Episode #9 – Business of Startups with Marty Zwilling of Startup Professionals
My guest for this episode is Marty Zwilling of Startup Professionals. Marty has been involved with startups for many years even working with Bill Gates in the early days.
Marty is now a consultant and angel investor. We’re going to be discussing business plans, getting investors, the pros and cons of patents, and much more.
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Marty Zwilling, Founder of Startup Professionals
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John Teel: Welcome to the Predictable Designs podcast, where we discuss all things related to developing, manufacturing, marketing and selling successful new electronic hardware products. I am your host John Teel.
This is episode #9. Today I’m speaking with hardware entrepreneur Marty Zwilling of Startup Professionals. Marty has been involved with startups for many years even working with Bill Gates in the early days. He’s now a consultant and angel investor. We’re going to be discussing business plans, getting investors, the pros and cons of patents, and much more.
Welcome to the show Marty.
Marty Zwilling: Welcome as well to you, John, and I appreciate you giving me the opportunity to spread the word.
John: Absolutely, happy to have you here. Can you go ahead and tell everyone a bit about yourself and your background?
Marty: Well, thank you. Yes. My name is Marty Zwilling. I’ve been in business a long time. I’ve spent the first quite a few years with IBM in big business. Then I got involved nicely, I really enjoyed it with the IBM PC development group. That’s where I really fell in love with entrepreneurs specifically at that time.
I got to work with Bill Gates and Steve Ballmer and people at Microsoft. I was envious of the things that they were able to do as entrepreneurs that I wasn’t able to do in IBM. I really couldn’t wait to leave IBM. I went back to Silicon Valley, spent a few years there as an executive in various startups, some work, some didn’t work. I learned a lot of the goods and the bads and what to do right and what to do wrong.
I then had moved to Phoenix, Arizona where I became an angel investor. I started a consulting firm as well, Startup Professionals, which really is focused on startups. I’ve had a lot of fun ever since. Did quite a bit of writing in my own blog and for various magazines, but I’ve also really worked with local universities. That’s what I still do and still enjoy it.
John: Okay, great. I couldn’t miss that you mentioned that you worked with Bill Gates. Did you ever actually meet him or have meetings with him or you just networking for him, sort of at him being in a much higher level?
Marty: No. Actually he and I had dinner together several times and worked many times. I lived in Boca Raton, Florida that’s where the organization was. He lived in Seattle, that area. In fact, probably the stupidest thing I ever did was not to go to work for him because he invited me to come there.
I spent many trips to Seattle, but it was always raining when I got there. So I said, “What kind of an idiot would leave Boca Raton Florida to go to Seattle to live?” Little did I realize that he was on his path to become tremendously well to do entrepreneur and I might’ve been a part of that.
John: That’s really great. I had another podcast I had done, I believe it was episode two, and he had worked with Steve Wozniak. Bill Gates and Steve Wozniak are obviously two huge icons. I couldn’t pass getting some details from you about working with Bill Gates that’s pretty fantastic.
Marty: Very impressed with Bill Gates. Now, of course, he’s focused on philanthropy and still actively involved with a lot of the startups. While not everybody is a big fan of Bill Gates, I think he has a lot of positive attributes.
John: Yes, I agree. From an entrepreneurial standpoint, you have to love him at least for that, whether or not you agree with the way he did everything. Let’s go ahead and jump into one of the big topics that you’ve specialized in and that’s doing business plans.
My general thought and what I tend to recommend entrepreneurs is that when you’re first starting out and you have an idea, I believe sincerely you need to have a plan and ideally even a written plan. I find that until you’re ready to start seeking outside investors, having a really formal business plan, which as you can attest takes a lot of time and energy to put together that’s usually not the best use of your time when you’re first starting.
Do you agree with that? If so or if not, when do you think is the best time to start working on a professional business plan?
Marty: I definitely agree that you need a plan and I definitely agree that you need to think about the business side of it from the very beginning. Both of those things I find, unfortunately, too often lacking in early-stage entrepreneurs.
They’re thinking about the technology, they’re thinking about the product, they’re not thinking about the business. Maybe they’re thinking more than doing, in the sense that they’ve got an idea but haven’t really focused on what it means to have a plan. I always say, first of all, you need to have a plan and secondly, you need to start writing it down. I certainly don’t feel it needs to be a formal business plan.
In fact, I often tell entrepreneurs, “Write down a one-page plan.” It actually forces you as an individual to think through what you’re doing.
Maybe structure it a little bit better because I hear an awful lot of talk, which can go this way or that way depending upon the wind or depending upon who you’re talking to. I really think you have to get beyond that in order to be serious as an entrepreneur.
John: Yes, I absolutely agree. When you’re first starting out, I love that you said that they’re spending more time thinking than doing. I think you really hit the nail on the head there that’s such a common dynamic that I see. Everyone gets caught up in whether that’s– wanting to create a formal business plan or getting a patent or a prototype.
They always want to focus on what I think are not the right things to focus on initially and we can talk about that more. I think a much better use of your time when you’re first starting out is to get out and talk to customers. I feel like customers are always the neglected piece of the puzzle.
Everyone’s focused on technology and their idea and the product and that and they neglect the customer. I always encourage entrepreneurs to spend more time talking to customers and a little less time sitting around thinking.
John: While we’re on the subject of business plans, what do you think are maybe some of the most important points for startups to remember when it comes to business plans or creating a business plan? Are there any tips or important things that they need to watch out for?
Marty: Well, I think they really just need to get down to specifics. The first specific is what is the problem that you’re trying to solve? I have to think back. I’ve been an angel investor for a while. I remember sitting in a meeting with other investors.
An entrepreneur’s giving a passionate pitch and the guy next to me leans over and he says, “We’re like 10 minutes into this pitch and I still have no idea what the problem is that he’s trying to solve.” He’s talking about his technology, he’s talking about how great it’s going to be, but you’ve got to talk about the problem. Here’s the problem.
Secondly, you got to talk about your solution. In other words, this is how I solve that problem. Then thirdly, the opportunity, is this a big opportunity arena? Maybe it’s a great idea from a technology standpoint, but who cares, there’s nobody out there looking for a solution that you’re providing.
That stirred then competition. You got to get into a competition. I always cringe when somebody says, “I don’t have any competition.” That to me means, either you haven’t looked or nobody wants what you’re going to do because everything that is important, somebody is trying to do or has tried to do, maybe not so successfully.
That’s what competition is all about. It goes on from there but those are the key things that I think you got to keep in mind.
John: Those are great. Yes, competition is definitely one I see a lot. I feel like so many people, they’ll be researching their product and as soon as they see that there’s competition or someone offering a similar solution or something that solves that problem, they totally freak out and think that, “Okay, well there’s no point in me pursuing this,” and in most cases, it’s just the opposite.
A lot of times being the first to market isn’t the best strategy. I’ve heard a quote or something saying that pioneers get shot, so it’s better to be a settler instead of the first, in that territory.
I feel like that’s true with products as well. Competition just proves that there’s a market for the product. If there’s no competition, then it’s either someone else has already proven there is no market or it’s just going to be really difficult to reach market. I think that’s a great point to emphasize the competition and how that comes into play in creating the business plan.
Marty: Right. One more point on competition I think and that is, stay positive. One of the things that I run into a little too often as people who try to run down the competition, I think that’s a good thing in the sense of these people do a lousy job, I’m going to do a great job. I think all that does is run you down in the sense that you’re not really out there in a positive way.
Use your competition to highlight your strengths. It’s fair to say there’s competition out there, but they only go this far we go twice as far or they do it for $10 and we do it for half the price or half the cost. Highlight the positive in a positive way, what you do off of the competition rather than focusing on degrading the competitors.
John: That’s a great point. One other point in regards to competition as you made the comment that it’s typically a good thing. I think one exception would be is if you don’t want to be in a situation where the company you’re competing with is an Apple or an Amazon or a Google.
To me, I think that’s one of the exceptions you don’t want to be trying to create a new smartphone that’s going to compete with Apple, is that something you would generally agree with as well?
Marty: Absolutely. If that’s all you have then I guess that’s all you can talk about but the fact is that you can usually find dozens of competitors. I don’t recommend that an entrepreneur try to say, well, are there a dozen competitors out there, including Apple and IBM and compact or whatever you have to try to focus.
I recommend to entrepreneurs, they pick three competitors and then they talk about their positioning against those three. Ideally, it’s not going to be Apple because that’s a very tough market to step into to say, “Well, I’m going to take on Apple or Google or IBM and I’m going to knock them out of the market.” You got to be credible and you got to be realistic in terms of what’s the potential and what the competitors really have out there.
John: Yes, absolutely. It’s hard enough with hardware or any type of startup very well if you’re going to try to immediately start off going against hugely multibillion-dollar company like Apple or something so it’s not something I would generally advise either.
Marty: There’s always what’s called market segmentation that is pick a market that has the opportunity but also doesn’t have the big players. If you were thinking of doing a personal computer, you probably wouldn’t tackle Apple in the consumer market you might say, I have one for the industrial market and that’s where I’m going to focus or start and at least fit yourself in some possible position of success as opposed to trying to talk to investors about competing with IBM or Apple.
John: That’s another good point. While we’re on the subject of marketing the other thing that I’ll come in, let’s see, is, and I know I did this with my own product, is you need to segment or pick a niche or a niche and not try to reach the overall market.
If your product is something, even if someone asks you, who wants your product or who can you sell your product to the answer is every one, that’s a huge red flag because you’re not going to be able to reach everyone. It’s much better, I found in most cases to focus on a niche or just a segment that you can dominate and not try to be everything to everyone and that’s usually a recipe for failure.
First of all, you just startups don’t have the marketing budget to reach the overall general population. That’s something that is generally best left for a company like Apple or Amazon,
Marty: Right, the keyword there is focus. Pick something and go after it because it’s hard enough to reach a specific area, but it’s virtually impossible as you point out to have the scope to reach all kinds of people.
I listen for keywords and if people– you’ve probably done this, see, listen for a keyword like somebody is,” I could do industrial, I could do consumer, I could do all of these things,” and I’m like, “Okay, tell me what you will do let’s not talk about all the possibilities.” We’ve got to focus on one of these and figure out how to make it work there first.
John: I know another red and you being an angel investor, you can speak to this better, but I know another a big red flag is someone that says maybe their product is safe for iPhone users and they’ll be like, “There’s many millions of iPhone users and if we just got 1% of those, then this is how many billions of units or millions of units that we can sell.”
Is that something that you– My impression that’s a general red flag for I see so many business plans that make these broad estimations and say that, “We can reach 3% of the world’s population everyone and that drinks water will want this product,” and it’s the opposite of niching down.
Marty: Yes, that’s definitely an issue. We talk about this or I’ve talked about this often in relation to estimating your revenues. Somebody says, “My revenue is going to be $10 million, but that’s less than 1% of this market.” I always look for penetration that says in five years you should be at a 10% penetration of the market segment that you’re focused on.
On the other hand, don’t tell me you’re going to dominate that market, meaning 50 or 90% of the market, neither one of those is really credible and neither one of those is a good way to set yourself a target. You do have to say, “I’m going to play, I’m going to be a player here and that means I’m going to be 10% or more of this market within five years.” Otherwise, I don’t think you’re a player.
John: Interesting. That’s a good start to have in mind. Since you mentioned the projected revenue, let’s maybe talk about some of the different main parts of a business plan, whether that be your manufacturing cost estimates, your projected revenue, future products, marketing plan, et cetera. What are some of the core parts of a good professional business plan?
Marty: I think you hit them. We talked about it a little earlier, the problem solution, opportunity, competition and then get into the specifics of the team. A lot of times people forget to talk about the strengths and weaknesses, your experience as a team and then talk about marketing, what you’re going to do for marketing, what you’re going to do for sales, and then talk about your projections.
Projections have to be inclusive of what are your costs, margins, prices and then projecting revenue. So I look for projections to be five-year kind of projections.
A lot of people tell me as you’ve probably heard, well, how can I project anything because I haven’t sold one yet? I don’t really know what my revenue is going to be. The reality is that nobody really knows, this is obviously a future prediction, but there are certainly ways that you should do your homework with competitors, you should do your homework with comparable size companies to see what revenues they’re expecting.
You should make sure it’s consistent with what you’re spending to staff up or marketing all of these things have to crosscheck. I look for those kinds of numbers, I look for specifics in a business plan rather than a lot of fuzzy terms like, we’re going to be great or we’re going to spend more on marketing than anybody else, that doesn’t mean anything to me.
John: That’s always one of the more challenging aspects I’ve found of doing the business plan is the projected revenue numbers. Entrepreneurs as you note overall tend to be very optimistic so I feel like a lot of times those projections are really unrealistic and that’s why I think it’s really beneficial that you need to have someone that knows about, business, knows about realistic. Revenue projections review or help you with your business plan before you start presenting it to investors.
In general, from my experience, that’s one of the biggest red flags with an investor is anyone that wants to work with an entrepreneur, whether that be a manufacturer or whatever, is that having unrealistic expectations or unrealistic estimates on future revenue growth, you’re going to be $10 billion in three years. Do you have any general suggestions when it comes to estimating future revenue when you don’t have any units that you’ve actually sold?
Marty: Yes. As I said, first of all, you’ve got to look around the industry and see what other people are doing. If your top competitor does 10 million in sales after 10 years, then don’t say you’re going to do it in the first year. These things just aren’t credible but I do believe that you can look at a forecast or you can predict what you’re going to be able to do the first year. In other words, say, “let’s see what is my manufacturing capacity, what is my marketing capacity, what territory am I serving, how many customers are there?
So if I’m going to sell to 20% or 30% of the customers that I find, what’s the revenue going to be?” Then now you have a first-year estimate. Now I say you should predict that you can double that revenue or more every year. Not 10 times or 100 times because no business can scale up that fast. Say, a really good company doubles their revenue every year.
Let’s see how that goes to in five years. Hopefully, that will make like a $20 million revenue stream in five years, because that’s a premium company. That’s what an IPO people look for. That’s what investors look for, somebody that can reach 20 million to 200 million in the fifth year.
If you can’t reach that, then you might be a good hometown company or a family company, but you’re probably not going to be an investable company that people look for as investors. On the other hand, don’t say you’re going to be a billion-dollar company in five years, because that strange credibility says, nobody can do that. Even Google couldn’t do that.
I’m saying double your revenue every year, get to that $20 million $200 million range. Now you’re a premium company. Nobody’s going to come back and say, “In five years, well, you said you could get to, you know, 50 million and you only made 40 million.” On the other hand, it gives you a target. You have to set yourself an aggressive target.
John: I think that is that’s a great strategy. I really love that. I love the idea of estimating that first year because it’s much easier to estimate that year than it is five years out.
Then taking that number– because that first year you should have some data on whether that be if you’re selling your product online through your website, what’s your website traffic, how big is your audience? Those can be indicators of how many units you’re going to be able to sell during that first year, or how many retail stores do you have lined up to sell the product. That’s all data that you can get.
Then your recommendation of doubling that each year I think that’s a fantastic strategy. From my own business predictable designs, that’s pretty much everything doubles pretty much on a yearly basis, whether that be traffic or revenue or things like that.
I found that same guideline to hold true with more of a service-related business like I have versus a product-related business. I love that tip. I think that’s a really useful way. You’re basing it on something more realistic upfront. Something that you have a better estimate on and then just doubling it from there. Thank you for sharing that. I think that’s really good.
Marty: Okay. Well, the whole game is to impress an investor who’s a business person. If your numbers don’t make sense for any business, then they’re not going to be credible, and you’re not going to get an investor. All I’m doing is giving you a formula or rule of thumb that a good business person probably has, in his own mind, based on his own experience.
John: Great. Now that we’re talking about investors already, let’s switch gears and just focus on investments and finding investors for a while. A lot of entrepreneurs, especially hardware, because it’s so costly to get started, they want to try to find an investor as soon as they have an idea.
In general, I recommend that they need to make some significant progress before they start seeking out investors. What are your thoughts on that and do you have what you think is an ideal time to start seeking outside investments. Obviously, that’s going to depend on whether you’re able to bootstrap or not and how much finances you already have but is there a good time to start looking at for professional investors?
Marty: Yes. To me, that’s a very, very important issue because I think most entrepreneurs, as you say, do start a little too early. Maybe it’s because they need the money so we can talk about that. Professional investors, want to step in when you’re ready to scale the business.
They don’t want to do research and development. They don’t want to fund research and development. They will say and I will say, as soon as you’ve sold one product, you should be looking for an investor as long as you didn’t sell it to your mother or something like that. You’re ready. You know that you have a product that can work. You know that there’s customers that are interested. You’re ready to go. You’re ready to scale.
If you’re earlier than that, and you need money then I always say, talk to friends and family because they believe in you. They don’t have a product to believe in because you haven’t built it yet. You start with friends and family, then maybe if you have a prototype and things are looking really good, you can start talking to angel investors. Certainly, serious professional investors and venture capitalists, they’re not interested until you’re ready to scale the business.
John: Yes, absolutely. One comment with the friends and family and I couldn’t agree more. I think that’s where you need to– I think the first source is yourself.
Then if you don’t have the financial means then to bring in friends and family, but just be aware of the fact that for the listeners that this can cause– if you have your family invest a lot of money or your friends and it’s a big flop and fails and they lose their money that can create a strained relationship with those people for the rest of your life. That is something to keep in mind as well.
I agree, I think that’s you have to start with the people that are going to believe in you the most, but just don’t push it too much and try to get your friends and family to invest huge amounts of money. I think it’s much better that if you take it slower, not try to throw a bunch of money and try to get things done fast. I find it’s much better to take a lot of small steps than it is to try to take a bunch of giant leaps to get to your endpoint.
Marty: Well, I think you made a good point. You should consider your own skin in the game. Bootstrapping, it is the easiest way you don’t have to waste time with investors. Any professional investor will say, “Well, how much have you invested in this? How much money have you put in?
If you say, “Well, I haven’t put any of my money,” then you’re not going to get invest your money because they don’t see you as really committed. You could say, “Well, I don’t have any money.” Maybe I would say, maybe it’s not time to start the business just yet. You better go work for a start-up or make some money with IBM or something like that. Then when you make a commitment, it’ll be obvious that you know, and think about what you’re spending your own money versus somebody else’s money.
John: Absolutely. If you have zero money, if you’re struggling to pay your rent each month, then it’s going to be really challenging to start any type of start-up, especially a hardware start-up. I agree. In that case, you may want to focus on trying to find some source of income that allows you to help fund your start-up, whether that be freelancing or obviously a full-time job or whatever.
You’re definitely don’t count on that the start-up to be the one to generate that income quickly. You can’t start a start-up with no money and expect it to start generating income for you very quickly. You can with a service business. Service businesses are much easier to get started than any type of product business, obviously.
Marty: Another point is, I lived in Silicon Valley, and I actually have preached what I call the Silicon Valley model for startups, with married people or with partners. You say, I’d like to go into a start-up but my wife needs to work for IBM.
You can switch off every five years if you want but the model and I often found it out there is that one of the couple has a real job so that they can get paid every week or two and they can get off work to go home and pick up the kids. Whereas the other person is in a start-up which has a very high risk. Maybe they aren’t getting paid, and they’re working 20 hours a day. Be rational about it. Don’t both of you go into a start-up of different type, the same time. That’s risking your family.
John: That’s a great point that lowers the risk level. Of course, then that can also create relationship issues if one person is the one making all the money, especially if the person that has the job isn’t the one that’s quite as motivated by the start-up idea.
I know that can create a lot of conflict in a marriage if one spouse is the one out working and bringing all the money while the other spouse is pursuing what the spouse is working, just considers a just a risky dream, then that can create some problems as well. Keep that in mind.
Marty: From an industrial standpoint, as an angel investor, I remember sitting in another meeting where a woman was presenting very, very sharp entrepreneur. At the end of her presentation and all the angels were nodding to each other.
Then she says, “Let me introduce you to my partner, who is my husband and my chief developer who’s my son,” and all the heads went down. It’s like there’s a big risk of actually being partnered with a family, not only the financial side, but it also raises that relationship risk tremendously. Investors don’t like to invest in a family of entrepreneurs.
John: Okay, that’s interesting. I haven’t really run into a family trying to seek investments, but I didn’t realize that’s something that was frowned upon, but I can definitely see that.
Marty: Even if your husband, let’s say, is a partner with you, find another partner that could also be a third partner. That gives you that opportunity to say, my partner is not Bill Gates’ wife, it’s Steve Ballmer.
John: Got you. You’ve mentioned a good point there, is other founders. In general, investors prefer a team that’s not a solo founder, a team of co-founders. I think an ideal team would be maybe an engineer, maybe a software guy, and then someone you could call a hustler, someone that’s out getting customers and doing the marketing and things like that.
You’re obviously an angel investor, you know this better than I do, is having a team that’s made up of cofounders and not just a solo founder, is that critical for gaining professional investments?
Marty: Actually, it’s very important. We almost never would invest in a single solo entrepreneur because most of us don’t have both ends of the spectrum of skills, the technical versus marketing or whatever. Even though I know Bill Gates, personally, I’d say he never would have made it without Ballmer because Ballmer was Procter and Gamble, marketing trained.
Bill was very technical, very good technology side. You need the two complementary skills. I think we haven’t talked about that specifically. If you’re seeking investors and you’re trying to put a product together, maybe you’re too busy to seek investors, you really need somebody like the Ballmer to be out looking for investors and put it into business together while you’re putting the product together.
John: Absolutely. Another famous example is obviously, Jobs and Wozniak. I had actually written a blog about that several months ago just talking about– Wozniak obviously was the technical guy. Apple wouldn’t have existed if it wasn’t for Jobs, but Jobs couldn’t have done it without Wozniak.
The two together are what made the perfect team. I think obviously Gates and Ballmer is another really fantastic example of that. We’ve touched on some of these already, but are there any general suggestions that you have that maybe we haven’t already mentioned for entrepreneurs that are seeking professional investors?
Marty: Well, I think it’s always good to look on the internet for angel investors, angel groups. In other words, I’m a big fan of starting with a group rather than talking to 50 individual angels, takes 50 times as much work. I’m in a group in Phoenix. Almost every city has multiple groups of angels.
You can find them on the internet, you can go to angel list, you can look elsewhere but I’m saying do some networking. If you just go to a business meeting or to industry meeting in your town, you’ll probably find out who the angels are or what the groups are.
If nothing else, talk to some peer entrepreneurs, “What did you do to find an investor? Who were the investors that you found? Maybe you can give me a warm introduction.” That warm introduction means a lot, it makes a big difference. Finally, you can go to incubators or accelerators. They always have connections to investors and as well to peers. There’s lots of ways to find investors, don’t do the cold-calling, do some connections and go from there.
John: With business, business is driven by relationships but from what I see, it’s like if there’s ever anyone that you don’t want to reach out to cold, that you need to have some type of connection or a warm introduction, it’s investors. That’s ideal for whether it’s a manufacturer or a salesperson or an engineer you’re hiring.
With investors because you’re obviously asking them for money that’s not something people respond to really well. If you’re just out of the blue calling them or emailing them or connecting on LinkedIn and then saying, “I’ve got this great idea, will you give me money?” That’s obviously they’ve got their defenses up to prevent. When you’re offering to give money out to people, you obviously have to be careful about who you allow to try to present to you to get that money.
Marty: It’s very interesting human nature. Let me tell you just because my name has been associated with startups and investing, I must get a dozen or several dozen a day requests from India and Africa or Europe or elsewhere in the US, “I have this great idea, send me money.” It doesn’t work that way. That’s a waste of your time as well as a waste of my time. Do the connection kind of thing, relationship kind of thing and you’ll have a lot more success.
John: Absolutely. You have to do some upfront work. I don’t get asked too often to be an investor, but I do frequently daily get emails where someone will just present an idea to me. Sometimes they won’t even present the idea. They just say they have an idea and want to know if I’ll work in exchange for equity in their company. Which is essentially asking me to invest, it’s asking me to invest my time.
I’m always a bit amazed, especially when they haven’t even told me the product. I’m like, “Okay. You really want me to think you’re going to get someone to invest in something I know nothing about. I know nothing about you, but yet you’re asking me to invest my time and essentially my money.”
That obviously gets even magnified when you’re an investor because you just draw all kinds of people looking for money and some type of handout without doing the upfront work that’s required.
Marty: Maybe some people would call it entitlement. If people think because they have the idea they’re entitled to some money.
I guess one of the things that both you and I can do is try to educate them at least in terms of the process because they should be applying their intelligence to building a product or trying to build a relationship. It’s not a broadcast approach that doesn’t work.
John: Absolutely. So many entrepreneurs think that money will solve all their problems. I’ve got this great idea, if I just had this money then I could get it developed and get it on the market. In those cases, if you have the money or you ask for money too early, you’re just magnifying all the unknowns and the problems.
It can just make things worse if you have money because you’re trying to take shortcuts and not do the groundwork that’s required to make it a success. You need to be out talking to customers and getting market feedback and things like that. I feel like if you have money– I’ve worked with entrepreneurs that didn’t have investors early, but they had a significant savings of their own and they wanted to just try to throw money at it to make it happen really quickly and that’s generally not something I would advise doing.
Like I said earlier, it’s much better to take a lot of small steps because every two steps forward, you’re going to go one step backwards. It’s just much better to take smaller steps so you don’t fall off a cliff when you have to go backwards.
Marty: I agree. I’ve watched this show Shark Tank, which is the billionaire investors. Even they, when somebody stands up and says, “Well?” They say, “How have you spent on this so far?”
One guy I remember said, “I’ve spent $3 million, my life savings, so to speak.” I said, “Whoa,” you had way too much money, you shouldn’t have spent anywhere near that much even if you had it, because it works against you.
John: Yes. It can go either way. If you tell investors I’ve spent no money, then that’s a red flag but if you’ve dumped millions of dollars into your product or hundreds of thousands and especially if you don’t have some major success to show for that investment.
That person dumped 3 million and what’s been their return on investment? So why would another investor, want to dump their money in it, if your millions of dollars didn’t have any return.
John: I’m curious about crowdfunding. How do you feel has crowdfunding impacted investing, in general? Do you think most entrepreneurs are better off starting with crowdfunding before seeking professional investors? How do professional investors look at crowdfunding, is it a positive because it’s proven market success or is it a negative because you’ve got all these other investors that have some equity in the company?
Marty: I’m actually a fan of crowdfunding in the sense that it provides resources to some people and there’s never enough money to go around, so that’s a positive. In fact, I particularly talk to early-stage entrepreneurs, to try crowdfunding just to validate their idea.
People come to you, they come to me, and they say, “I have is this greatest idea since sliced bread,” and I’d say, “well, maybe you ought to try it on crowdfunding, if you get no reaction, no response maybe you will rethink your idea. Maybe there’s a problem or a market lack or whatever.” It’s a good way to get feedback.
There are actually two kinds of crowdfunding. One is where you get a preorder, or you get a reward or donation kind of thing. Those I think are great. There’s a new kind of crowdfunding, which is an equity crowdfunding, those professional investors are wary of that because if you have the crowd, take a piece of your business, an equity piece, then that confuses the whole picture for a professional investor.
He knows that you have a lot of owners and he doesn’t know how that’s going to factor into his follow on investment. There are a lot of legal implications and so I think you have to be very careful going into an equity crowdfunding kind of thing, but in general, the other kind which is the Kickstarter, most popular kind, I see no problem with.
John: Okay, that’s a great point. That’s helpful that you differentiated between the two types of crowdfunding, so Kickstarter obviously being in exchange for a reward or a product and not equity, but I can see that if you have a bunch of equity holders in the company, I knew that was something that investors don’t want to have to deal with that just obviously creates a nightmare, I imagine, from a stockholder situation.
Marty: Yes, and from a valuation situation, people get their hopes way too high on what their company’s worth, so what percentage are you going to give or how you’re going to cash out, all of those things get very complicated.
John: Yes, that’s a good point. In your crowdfunding, you don’t probably have the data to do a realistic valuation of the company, so how are you going to know what percentage to give in exchange for what since you don’t really have a solid valuation, and like you said, we’ve talked about entrepreneurs, they tend to be overly optimistic about everything, including the valuation of the company.
John: Changing topics, once again, let’s jump over and talk about patents and IP protection, in general. Anyone that follows my blog or podcast knows that I’m not opposed to patents, I just feel that early on people they’ve over-focused on that patent that tends to be they have the idea and they think the next step is to patent it.
I think patenting fits into the overall process it can, but making it that first step after an idea is not a good way to go. A patent is expensive $10,000 plus to get a hire an attorney and get a patent, and I just feel there are much better ways to spend that money to spend that effort. Once again, talking to customers is one that I think is so overlooked but I’m curious, your thoughts on patents and when is a good time to get a patent?
Marty: Well, we may have a slight difference here. I think patents are very important from an investor’s standpoint because they show what I call a sustainable competitive advantage, secret sauce. That’s first question that every investor has, how are you different, why are you unique, what do you have that nobody else has?
A patent is one way to nail that. In fact, from an investor standpoint, I actually lean over and say, that’s worth a million dollars in a valuation sense when you talk then about what percentage of my company am I willing to give up.
To me, I agree, it may cost you $10,000 but it can be worth a million dollars in valuation. Now, when do you do it? You really obviously have to do it when you can do it. I don’t really get involved too often in how early because more often I find people who say, “well, no, I don’t have a patent or I can’t afford a patent yet until you give me the money”.
I’d say, well, “I’ll give you the money when you show me the patent”. It’s a conundrum, which is a difficult one, but in general, I think patents are one of the best ways to protect your intellectual property and define a unique, sustainable competitive advantage, so it’s very important.
John: Yes, and I agree completely. I didn’t mean to imply I don’t think patents are useful. I know from presenting to investors that it’s almost a requirement like you said, having a large retailer sell the product. I remember pretty sure that Walmart because my product had been presented to them, and they wanted a patent because it just gives them the comfort factor that you have this intellectual property in that there’s not going to be other people coming in and claiming that.
I couldn’t agree more, once you’re ready to start selling to big retailers or seeking out professional investors, I think you need a patent. My main caution is against that’s the first step that you do what you just have an idea, and then they immediately spend the next year and $10,000 just absorbed in getting that patent, and working with their patent attorney.
I just feel like that’s lost of time. That’s why I always encourage at least in the US that you start with the provisional patent application that gives you the one year to do all this upfront stuff like talking to customers and determining, is this something really that I do want to pursue before I start dropping the big money into patents.
I love patents, I had a patent on my product it was very helpful with investors and retailers but I just feel like if you don’t your funds aren’t limited then yes, go for a patent right up for it, but in general, if you have limited funds, that’s a pretty big expenditure to take from just having an idea and not even doing any market validation or market testing or talking to customers.
Marty: Well, let me be clear, I actually don’t differentiate between a provisional and a full patent. In other words, I think getting the provisional shows the conviction that I’m looking for, and in fact, it will lead to a patent in time, it may take time, it always does take time, maybe four or five years.
I’ve personally done a couple of patents for people when I was in my Silicon Valley years and they don’t cost that much. In other words, in fact, let me give you another clue. I was in IBM, and IBM believed in patents, but they found that the engineers were always too busy, it takes work to write all this stuff down and so we actually came up with a scheme whereby we would take the engineer and stand them up against the wall and do video, and say, “Okay, describe in detail all of the things that are part of what you could patent” and then we would have an administrative type person write it up.
It’s a challenge to learn the patent process. It’s like any other government kind of thing. They demand things to be done in a certain way and engineers aren’t the best people to do that typically, so there are ways to get around the costs or get around the time and still have the impact of having some protection on your intellectual property.
John: Good point. I don’t recall the exact price, but I know a provisional patent application, I believe, is maybe $2-300, so that’s a really low investment to at least give you one-year protection.
I can’t imagine why you wouldn’t want to at least start with the provisional patent, it gives you a year’s protection for just a few hundred dollars. Then after that year, hopefully, you have enough data to feel confident and spending the bigger money to get the full patent.
There are other types of IP protection obviously, I don’t think for a product, none of them carry quite the weight of a patent but a trademark is obviously is only is also much cheaper to get than a patent if you have a really cool catchy name for your product, perhaps a trademark would provide some benefit. I don’t think it’s valued nearly as much as a patent.
Another cheaper patent is a design patent is that something that you see as an investor very often people that have only gotten a design patent versus a full utility patent. A design patent just protects the appearance or the design of the product and not the function or the solution of the product. Is that something you see very often? I’ve never dealt with a design patent or done one.
Marty: I wouldn’t say I see it often. I would say that having even a design provisional patent would go a long way in terms of convincing me that this guy is well ahead of the masses in terms of having some unique offering or secret sauce.
John: Well, Marty, this has been fantastic. I can’t thank you enough for coming on here and sharing your knowledge of startups. You’ve obviously been helping startups for a long time and you have a lot of knowledge in this area. Thank you so much for coming on.
For any of the listeners that want to learn more about you or your business? Can you tell them how to connect with you? It’s startupprofessionals.com I believe this correct is your website. Correct me if that’s wrong? Are you on any of the social media sites that people can reach out to you?
Marty: Yes, startupprofessionals.com is my website and it has a pointer to my blog, which is part of the website so to speak. That’s probably the easiest way. I’m also on all the many of the social media sites as Startup Pro. P-R-O. On Twitter, for example, I have like a million followers and in that arena. You can find out some things that way.
In general, like you said, I’ve been around long enough, I’m on the internet. If you just go on the internet and type in, business plan and Zwilling, you’ll probably find a few of my articles because I’ve written literally hundreds of articles for Inc.com or Forbes or some other of those as well that seem to stay around forever as things do on the internet.
John: Yes, I’ve seen your name on articles for many, many years. Through Inc and some of the other big publications. Just to reiterate, if anyone listening is needing a professional business plan and just wanting to work on getting one together, that’s something that Marty through startup professionals, that’s a service that they provide. Definitely be sure to check them out at startupprofessionals.com.
Well, Marty, thank you so much for coming on here again. It was great catching up with you again, and I look forward to talking to you again soon.
Marty: Okay, sounds good.
John: Thanks, Marty.
John: Okay, that’s it for today. Be sure to tune in next week for another episode of the Predictable Designs podcast.
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