business plan

Business Use of Patents and Provisional Patents

The raging debate about Patent Trolls and what can and should be patented might lead one to consider, what is the business purpose of a patent?  Particularly if you are a startup (very early stage, perhaps pre-funded) with little cash, little time, and a need for focus, the question of patents, to patent or not, seems to be somewhat common.  This post is a summary of my advice and knowledge on the topic, as I recently provided to a new company called Basedrive who are working on their business plan as part of The University of Texas Longhorn Startup class and program.

Here is my advice…

1. First, don’t be a Patent Troll:

A Patent Troll is someone who patents something with no real intention of building it, so that later they can ‘claim royalties’ or sue big companies for ‘stealing their idea’.  This approach is not something upon which to build a true entrepreneurial business; and such loopholes should be looked on with great skepticism.

2. Don’t do patent searches…

If you are thinking of writing a patent, and are worried if your patent is truly novel or not, you may be tempted to ‘search prior patents’.  DO NOT DO THIS!   You will be required to list all the patents you looked at, and this could taint you or your ideas… further, you WILL likely find something similar.. but it’s not your job to know this, or if yours is “different enough”.

IF YOU THINK IT MIGHT BE UNIQUE, do not search… just move to step 3, below.

3. Decide if $130 (or so) is worth spending or not…
For $130, all in total amount, you can file a provisional patent.  (See Patent Fee Schedule)

So, what would a $130 Provisional Patent buy you for your business?
a.) You can put the words “Patent Pending” on your product.
b.) Investors will see you as ‘better’ than companies without a patent pending.
c.) It can lead to a real patent in the future, with a priority date equal to the date you submitted the patent (or earlier).

The downside?  None.  In order to claim the priority date by means of your provisional patent, you need to file the final patent within 12-months of submitting the provisional; but this is not a bad thing… even if you don’t write the final patent in the 12-months, you can still write the final patent later with no penalty. (just no claim on the provisional).

If you need to buy food, don’t spend the $130… but otherwise, I say do it.. at least for 1 thing!

4. What is Patent-able/What to write?
So, what do you patent?  My best advice is to focus on some implementation detail that you do that helps your product/service be unique.  Got no technology?  Don’t bother writing a Patent (IMHO).

What kind of technology?  Hardware?  Yes.   Software?  Yes.  Both?  Ideal!

Even if your use of the technology is in software, I suggest writing the patent as though the software could be implemented “into a device”… (thus covering both hardware and software).  This might require creative thinking, but it might also get you the patent later!

What do you write for a provisional?  SIMPLE:  Just write in plain English how your technology works, and how it might work in software or hardware.  Simple, plain, English.

You will also need 1 drawing.  1.  not 2.  1.  Simple block diagram is ideal, showing the system.

Now, go to uspto.gov and SUBMIT IT YOURSELF!   No need to pay a lawyer to submit or review a provisional patent.  JUST DO IT!

5. Should you file a final, full patent?

Maybe.  But not yet.  Not until either: a.) you can easily afford the $8,000-10,000 for a lawyer to do it right… or  b.) your business really needs it for some reason [e.g. to increase your stock’s value even more by having full issued patents ].

When you do a final patent… simply get a lawyer to do it.  Simple.   A real patent lawyer.  You don’t want to do a final by yourself.  Just give the lawyer your provisional as a starting place, and off you go!

6. So business value?
Yep.  Provisional = Obvious.  It’ll help you stand out and raise money and look good. (that’s it really).
Final full patents… = Less Obvious.  It MIGHT help you raise more money at a better price, it MIGHT protect you from getting sued [because you could counter-sue], it MIGHT help you go after someone who is infringing on your patent (doubtful)…

So, Provisional = Yes.  Final = Doubtful (IMHO).

So, get to it!

Business Modeling for Engineers

So, you have a whiz-bang idea huh?  Working on that “business plan”?  Well, you are going to need a BUSINESS MODEL to go with that idea… and this little post will help you get started.   You can also download this little Excel .xlxs file I made that has the bare-bones of a Business Model for you.

A Revenue Model:

You are going to need a model for revenue.  Revenue is the top-line, what people pay you.  To create a model follow these simple steps:

  1. Decide the “Value” of what you are selling (Product or Service).. in terms of your TARGET MARKET AUDIENCE.
  2. Set a “Price” for your product that is less than the Value:
    1. this might be recurring (e.g. monthly) or one-time (transnational)
    2. Value has NOTHING to do with COST. (ignore cost).
    3. Value can be calculated as either:
      1. the price of an alternative +/- some premium (because yours is better/worse)
      2. the sum of ‘savings’ that a user experiences with your product/service
      3. the sum of ‘benefits’ that a user gets, in terms of a number of alternative products/services.
  3. Now, figure out a Quantity you think you can sell.
    1. Bottoms-up: Use some model of Customer Acquistion (like impressions->clicks->sales)
    2. or Tops-down: Use some model of Target Market Size (like 1% market penetration in year 1 of your target market).
  4. Now, simply multiply the monthly Quantity * the Price, and you have a Revenue Model.
  5. Show some scale/growth in subsequent months according to some formula (like 5% annual growth or as a complex model with advertising causing growth)

A Cost Model:

Next, you are going to need a cost model simply:
  1. Calculate the cost per unit by summing the cost of it’s parts + the sum of the cost of the labor to ‘produce it’ (or in the case of a service, the labor cost of providing the service).
  2. Multiply the monthly Quantity (above) with the monthly Cost, to get Monthly Costs.
  3. NOTE: COSTS ARE NOT EXPENSES!!!  Costs, are purely the VARIABLE costs that it takes to produce a good/provide a service.

Gross Profit:

   This is simply Revenue – Costs

Expenses:

Estimate monthly expenses for operating the business….  here’s a rule of thumb:
  1. Use $4000 for rent, $2000 for Legal, $1000 for Misc.  (or do a better job than me at estimating your actual costs!)
  2. Use at least 5% of Revenue as a Marketing Allotment (or do a better job than me at estimating your marketing expenses).
  3. Scale expenses yearly to increase by 10%.
  4. Any employees you have are also here as an expense. (yourself for example).
  5. Use the monthly salary * 1.17 (for benefits/taxes)

Net Income:

Net Income is simply Revenue – Costs – Expenses.
(it gets more complex if you have loans and other stuff… but for now this is a simple model).

Cash:

Take your starting cash, then add your Net Income to it each month.
(this is not precise at all, but also not a bad model).

Done.  You have a model.

Enjoy!  Feedback/suggestions welcome!

* photo courtesy of: http://www.geograph.org.uk/photo/2824035

7 reasons to Fail Early & Cheaply

Since everyone knows 19 out of 20 start-ups will fail… why not fail as soon as you can and as cheaply as you can?  In fact, recent evidence suggests that the #1 reason start-ups fail is trying to scale up too quickly/too soon.  Here are 7 reasons to FAIL as quickly as possible, and as cheaply as possible:

  1. Whenever you fail, you almost always learn more than if you succeed… especially if you start out with the goal of learning/deciding if a hypothesis will work.
  2. If you can fail quickly, you will likely have time and energy enough to try again!  (not necessarily a ‘new’ start-up, but instead another “hypothesis”/product variation to test in the current one).
  3. If you fail cheaply, you may have money enough to try again!
  4. If you fail early, you avoid spending too much time on a bad idea.
  5. If you fail cheaply, you haven’t invested too much “sunk costs” into the idea, and can let it die more quickly.
  6. If you can fail quickly, it means you have wisely set criteria for failure (a rare thing indeed!)!
  7. If and when you succeed, you KNOW you have something, because you have defined (wisely) what success is, and your past failures prove that the current situation is “Worth” scaling up!
Final word of warning: Scaling up itself is a difficult challenge, so use the term literally, and slowly increase the rate of growth, rather than step function.

Extroverts, plan your Introvert time. Introverts, plan your Extrovert time.

Seth Godin (and many other business authors) agree, growth comes from “stretching” your discomfort.  DO the uncomfortable and you will grow.  Don’t want to grow?  Stop reading blogs for goodness sakes!  Want to grow, here are some tips for HOW to Stretch and Exercise your “discomfort zone”.  (Extroverts and Introverts both)

Extroverts (like myself) prefer to think “outside their head”.  We like to draw on white-boards, engage in debate, and generally “talk & interact” with people.  The problem is this: if all you do is extroversion, you miss out on deep thinking, attention to detail, and most of all quiet focus.  For an extrovert, it is “uncomfortable” to have quiet, work alone, or focus on details.

Planning your introversion and “forcing yourself” to spend time alone, focusing on details, is the best way to stretch that uncomfortable muscle.  It will grow from there (or at least you will minimize the effects of lacking introversion).

  • Each day, plan out 2 x 1-hour blocks where you will DO something introverted.  
  • (fix bugs, add comments to code, handle accounting, submit expense reports, research competition, develop formalized strategy/documentation)… 
  • most important do it ALONE, and make sure you force yourself to do it for the whole 1-hour block.
  • Because you set an “end-time” for the discomfort to end, you will find it less dis-comfortable to do it (just for 1 hour).
  • I find the best time for me to do it is 1st thing in the morning, and then again right before I leave work.
Introverts (like my wife) prefer to think “inside their head”.  They prefer to work alone, to think deeply on problems, and to focus on details.  In many cases, they fear (and are VERY uncomfortable) engaging “with people”.
Planning your extroversion is even more important!  Unlike extroverts, you have to make plans that involve other people.  Here are the tips:
  • Each day, plan out 2 x 1-hour blocks where you will DO something extroverted (WITH others).  
  • (brainstorming session, lunch hour, happy hour, coffee, phone call)… 
  • most important do it WITH someone.. preferably NOT someone you know really well.
  • Because you set an “end-time” for the discomfort to end, you will find it less dis-comfortable to do it (just for 1 hour).
  • Lunch hour and happy hour are the best times.
  • THE ADAGE: NEVER EAT LUNCH ALONE comes to mind… that can be one of your hours!
    • just invite people you are connected with on LinkedIn or Facebook to lunch… be sure to say “dutch, just to catch up”.
  • GO to those events you hate (the happy hours, etc.)… but just spend 1-hour there… for the whole hour set yourself a goal:
    • talk to x people
    • pass out x business cards
    • whatever
  • Then…. next time, try to improve on the target #!
    • You may find it turns into quite a “game”.. or you may continue to hate it… but at least…
  • You are out there!

How to Build a Marketing Plan

I’ve scoured the internet for a nice, simple, method for how to build a Marketing Plan, and all I find is very short, confusing, unorganized stuff (and very little of that).  So, without further ado, my 10 steps for building an “AWARD WINNING” Marketing Plan.

  1. Learn what the heck Marketing is in the first place.  (See my blog on my topic here…. my 5 year old son could figure it out… so can you).
  2. Research your 5-Cs. Customer, Company, Competition, Collaboration, Context
    1. This can be done fairly easily with some Google searching or industry related press reading.
    2. I find doing it in order is the best..
    3. Just jot down as many notes as you can for each section.
    4. Below is the goal you are trying to reach for each C
  3. Customer – Write down WHO is your ZEBRA (Ideal) customer.. then expand that view just enough to encompass a market that is of a “small, but big enough” size.  The goal here is to choose a FOCUSED group of people who you can clearly identify… NOT make it the biggest set of people possible (that’s for Business Plans, not Marketing Plans).
  4. Company – Write down what are your companies strengths, weaknesses, vision, and values.  (This will help in the rest of the plan).
  5. Competition – Write down a list of competitors and note their “pricing” and their “differentiation” claims.  SPEND LOTS OF TIME HERE.  It’s worth it later.
  6. Context – Write down trends in society, business, culture, and geography that MAY (or may not) cause you PROBLEMS or create OPPORTUNITIES.
  7. Now, write down your 4 Ps – Product, Place, Price, Promotion.  First up: Product.
    1. To get Product right (for Marketing purposes), it must fit in the following Sentences:
    2. ACME (YOUR COMPANY/PRODUCT/BRAND) is a _______  that does ____________ for ________.
    3. UNLIKE OTHER _______ we do _________________________.
    4. Now list 3 Benefits. ( NO MORE )
    5. Now list 3 Features. ( NO MORE )
    6. If you can get this focused with your product, you’re ready for the next step.
    7. NOTE: If you have engineers/tech people, don’t invite them to help with this section… do it yourself (or have someone do it for you)… then correct as needed.
  8. Place – Where do you plan to sell?  What is your selling motion?
  9. Price – How much will you charge?  What is the upsell path (or options)?  What is the average lifetime value of a customer?  How does all this compare to the competition?
  10. Promotion – NOTICE, I am last here… many people think a “Marketing Plan” is just this section… (the Advertising, PR, etc.)… but it is not.  This is important, but not the MOST important.  To me, the first C is most important (Customer) Followed by the first P (Product).  Anyways, here’s promotion:
    1. How much can you spend to acquire a customer? (see average lifetime value for hints)
    2. How many customers do you want to acquire in a period? (therefor, that is your budget)
    3. What “Free-ish” marketing can you do? (PR, Social Media, SEO, other)?  How can you measure its effectiveness?
    4. What “Cheap-ish” marketing can you do? (SEM, Google Adwords, Google Adsense, CMP, CPC, CPA)?  How can you measure its effectiveness?
    5. What “Expensive, but hopefully measurable” marketing can you do? (Partner/Reseller Marketing, Paid Banners, Trade Shows, Events, etc.)? How can you measure its effectiveness?
    6. What “Brand building” MUST you do? (non-measurable stuff like TV, Print, Billboards, etc.).?
    7. Now, allocate budget from 2-6… where you don’t spend 1c on the next item, till you’ve spent all you can (reasonably & scalable) spend on the prior number.  MOST COMPANIES SHOULD NEVER GET PAST 4.  (at least not in the early days).

Hope this was helpful!  

Comments and Arguments and Links are always MORE than welcome.

How to recognize a BAD/Small Business Idea & MVP

Knowing a bad idea is sometimes easy… check out this hellarious site: stupidbusinessideas.com.  What do these have in common? Simple: it is obvious that people are not willing to pay for it (or the market is VERY small).  But how can an engineer-type thinker discover if his idea (which isn’t so obvious) is a Bad (small) business idea?

I will outline 2 methods, which would ideally both be used.

The First Method P.O.D.C.
PODC is a qualitative tool that helps a person analyze if the 4 key components of a Business Idea make sense
P = People
O = Opportunity
D = Deal
C = Context
If you see green lights all down the PODC list, you are good to go to the next method (or take your chances if you wish).   Here is what Green Lights should look like.
P.  The people running the business and inventing the product(s) are experts in the relevant fields and have experience having done it before.
O. The opportunity (the problem you are solving/need you are satisfying) is large enough that a small market share is all that is needed for a viable business.  E.g. a 1% market penetration would lead to a $5MM+ business.
D. The deal proposed is not too small or too big and has milestones and success markers along the way before further investment is needed.  E.G> a small amount of $ investment $ is all that is needed to get to the first milestone.
C. The context (the world view) is fresh and new, not old and boring.. and the business does NOT rely on some obscure law or quick trend.  Competition may or may not be there, but this solution seems unique and could be a long-lasting business.

Did your PODC come out green?  Now the real test: will people pay?
To test this, Engineer-thinkers need to deploy a Minimum Viable Product (MVP).  This is VERY hard for Engineer-type thinkers, who want to solve the whole thing & get it working first.  WRONG.  You need to TEST to see if people will pay first.  
Some guidance may be found here: http://venturehacks.com/articles/minimum-viable-product  and http://venturehacks.com/articles/minimum-viable-product-examples and of course http://www.startuplessonslearned.com/

Here is my quick instruction manual to make an MVP.
1.) Find someone creative who will build you a 3-page website for cheap.  ($1000)
2.) Build page 1 that gives the pitch for the new product/service.  1-button: Order Now.
3.) Build page 2 that shows the price & looks like a shopping cart.  1-button: Proceed with Order
4.) One page 3, say: “Sorry, we are currently back-ordered.  You will be emailed when new inventory is available.  Thanks for your business.”
5.) Build some ads for your business idea on Google Adwords: http://adwords.google.com/
6.) MEASURE how much it costs to bring ppl to your site… how many are interested in Order Now… and how many “Proceed with Order” after seeing the price.
7.) Adjust parts 3-6… and see if you can make MONEY with the business.

If you can sell for more than 4x the cost (where cost is product cost + shipping + marketing cost)  you are in good shape.

If not, start over with PODC and see what was wrong.

Best of luck!

Now, get some good ideas!

Self-Motivation: Short-term goals that lead to long-term success.

Engineers daily face the challenge of self motivation. Especially when working on a ‘big’ project. Engineers who master this self-motivation will do well in business because they understand short-term goals vs. long-term goals.

Imagine the Engineers day: “work on THIS bug” which helps me complete “this small task”…which leads to “this small feature” which leads to “this part of the product” which leads to “this product”. For that day, it was just that bug. Thats it. It will be months, years before that bug ‘doesn’t’ show up in that finished product.

In Business, this skill is absolutely necessary. Becoming overly fixated on “the long-term success” can lead one to do the wrong things at the wrong time. Like a good programmer, the businessman MUST fixate on the ‘current task’ while keeping in mind “the long-term goal”! For this, one needs a plan. ANY PLAN. It doesn’t have to be ‘the best plan’ it just has to make sense and be flexible. Like a good engineer, if ‘fixing this bug’ is taking too much time/effort and no end in sight, perhaps ignoring it and working around it is a better approach. The same goes for business. If ‘the current’ task/step is bogging you down, and forward progress seems blocked, we must be flexible enough to work on something else (a workaround) or a future step.

In essense, we must “Begin with the end in mind” as Covey would say. But we must also “Put first things first”! If you can’t imagine the long-term success… you are sunk. But you are equally sunk if you can’t put together a logical (if difficult) series of steps that get you there.

Covey’s 7 Habits of Highly Effective People info:
http://en.wikipedia.org/wiki/The_Seven_Habits_of_Highly_Effective_People

Photo Attribution: