What is Your Idea Worth?
Wednesday, February 20, 2008
There’s a lot of talk among entrepreneurs about the value of an idea. Many entrepreneurs believe that a brilliant idea will spawn a great company. We read about companies like eBay that took one simple idea – online auctions – and turned it into a powerhouse company.
Yet ideas alone aren’t worth much. Very few companies, including eBay, became successful based on just an idea. Unless your idea turns into a patent that no one can replicate, it’s worth nothing until you can add the right elements to it.
Therefore a savvy entrepreneur will quickly try to back their idea with smart management, paying customers, and strategic partners as early as possible in order to build value around their idea. All of this can be done even before the company is ever officially launched, generating a ton of value in the formative stages.
Smart Management
There’s an old saying that the wrong idea with the right management team can at least have a chance of surviving, but the right idea with the wrong management team is altogether doomed.
That’s because the true value of an idea isn’t about the idea itself, it’s about the execution of that idea. There were lots of companies that easily replicated the idea of online auctions to compete with eBay. Do you remember them? No? Neither do I. That’s because eBay’s management team executed so much better than their competitors who had the exact same idea.
You can brag and boast about your great idea, but unless you can pull together a team that can actually pull it off, you’ve got nothing. Investors are well aware of this fact, which is why they often evaluate their investments on the merits of the management team of a new startup company more so than the business idea itself.
You can pull together a management team on paper without having to actually hire all of the members. Many startups have commitments from each key member of their management team long before the company actually launches, and most of those folks will probably be working at their old jobs for a while even after the company launches.
Paying Customers
It may be hard to think about having paying customers simply at the idea stage of your business. Let’s assume for a moment that the business hasn’t even launched, so landing real paying customers isn’t even an option.
Regardless, an idea is just an idea until you have a paying customer attached to it. Only then is it considered a business.
In order to get to the “business” stage then, you need to validate your idea with customers. This can come in many forms, from having initial conversations with potential customers to actually getting a purchase order ahead of delivery. Think about building up a “pre sales” pipeline of customers just as if you had already launched the business and were selling for real.
Anyone can question the merits of your idea, but no one can second guess a paying customer. The more customers you can find that are willing to buy into your idea (once your company has launched) the more value you’ve created for your potential company.
Strategic Partners
Strategic partners come in many forms, from investors to advisory board members to key industry partners.
Not every new company needs investors, although more than a few certainly would like to find one. Although investors can provide some much needed capital to launch or grow a company, the right investors also provide strategic value to your idea.
The most ideal partner would have either launched or invested in a company just like yours. They would know the ins and outs of your business completely and have a deep rolodex of customers, managers and potential acquirers.
With a partner like this, your idea gets some invaluable guidance to avoid costly mistakes along the way.
Lining up partners is really the last step in the process. Once they can see that you have the right team assembled and enough demand from potential customers, making a decision to partner with you, or in the cast of investors, to write you a check, becomes a whole lot easier.
The Value Hat Trick
All in all, your idea itself is nothing more than the foundation of your company. It’s the key building blocks of management, customers and strategic partners that truly build the structure.
You’ll notice that as you add each of these elements your sales pitch will become more and more bulletproof. More importantly, people will start to spend less time debating the merits of your idea and more time taking interest in the value you’ve created in your company.
Bringing all three elements together is the ultimate hat trick for an aspiring startup and frankly, a goal that very few entrepreneurs ever pull off. Yet if you want to get some traction with your big idea, it should be your first goal.