part of it is on the company side. Companies were getting tanked by these lawsuits and things like that. It’s both protections. I do want to be cautious. Do not think that being on Kickstarter alleviates you from any risk of lawsuits and other thing. We’ve been talking about it. Their class action lawsuits are getting bigger and bigger on Kickstarter, more frequent. You have a performance obligation on Kickstarter whether you believe it or not. Just because everybody’s late on their projects and just because most people let that go doesn’t mean that that relieves you of the liability of having to perform.
[Tweet “Equity crowdfunding is basically non-qualified investors.”]
In both cases here, whatever you say you’re going to do, you better do. You better deliver. You better have the right team in place. That’s why with the equity crowdfunding, we’re saying to you $150,000 because that ensures that you’re going to have the right team in place. You’re going to have the right pieces of information. You’re not going to step over your bounds and promise something that you cannot deliver. You’re not going to say something you’re not supposed to, which is another reason why you go and you attend one of these classes and you learn about what you can say and can’t say because there are restrictions just as much as what you publish and what you put in your slide deck and your pitch presentations to what you can and can’t say to investors. These are also critical things.
It’s very important. Just a couple of practical examples that I know of I think would be helpful for people to understand here. In order to raise money from investors anymore than five, you can raise Angel investment on the down low from up to five people. If you’re getting Angel investment from mom or dad or aunt or uncle or any friend or person, if you keep the number of people you’re raising money from contributing for a piece of your company to under either five or six, we’ll have to confirm that you can just do that, but once you get over that amount of people, you have to comply with all the laws. That means there are certain documents that you need to distribute to potential investors for them to review, your business plan and all sorts of other aspects.
I’m not going to go into the details, but there are rules of things you need to disclose to be in compliance with the law and a website like Sprowtt helps you because not only does it qualify the investors, but it also is a tracking system. When you have an investor who is interested and wants to know about your plan, you distribute documents to them. When they go and request those documents and they confirmed through the website they’ve received them, you’re in compliance with the law. They can’t say later on, “I didn’t get the documents.”
I think from an investor’s perspective, it’s a lot more secure for you too because you put your pitch deck out there and you’ve got your IP revealed. In some cases because you can’t not reveal anything, so the process allows you through these platform to do the non-disclosures, really track and see who’s downloading these things, who’s really watching that, who’s looking at that, and how many times do they access it. Are they accessing it for multiple computers? You can see that in some of the sites and if that’s the case, maybe they’re sharing their link with people and sharing their username and password. The best part is that you could shut them down too. You’re in control of that investor. On some of the sites, you’re not in control. There’re actually a few risks to the sites that I found out that I really want to mention to everyone on these before we go onto talk about some of the other forms of funding.
Broker check, they must have a broker license and all of these sites must have that compliance in place that they must be approved. You should check that out. You really need to look into that. There are places in ways to check at Finra.org, you can do a broker check and a portal check. You might be able be to raise the money without dealing with it, if you don’t need as much for starting capital and seed capital. I keep this in mind because I just did an interview with a VC that seed capital has to go further now. You don’t get into a series or what is really capital raising until you hit a scalable growth model. Are you going to scale up? Are you going to really expand? Have you already proven your market? Have you already proven your product? All of that proof phase happens in the seed capital and there are ways to do it through debt financing, through loans, whatever you need to do, raising it from friends and family.
It’s not a better model until you’re really sure that you’re ready to go forward and that you have something that’s going to be scalable and something that’s going to fund. Also some of these sites have what you call test the waters. You can actually put your pitch deck out there and screen it through a few investors and refine your language. Maybe you’re going to find out they have a ton of questions and other things. Before you go into full filing of your documents, you’re allowed to do this test the waters thing, and there’s a limited amount of information required and you do have to spend a little bit of money to get your strategy in place and get that going. Before you finalize everything and then you go with the SEC filing, you can test the waters and check it out. That’s also maybe a really great way for you to really say, “Am I really ready for this?” When the questions come back from to me, am I really feeling, “I have some more homework to do. It’s not time yet.”
The other thing is that some of these portals are niche based, so make sure they’re in your niche. Some of them are in states only because there were different state rules and regulations that go on. They all have to be registered and licensed within the different states. Some of them have said, “We’re only doing California,” which means not only do you have to be in California, but your investor needs to be in California. I believe that it’s both, but definitely our investors will only be from that state because they’re only qualified to take investment from that state. I think actually you’re allowed to be in another state, your company, as long as you’ve registered your filing within the state. That’s another reason why the costs get up on the SEC because you have to register in all the states that you want to raise money in.
In order to put together all the proper paperwork and documentations to actually even take it to the angel investors, the cheapest way we know to do it costs you about $6,000 if you’re going to have others do it. Probably $10,000 is more accurate. Then if you’re going to go into equity crowdfunding and using a site like Sprowtt and raising the bigger amount of money, first up to a million and then potentially more than that, it’s going to cost you what about 15 to $20,000 to do all those documents.
Even less because some of these portals like Sprowtt have electronic filing with an attorney’s review that you can do through there. You don’t have to have a separate attorney to do all of that, because the reality is that there are so few attorneys who have started doing this yet, so you need one who has experience having done it many, many times over. It’s small potato for a securities attorney if they’d like to do big companies that are going for IPOs and other things. The ones that are specializing in this have participated in with some of these platforms. There’s an auto process where you file all of the documents within that. Then the attorneys review format and make sure everything’s ready and in order and then get it filed.
If you have never done it before and you haven’t gone to a class at CEO Space, you don’t have any idea what I’m talking about. I’m going to talk a little bit about those things as we get towards the end, but we’ll talk a little bit about the things that you should be prepared to know and the things you should get an order besides getting your invention proof in order. I think you spend too much time on that and not enough time on the business side of things. We want to balance that out this week. Be aware of those niche because if it’s a real estate niche or estate niche and that doesn’t fit where you’re going, you’ve got to be careful. You’re not going to find any investors on these sites. The other thing is some of them are a mall situation, so think of it like Kickstarter is a mall. Some people might search in there and say, “I want to find out about every time there’s a 3D printing Kickstarter up for grabs. I want to see it.” You can ask to be served certain categories of things.
Seed Funding: Be aware of those niche because if it’s a real estate niche or estate niche and that doesn’t fit where you’re going, you’ve got to be careful.
The reality is if you were working really hard to find your investors, do you really want to get them, drive them into a portal to review your documents? That’s a mall. Then they see the next guy who might be in 3D printing. We’re running our 3D print venture and they go, “This sounds really interesting. I’m going to go into the portal and I’m going to look.” They go into the portal and they look at our proposal and then they see over on the side, “If you’re interested in 3D printing, here’re all these other 3D printing projects to invest in,” and then all of a sudden your investor says, “I don’t want to spend here. I’m going to spend there.”
They get diverted. That’s where the investor essentially doesn’t belong to you. There are other sites, and I know Sprowtt is one of them, where they drive them only into you. They only see you, they don’t see the others, it’s really for you. That’s if you’re working your butt off and you’re spending $150,000 marketing and getting investors and getting yourself out there and in front of them, you want to keep them to yourself. I think that that’s really an important portal consideration and consideration as you’re raising capital. Fifth one is that the reality is that these sites have compliance concerns and you want to make sure that they’re over complying because we don’t really know the nuances of the rules yet.
There’re going to be tests of those rules and you don’t want things to go wrong, but if one of these brokers got de-certified because they didn’t follow and comply and do all the things in the rules, what happens to your investment? Now all of a sudden it’s debunked. It’s completely closed down. You don’t get your money. It’s sitting there in escrow. It gets returned to the investors. You have to start all over again. That’s a real issue. You really want to make sure you’re in a site that’s doing over compliance so that you can make sure that it can cover an issue in case of a failure in this brand new system that’s going on.
I think one of the stories that we heard, there was a legitimate true story of an NBA basketball player who made an investment in a company and then his wife and he got divorced. Then the attorneys for the wife and the divorce proceeding managed to somehow say, “There wasn’t full disclosure for our client, for the wife of this investment.” Therefore the rules of the SEC weren’t followed. Rules were not followed and therefore they were able to go back and unwind these investments. It wasn’t with the basketball player who made the investment want it nor did the company want to have to deal with this because they ended up having coming back almost like in a bankruptcy proceeding where they come and snatch back your money if it was done in a certain period of time or in the wrong way or any of that thing.
This is one of the reasons you may think, “I know this person. They’re a very qualified investor.” You may know them but you might not know their entire family dynamic and situation and that is why these laws have been put in place. Yes, they protect the investments but you as the person, as a company raising capital, and we’ll make sure if you follow all the rules and stay in compliance that you won’t have any surprises like that with somebody being able to come back and cost you a lot of dollars in legal fees and be able to come back and take investment that you took it in good faith back either.
Keep in mind there are principal risks to the business. The core risk of the business is there’re legal risks. There’re also regulatory risks which are the unknown and untested right now. Then you still have product liability risks or performance risks of non-delivery and things like that. Those are all things that you have to consider and some of those are on you, but some of them are going to be on your choice of portal or your choice of securities attorney. This is why we’re saying, “Plan this budget right, because you cannot skim here.” This is not a time to say, “I’m just going to save $5,000 and go in this portal or go with this attorney and they’ve never done it before.”
How many of you have an attorney? If your attorney is your uncle or your stepfather or something, you don’t have an attorney. Most people don’t have an attorney like that on speed dial. Not any attorney can do this. This is a securities law. You must be licensed to do securities law. You cannot use just any old attorney. Those are things that you must consider. Let’s talk a little bit about the things you need to have. We talk about what is seed money, seed money is like things that get you started, that grow your business program, that checks the inception, from the concept idea to product market fit, to where you have proof that you have a likelihood that the market wants what you have to sell.
Seed money is often an Angel investment. Is it not? It’s unregulated. Friends and family and some individuals, small individuals, Angel investment. It’s highly likely that that’s where that money is going to come from. In very rare cases, seed money might come from a VC, it might come from an investment group, and might come from something bigger than that. More of those are what I would consider to be corporate VCs. In the 3D print world, if you got money from Autodesk’s Spark, that’s maybe seed money in a way. That will give you might get $100,000 to $300,000, $400,000 of seed money to get started on the idea because they think that it might have potential in a more global way to make a difference in that marketplace. They have a particular interest in that marketplace and in growing companies that are complimentary to what they sell and what they do already. There are actually a lot of these corporate VCs doing this or corporate funds doing this. It also has to be a perfect fit for them. That’s always a risk as well.
There are lots of ways to get seed money, but I think most inventors who want to maintain ownership of their product idea as long as possible use debt financing. Quite honestly, they’re using their own 401(k) money or using their own other investments they’ve had. They’ve cashed in or just savings to fund proving the concept of their product, making a prototype, and paying for their patent expenses and things like that. I honestly think that’s the most appropriate way for an adventure to do it, to maintain complete control over your product. A lot of investors, we’ve had this happen to us quite recently where an inventor will come to us and say, “I have these great concepts.” What they have is an idea. It’s probably written down on paper in some way or sketched. They can show that to somebody and say, I think that’s a great idea,”” but that’s all really it is, an idea. I’ve had people coming in with that stage and say, “This is a great idea. Would you like to get involved? Help me make this thing and help bring it to market.” You just have an idea. The idea that someone is going to give you money to help you fully developed that idea and prove the market, it almost never happens unless it’s from family.
In our experience, ideas are worth nothing. It’s that ability to turn that idea to the action that you have to take and the experience that you need to have him turn it into something that is worth the money. Whoever puts in that effort is the one who deserves to make the money off of it. An idea, it’s just an idea. Ideas are not protectable. We have so many different product ideas. We have 37 patents. We have developed 250 products in the last ten years, but we’ve had five, six times that many ideas. Ideas are cheap or nothing. It’s ideas that somebody will pay money for ultimately, consumers will part with their hard earned dollars for it that are worth something and it takes a long time to be able to prove that. You or me even thinking that it’s a good idea, that doesn’t matter. It’s what does the market think and that we talking about proving it in the wild before. Ideas are better than others, no question. A huge number of ideas could be a product that sells. That could be, but that’s just it, they could be. People are coming through and say, “This would be great. You can make a lot of money.” That’s possible, but I’m not going to do that work for free. If you want someone else to pay you to do it, why are they going to do that?
[Tweet “The core risk of the business is there are legal risks.”]
You got to think about this. Why is someone going to pay money for them? They could be. It takes someone with passion, who really has a fire in their belly for this idea to go and make something of it. Yes, a lot of things could be company. I had somebody come up to me and say, “I need to hire a CEO. I need a CEO who can take that.” At first he told me, hire a CEO. I’m like, “How much money do you intend to pay the CEO?” “I don’t have any money to pay them. I want them to do it for a piece of the company.” You’re asking somebody to come and be your CEO to run your company as a full time job, which is a full- time effort, to then contribute their time for free. Whatever living expenses they have or putting food on their table, you’re expecting them to pull that out of their savings. Working for free, but still having expenses until some point in time, the future, which is going to probably be a year or two until enough money is coming into this business or enough investment, is there to justify a salary.
Keep in mind, this is from idea. When you’re talking about idea, how long is that going to take before they’re making money on it? If you spent the time and a small amount of money to get market proof and product market fit, now they can see the potential of it. It has potential. I have proof of traction. It’s closer along. I am showing that I have skin in the game and I’m working towards it and I’m passionate about it. Maybe I don’t have the skills to run the company and that’s why I need a CEO. All of that makes sense. Now you might be able to get somebody on board.
If you really don’t have any intention to build a company from the ground up for around your invention, then no one else is going to have that passion either. The only other road you can go down at that point is to fully develop it. I’m talking about spending smaller amounts of money but it’s still going to be your own money or money you borrow to go and fully develop a product, make an absolute working sample. I’m not saying you have to tool for it. Very low cost, no tooling, but make working samples and maybe file a provisional patent, maybe do some market tests after you file that provisional patent if it’s patentable. Most things I guess for people here would be, but then you’ve got to go and seek a license with someone, another company who’s then going to do the rest of the work, but you’re going to get a better license to further down the road. If you try to take a company, an idea that you haven’t filed a patent for yet or a patent has an issue yet and you haven’t even gone so far as making a prototype and proving it out, it’s going to be very, very hard to get that license. It can happen. I’ve seen it happen in rare cases, but the deal you’re going to get is a much lower percentage. The further down the road, the higher percentage you’re going to get.
Not just a higher percentage, but the better terms you’re going to get as well. Here’s what we have experienced before. We have yet to see a successful license come from any one of those marketing firms. We have yet to see one person succeed that’s not the testimonial on their website. We’ve yet to meet one. We’ve talked to many, many, and almost every single one of them was, “I spent $25,000 and all I got was this binder.” I got the bound book of this patent search and the next step which is going to cost me X more money.
Let me Google that for you and save you money. That’s our big job. There’s that app. Let me Google this. Google that for you. Anyway, that’s what people should do. Just go to Google apps. You can do the search yourself and not spend $25,000. The reality is that when you get a license agreement or when you’re in process of a license agreement, there are so many things on a corporate level that go wrong. There’s a not invented here syndrome that happens when you have corporate design and engineering. It can even happen at the manufacturing level that they are like, “This is just too difficult. We don’t want to figure it out. We’re not going to take the time,” and they stall. What I have had happened to me is that some inventors will come to me and say, “They bought my patent and they were just sitting on it. They shelved it, and they did this to me on purpose.” I guarantee you they didn’t do it to you on purpose. You were too small to succeed and they could care less about you unless you were really selling against them.
If you were just a small guy just starting out and you got a licensing deal with this company, I guarantee you it’s the organization that killed it on it for you. You have nowhere to get it back because you didn’t plan your license. That’s another problem that happens. The reality is that the company is spending money. We always talk about licensing as having three things in it. One, upfront money which rarely if ever happens because most often you guys haven’t done your work and gotten your product far enough along that it’s ready to go, so that means they have to invest money to make money and they’re not going to give you money on top of that. That happens in rare occasions. We’ve gotten up front money before, but we take our products a whole lot farther and we have a whole lot more proof. We know how to make that happen.
We took it to the point of having a turnkey solution. All they had to do was pull the trigger. They just had to start paying for tooling. Even then we still got a small amount, but we got enough to be an advance in a sense. It’s a high royalty percentage or high license fee percentage. You won’t get a high one if you haven’t taken your concept very far. It won’t be. Someone told me that they do 5% and 6%, but to be honest with you, for mass retail, I think you’re lucky if you get 2% nowadays. You have to have a proven patented to get more. You need to have a big name like Martha Stewart who is licensing their marketing name across all product lines. In order to get market power of 5%, you’ve got to have some equity in your brand.
In your brand, your item, or both. The third thing is metrics or terms, basically saying minimum guarantees that you’re going to perform or the company that bought your product is going to perform. When they don’t perform, they either have to pay out that minimum amount of money to make you whole or they lose their license rights. Those three things, you won’t get them, if you just have an idea. When a year later you’re still waiting for licensing money to come in, this is why. Licensing is not the best idea for an early stage concept. That’s what we want to talk about, early stage funding.
What’s the real early stage? I’m an inventor. I’m a working class guy. We meet a lot of these people. We see them at the local farms where I’m a working class guy and I come up with an invention. I have some intellectual capital if not property yet, then I want to fully develop that. I don’t have the money to do it because my day job, I need everything I make to pay my bills. How am I going to get some money to do that? One of the ways we could consider is debt financing. Our friends call it ABC financing. A is asset-based, B is bank, and C is credit-based. Those are your different kinds of financing and debt financing.
Let’s use plain language. We’re talking about getting a loan, you yourself getting a loan in order to fund your early stage invention development. They’re the most common way it’s done other than using up your own savings, cashing in your 401(k) whatever. Something you’ve already said, if you don’t have money already saved, getting a loan of some kind. There are lots of different loans. You don’t have to have stellar credit. There are different levels and some get higher interest rates, but if you really think this is the thing, there’s a cliché, no risk, no reward. Somebody has to take some risks in order to move an intervention along. That’s true whether you’re using your own money, you have savings or if you’re getting a loan for it, it is a risk. There’s no risk free way to do it. That financing is very real. AllGreen, there’s a company here in Irvine, California that helps companies actually fund their businesses, not just interventions. It’s not specific to interventions, but anything they’re trying to do and growing a business or a product, they help people do that and they also have a lot of other services they provide around developing your product or your company if you need it.
Seed Funding: Most inventors who want to maintain ownership of their product idea as long as possible use debt financing.
More on the marketing side of things, but the reality is that you’re going to need that and so you have to get that money from somewhere. Friends and family, you can stretch that system if you want. I can say that because we’d done it before, that is the probably the worst way to raise money ever. It always hurts your relationship no matter how good a product it is. No matter how good the return is, it’s always slower than they expect. It’s always in a way more than they thought they would be in for and it’s stressful in your relationship. It’s not my preferred way of doing it, but if you need to, you need to. Some of the people will tap their retirement funds. I’ve heard of a lot and they have been approached by quite a few companies that are talking and doing some of these unusual insurance policies against retirement funds and things like that. There’re some creative financing funding going on out there. I don’t know a whole lot about them, but I’m maybe hoping we can get Sarah on the show do a talk for us on what that means and maybe some of these options would be great.
We don’t know the details for what kind of credit union you have, how much money can you raise, or is realistic. Our listeners are going to be on their own to try to figure that out, but we’ll address it in the future. Brian Eden’s already in there and Sarah, I invited as well. Hopefully they’ll join in and you can actually message them directly within the network. If you have questions you can ask it that way. Don’t forget that your membership is here and you can see the other members in the membership area, on the portal page, and make sure you go there and use each other. That’s why everybody’s in this group, it’s so we can network together. Just ping us and we’ll connect you too, if you don’t know who’s who within the network. These are some things that you have to do in the early stages. Here’s what I really want to leave you guys with.
We have a question, “I have developed a product that is for different markets. The same object is adapted for use in one country, one for the EU and one for the US and one for the Brazilian public. Should I had to for all the markets, starting in only one country, I will use a service bureau for 3D printing this object.” First I want to start with is that do not start patenting internationally from the get go. File within your country that you’re making from and prove out that the product has traction and sales before you start broadly patenting around the world. Just start there because international patents are so expensive.
The rules are different in every country. Unless you’re prepared to really enforce it, it really doesn’t make a whole lot of sense to be doing it. Why would you spend all that money to let’s say patent in Australia, if no one in Australia is ever going to buy your product. If you’re really developing something different that’s different in each country, you will have to file each one of them differently or have your claims written in such a way that it includes all of those different processes if you can, as added claims.
Depending on what the product is and it’s hard. I know it’s hard to answer without knowing that, but it was like electricity voltage difference or language difference. The claims would so that you wouldn’t have to do that different in every country. I agree, I wouldn’t go spending a lot of money to patent things and other countries unless you really know there’s going to be a market there. What would you do? Most companies have some form of a provisional patent that you can file, and I would recommend starting there because it’s inexpensive and you can try to prove the market at least in somewhere.
Usually it gets you eighteen months two months to two years. Sometimes you can have as long as that depending on filing dates. Then when you file your patent and you have time to prove the market before you’ll end up having to file the international patents. International, that’s different. You’re going to need to consult your patent attorney about when to file international patents, but the provisional patent will give you one year. Have a priority date for you to have to file a full patent in that first country. There is an international treaty called the Patent Cooperation Treaty, PCT. You can file a PCT application to reserve the right to file international patents in other countries, and that gives you another year of time to do that. You can build yourself a couple of years, have a provisional for a year, and then toward the end of the deadline you file the first patent application in your country. Then you would want to file a PCT before the deadline, which I think is about the same. That might give you another year before other countries.
21 to 24 months if you did what you can get. I would be very careful because then the reality, we have 37 of them and that’s very useful. We only have one PCT though. One that we did internationally in all that time. To a large extent it’s difficult unless, you really have the money or you know you will have the money if you’re raising capital to be able to enforce that in another country because that’s a very expensive endeavor. I like copyright better. We have another question. It says, “Do you have a list of companies that help with funding/mentorship such as the one in Irvine, which you mentioned.” Do we have a list of those?
I don’t know if we have a list of those. Why don’t you message us? Because if you’re really looking for a specific kind of company, there’re different funding options that might be great for you. We don’t have a list, but we do have a network of referrals. There are some companies though that really do a great job of helping you figure out what your strategy and plan needs to be so that you can really dial in and figure out how much funding you’re going to need initially. I’d say anywhere, if you were really looking and serious about building a business and serious about eventually going for equity crowdfunding or capital raising, the minimum I suggest you have is about $50,000 planned over the course of about six months’ time. That’s the estimate that I’ve come to you from a lot of research. I’d say you’re going to spend anywhere from $15,000 to $25,000 on consultants to help you formulate your plan, make sure your numbers are right, get your pitch right.
If you need that, various things like that where it’s really right, it’s not anything in there about your product. Keep that in mind. This is about building a company and a building a successful capital plan. Then I’d say you probably need another $25,000 for the legal fees, the regulations, just some amount of travel and time and initial jumpstart to figuring out what your marketing plan should be in terms of marketing to investors. Some of that might be spent on website revisions and things like that that you need a video because you can put videos into your equity crowdfunding plans as well. So some of those things. So some marketing needs is in there as well, but that’s where I’m estimating and in fact that’s exactly our budget for where we’re going to go for six months, will be a $50,000 amount of money spent.
Our project is a big company. It’s $20 million a year in revenue within three years. We’re talking about raising a significant amount of $4 million or $5 million worth of capital in order to really bring that venture forward, in order to be able to then have a company that has $20 million in sales and all that. Just be thinking about that, I think that if you’re just dialing in and doing an initial investigation, I’d say probably just need a budget of about $15,000 to get started and really do an investigation and get to the next step before you decide if you’re going to go further or how you’re going to go further. One of the other things in there for us is in that money and that’s why it’s $25,000 for the legal and compliance documents and all that, because also we’re going to reform a new corporation and some of you may need to do that and that can be anywhere from $3,000 to $5,000 to reform a new corporation, which will be the new entity.
[Tweet “Whoever puts in that effort is the one who deserves to make the money off of it.”]
Especially if you’re going to go for an exit strategy of selling your company, you want to have it separated. We want to have it separated from our core business for instance, because our core business is just us and this would be a sellable entity. That may be required for a lot of people. The inventor part of my mind and the designer part of my mind just went, “I’m overwhelmed. That’s a lot of information there,” and that’s why you need to spend money hiring good people, because it will only stall you. That’s what we want to put into your mind here. The three things that I really want you to take away today is that these funding options are out there, there is money being spent and if your idea is really good and if your product is good and you’re passionate and you’re hardworking and you want to make this happen, there is a way to make it happen. You shouldn’t be discouraged in that.
There are new ways coming up all the time. I love the idea of only raising a million dollars and really taking a very small piece of your company and getting to the next stage that would make you ready to do capital raising larger amount. I love the idea of that and I’m really thrilled that this equity crowd funding rules have gone into place and it’s happening because I think it can make a lot of companies more viable and successful. That’s there. The second thing that I want is that make sure you really don’t just spend all your money and all your time on your product, on your invention, and on your idea. You must spend it on strategy, tactics, people, and personal development
It’s your product, your invention, your baby. The company wouldn’t exist without you, but do you have all the skills to run a company and to even build a company and get it funded? I’m not saying you have to have all the skills from the get go, but you need to be willing to go and learn what you don’t know. There are organizations that can find a team or build a team that has the strengths where you are weak. Recognizing that is so critical. I know I’ve met a lot of investors who is in the business plan, they don’t see specifically what you’re doing to personally develop yourself, to improve, to learn what you don’t know.
The team part is actually extremely critical and this is another way. You need money to do that because if you don’t have your team actually hired and on your staff consulting with you, they’re not really a part of your team. This is a grand idea that that person will be available. You need to spend a little money and getting them on your team. That means you may have to contract with them. You may have to pay them a minimum amount of money. You have to have an agreement in place with them. Those things all require documentation, a plan, getting going with them. To think that that’s going to happen and someone’s going to come on board and be your free CEO because they like your idea, that’s not the way to go there. You must spend a little money to get a good person who’s resume you can use. People ask us all the time.
People ask us to be on our board of a company that are forming and some of them, if we believe in what they’re doing and after they raised their capital and get to a certain point, we’d be willing to be on their board and then they can use our bio in their business plan that helps give their planning credibility. We make it a policy that they have to contract with us at least some small amount ahead of time so that we can officially say they are clients, that they work with us, and that they are partners with us because otherwise it’s just borrowing our resume. That’s a very big thing to ask, we have enough to do.
If ever will agree to it anyway, that’s beside the point. Spend a little money, make sure you’re spending money on those things and not just on your idea and invention. No one cares about the what, they care about the how. Then just let me finish the third thing and then we’ll get the last question in here. The third thing is that I urge you to really spend the time and decide, “Should I do it, should I make this happen?”” That we’re going to make our next topic.
We have one more question, “How should I approach the financial side?” If you’re talking about raising capital, you must do it through escrow accounts and through proper channels. That’s why you need to be in a portal. If you’re talking about selling your product or just sales with those, PayPal is very international. We find no issues with it. You can do invoices and other things. We do a lot. We pay people all over the world who work for us through PayPal, so that’s a very successful way to do it. PayPal does it all for you. There’s also Amazon Payments. Amazon Payments is another way to do that. It’s not quite as simple to use as PayPal is. PayPal seems much more straightforward, but if you’re really selling product, Amazon Payments in a click button makes it really easy to, so if it’s product sales that you’re talking about, I think that’s an ideal way for you to do it.
If that didn’t answer your question, you can message us or email us you do a certain other things and then explain a little more detail and we’ll try to answer your question more specifically. If you joined late to the broadcast, it will be on the Facebook page and when you go into it, there’re two things. One is when you’re in the group and you’re doing discussion in the Facebook group, you’re in the group discussion. It’s like the chat area. You must go to the Mentors to Inventors page. When you hit that page, there’s a tab at the top that says, “Join Us Live.” When you click that, that’s where all the videos are. Thank you so much for joining us.
Important Links:
- Sprowtt.com
- Finra.org
- Spark
- AllGreen
- Hazz Design’s Facebook
About The Authors
Tom Hazzard
An inventor with 37 patents and an unprecedented 86% success rate for consumer product designs, Tom Hazzard has been rethinking brand innovation to design in success for over 25 years. Tom’s patented innovations provide entrepreneurs and businesses of all sizes a system to spread their brand, grow valuable consumers, and diversify into higher converting revenue streams without a lot of time, cost or effort. Tom is co-host of the Forbes-featured fast growth WTFFF?! 3D Printing podcast as well as host of two new podcasts, Feed Your Brand & Product Launch Hazzards borne out of his core business, Hazz Design, where he has designed and developed over 250 products that generate $2 Billion in revenue for retail and e-commerce clients.
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