What is your Business Idea worth ?.

I get approached by inventors, and other people with interesting ideas, and the one question I get asked in these situations is “what is my idea worth ?”.

There are so many ways to say “Zero” as the immediate response, but let’s delve into why your business idea is – or is not – worth anything.

Why your business idea is not worth anything.

[1]        Is it a better, faster, toaster ??.

Because if it is – yes it probably has some value, but the next (even) better, faster, toaster is just around the corner.

Therefore, your window of opportunity to leverage value from your idea is very small, and sophisticated investors know this.  These investors would rather chew their own arm off if that’s what it takes to get away from you when you accost them at some function and start trying to convince them about your idea.

[2]        Have you tried to patent it ??.

If you have, at least you will soon know that answer as to whether your idea is original or derivative of an already existing patent.

If you haven’t … the first question an investor is going to ask is “why not ?”.  The implication being that if you don’t believe in your idea enough to spend the $$$’s to get a patent application then why should they spend the $$$’s.

[3]        This could be worth MILLIONS !!.

Yes it could be, but using Amazon/Google/Facebook/Skype/…etc as an example for your business idea just will not cut it.  Only 1 out of every 200,000 ideas will get even remotely close to something like this …. And why is your idea that 1 ?.

An investor would be better buying a lottery ticket than investing in your business idea with those sorts of odds.

Why your business idea MIGHT be worth something.

[1]        It is a BIG Idea.

This may seem obvious, but bear with me.

Why start a company that you want to turn into an emerging growth company if it is not based on a big idea?

In spite of this almost every day aspiring entrepreneurs are out there pitching ideas that are just obviously not big.  At best it might be a great feature for another product (and that has tangible value for an investor).

Maybe it is a niche product that people would pay for, but there aren’t that many people in the niche.

For serious investors who deal in early-stage businesses they need businesses with BIG IDEAS and HUGE POTENTIAL.

Why ?.

Because they need to see returns of not 3x or even 10x, but 30x or more-like 50x.

This is because out of every 10 early-stage investments, these investors anticipate that only 1 to 3 will be successful.

If your idea is just a feature or a niche product, I’m guessing it is worth whatever you can license it to somebody else (who can do it much better than you) for – it is probably not a truly investable proposition.

Don’t get too down in the mouth though, many worthy ideas make good money for their creators in just this fashion – in the software/hardware game OEM’s, Plug-In’s and other types of “features” are regularly licensed from one company to another and the company licensing it can make very good annuity income.

[2]        You Have Prove That You’re Not Just Making it Up.

Having a business idea is all fine and dandy, but can you prove that it works?

Investors in 2010 are just not investing in 2 people with an idea sketched out on the back-of-an-envelope.  They need objective data that points to how this idea can – and will – make money.

Now, this doesn’t mean that they need to see profitability or even revenues (not right now anyway).  But it does mean that they want to see that you have something that people are interested in using.

Some examples of this objective data:

  • Can you show adoption rates ?
  • Can you show a nice upward trend in hits to the website ?
  • Can you show a sustained upward trend in new users/subscribers ?
  • What are your retention rates for users/subscribers ?
  • Do you already have your patent approved ?

[3]        You Can Justify A Valuation That Has No Rational Relationship To Your Earnings Power.

This is related to the “big idea” requirement, but is more subtle.

In essence … “what is your secret ingredient”:

  • Is it a hot new technology?
  • Is it a rock star team?
  • Is it a revolutionary new business model?
  • Is it a ground-breaking mathematical algorithm ?
  • Is it a new way of solving a commonly-experienced problem ?

Basically, it is about how you can justify to a buyer that they should pay 12x or 18x EBITDA, but your competitors are selling for 6x or 7x EBITDA.  This is particularly crucial in those instances when you’re claiming an EBITDA that doesn’t exist yet (ie: purely forecasts, because you haven’t even earned a single dollar).

Feel free to contact me if you’re facing these sorts of challenges.

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