Want investors? Show ’em what you’ve sold
By Jack Lander
I finally got around to watching the TV show, Shark Tank, for the first time a few nights ago. I’ve been turned off by inventor shows since viewing one of the first series a couple of years ago. Judges not only lacked an understanding of the business of inventing, but they insulted the intelligence of the viewers with their selection of absurd inventions. And they used sincere, but naïve, inventors as unwitting jesters.
The Shark Tank panel, though brutal to those inventors with screwball ideas and naïve marketing schemes, is realistic in their assessments. What I heard again and again, as the “sharks” addressed each inventor’s case was, “But you have no sales.”
Are preliminary sales really that important if we want to gain the interest of a potential licensee? You bet. Whether a failure or success, early sales enable us to shape the fate of our inventions and products. If you lack early sales this suggests either you’ve chosen the wrong marketing channel, the wrong method of exposure or that the market is too small to foster a profitable enterprise. Fair to brisk early sales paints a good future for either producing or licensing. In the absence of any attempt at producing and selling our invention as a product, we are asking independent or corporate sharks to believe in us and invest in our naked dreams. This is not typically in their DNA.
A business theory to consider: When businesses are sold, we often find that the selling price was somewhere between one and three times annual sales. Using a multiple of sales to set a selling price has some logic, although in most cases tax advantages and a host of intangibles are probably factors that have had major input to setting the multiplier. But the point is that investment in a going company is intimately related to sales. The going company’s sales have inertia—the tendency of sales in motion to remain in motion.
Now, let’s relate this to soliciting finance for your invention or product. From the investor’s perspective, even if you are producing and your business has sales, the risk of continued sales is higher than for a going business having a longer history behind it.
What if the inventor has no money to invest in setting up small-scale production? Even on a small scale tooling, printing, packaging and inventory must be paid for. The ideal answer is to get this seed capital without borrowing it. Set up a limited liability company (LLC) and with the help of an attorney, issue letters that delineate each investors’ percentage of ownership, often called private placement memos. This way you aren’t borrowing, you’re taking in investors in an openly risky venture. If the venture fails, each investor knows in advance that his or her money will be forever lost. People like to gamble, but they hate to lend money
As a last resort—if you don’t have the stomach for producing and marketing—use the “promise of sales” in place of actual sales. Get endorsements from credible sources and use these in the testimonial section of your sell-sheet. One of our clients, Joe, had phenomenal acceptance of his product by a supply store. But he had to guarantee that he could replenish the buyer’s inventory within a few days. Since his product was being made in India, and since he had to pay for a standard containerful in advance, he couldn’t make such a guarantee. So, he asked interested buyers for a letter indicating that they intended to buy as soon as Joe could guarantee backup inventory. He’s placed these statements in his sell-sheet, and is now searching for an investor based on the promise of sales rather than real sales. Promised sales aren’t nearly as compelling as actual sales, but a rare gambler may risk investing if the returns promise exceptional profit.
I’m reminded here of the fellow who was plagued by mice. Each night he set a trap and the next morning he had caught a mouse. One night he ran out of cheese, so he baited the trap with a picture of cheese. And the next morning, sure enough, he had caught a picture of a mouse.
I’m not sure that’s a perfect analogy, but you get the point. A promise of sales is not the same as actual sales. Strive to produce on a small scale, and get sales to strangers, not your friends and relatives. As a last resort, use the promise of sales to get your investor. In any case, don’t borrow from uncle John unless his remaining days are seriously short.
