Step 4: Confirm the Invention's Potential

This is probably the most important stage of the inventing process. Up to this point you relied upon your own instincts and perhaps the input of close friends and immediate family to determine if your idea has commercial potential. Now you must decide if your invention is worth serious investment.

As a professional in the inventing business, I try to find a solid rejection as quickly as possible. If I can find something that convinces me the invention is likely to fail then I will walk away from it, and move on to other things. All of us have many more opportunities than time or money. Success comes from pursuing only the best opportunities.

You may feel that today’s idea is the best idea you ever had, that you will never have an equally good idea ever again. This is simply not true. It is also a recipe for failure. You will have many great ideas in the years ahead. Your belief in having more great ideas will enable you to take the steps you need to succeed. This belief enables you to overcome fear.

You must be willing to throw your idea into the lake to find out if it can swim. If it cannot swim, you should abandon it and develop a new idea.

The Steps of the Confirmation Process

• The Swim Test – rough evaluation weeds out likely losers.
• Financial Evaluation – rough approximation of market potential. Estimate what the invention might be worth.
• Review of Prior Art – likelihood of a strong patent.

The Swim Test

The Swim Test is a shorthand evaluation I use that is appropriate for consumer products that might be marketed by a small start-up or a Fortune 500 corporation. This test edits out many viable ideas but, as I wrote above, there are more opportunities than time and money. The ideas that pass this test are ideas that should be easy to commercialize and go on to make healthy profits. The test below is used for consumer products. Industrial medical and software products could use a similar test with a few modifications. Here’s the test:

• Do 75% or more of my “on-target” personal reviewers (wife, brother, partners, friends) say they will BUY it? “On-target” means potential customers. Example: I do not ask my brother about golfing products since he has never played the game.
• Does the invention solve a clearly identified problem that nearly everyone can relate to? Vague benefits do not motivate buyers. Strong selling points that can be communicated quickly are critical for success.
• Does the product have a perceived retail value of $19.95 or more? In answering this question I also consider kits that might contain the invention as the primary feature. A kit might enable an invention with a $10 retail value to reach the magic $20 figure. Items at $20+ can be sold in all distribution channels including catalogs, television, retail stores and even multi-level marketing. Products sold for under $20 -especially those under $5 - generally have only two channels for distribution: retail and premium/incentive (give-away). Fewer distribution channels means higher risk. Catalogs are a great way to launch a new product since the catalog both advertises and sells. But the economics of the catalog business requires at least a $20 price point ($8 to $10 wholesale).
• Does the product stand alone? If the invention requires another product to function it is a hostage to the other product. Being a hostage may mean that adapters are required or that permissions must be obtained (for example to get the right to use a trademarked name). If an invention needs to be built into an existing product then the opportunities for success are even more limited.

If an invention passes for each of the four points above it will probably swim. If it fails on all four questions, it will probably sink. A mixture of yeses and nos means it might float, but will probably require a lot of hard work… and a dose of luck.

Does getting 4 no's mean an invention should be scuttled?

Not necessarily. It means that some other specific reasons for likely success must be identified. If I believe deeply in an idea I’ll continue to explore it even if the item fails my Swim Test.

Does getting 4 yes' guarantee gold?

No, it simply means that the item deserves further investment and development. Some form of quick evaluation similar to the Swim Test is what buyers and potential licensees use when considering a new product. You may have spent several years developing your invention, but when it gets in front of a buyer or potential licensee (unless you’re there presenting it yourself – a very good idea whenever possible) it’ll probably get less than one minute of initial consideration.

The Swim Test and the Elevator Pitch

Understanding you’ve got less than a minute (assume 30 seconds) to grab attention, you must perfect the pitch for your invention so that a prospect wants to learn more. In the Venture Capital world this is called an elevator pitch - an entrepreneur running into a VC in an elevator has 30 seconds to pitch his entire business plan (those 30 seconds are worth far more than a 100 page plan). You can combine details about the development status of your invention, research on prior art and performance on the Swim Test to make a compelling 30-second pitch. It might go something like this:

Inventor: “Oh so you invest in new products… I’ve invented a patent pending kitchen gadget. My initial surveys found 75% of the target market saying they wanted to buy it on the spot for $20 and up. It’s a stand-alone product that solves a really annoying problem everyone can relate to. First stage prototype and concept drawings have been completed. Initial reviews of prior art seem to indicate we can get a patent with meaningful claims. Will you sign a NDA so I can tell you the details?”

You’ve got more homework to do before making this pitch. This simply illustrates how results from the Swim Test might be used later on. Confirming your invention is not only important when making your personal decision to move forward, it’s critical for actually moving forward.

The Swim Test provides a rough method for making the decision to invest time and money in exploring the idea further.

Financial Evaluation (guessing the potential value)

Remember that along with being an inventor you are also a venture capitalist. Will your invention make you at least 5X to 10X your money within three to five years? To answer that question you must gauge (guess would be a more accurate word) the market potential for your invention and determine (again guess would be more accurate) the likelihood that your invention will achieve its market potential.

The cost of turning a relatively simple idea into a commercial product is generally somewhere between $100,000 and $1,000,000 (not counting your time). As the inventor your share of this cost (legal advice, patent filings, prototypes, engineering) will typically be around 10%. In other words you’re likely to invest between $10,000 and $100,000 in hard dollars (your time valued at zero) to move your invention from idea to manufactured product. (If you plan to make and sell the invention yourself your share could be the entire amount). Don’t worry if you don’t have the money. If you have a truly great idea and are passionate about it you’ll find partners who will help you.

Your time is worth something so you should assign a dollar value to it – the dollar value will be low since you’re learning on the job (how low is up to you). We’ll use a below-minimum-wage figure of $5 and hour to value your time (at least you’re earning something while you learn). The amount of time you’ll invest will vary tremendously. For a relatively simple item you should expect somewhere between 1,000 and 5,000 hours over a period of 1-5 years. It sounds like a lot and it is. However, if you enjoy what you’re doing it won’t feel like a burden. For the following discussion let’s assume you’ll spend 2,000 hours (@$5/hr = $10,000) and invest $10,000 in hard cash, a total investment of $20,000.

The VC Calculation

As your own venture capitalist you should ask yourself the following question: Is my invention likely to generate between $100,000 (5X) and $200,000 (10X) in profit for me within three to five years? That’s a pretty high hurdle. Very few inventions ever meet that standard. Nonetheless, it’s a realistic standard used by professionals. Let’s look at an easier standard that’s potentially more appropriate for amateurs. It’s called the “Rule of 72”.

The Rule of 72

To justify going forward more easily you could use the Rule of 72 as your investment guideline. The Rule of 72 is a quick way of calculating how long it will take for your money to double at a fixed percentage rate. For example, using the Rule of 72, if you put your money in an investment that returns 6% annually your money will double in 12 years.

Here’s how it works:

Choose the percentage rate you would expect when investing your money in a safe and secure investment. The percentage rate could be that offered by a CD, savings bond, mutual fund, in short an investment you believe will be safe for five years or more and generate a stable rate of return. Next divide 72 by the percentage number (the percentage rate without the % sign or the decimal interest rate multiplied by 100). For example if the interest rate is 6%: 72 divided by 6 = 12 years to double the investment. The general formula is:

72 divided by the percentage number = years to double the investment

Using our example of a $20,000 investment and a 6% rate of return for a safe investment, the question becomes: will the $20,000 spent in developing your invention return $40,000 within 12 years?

The Difference between a VC return and the Rule of 72

There’s obviously a huge difference between $40,000 in 12 years and $200,000 in 5 years. Are venture capitalists simply greedy or is there some other justification? The difference is risk. Doubling your money in 12 years does not require you to take much risk – conservative mutual funds have easily generated over 6% average annual returns for many years and will likely do so in the future. If you wanted to be really safe you could buy US Savings bonds (current yield approx 4.5%) - in that case it would take 16 years to double your money.

On the other hand VCs know that roughly 6 out of 10 investments will likely be complete losers. Two out of ten may break even or make a little money. And one or two should achieve the goal of better than 5X to 10X.

Figuring Risk

The value of an investment is equal to the return on the investment multiplied by the risk (likelihood) that the return will be realized. Consider a bet on a coin toss (50/50 odds). The bet pays 2X the amount bet. Bet $1 on heads and if it comes up heads you’ll get $2. If it comes up tails you’ll get $0. In this example, we’ll make the return on investment 2X and the risk 50%. Here’s the equation for a $1 bet:

$1 bet = $2 (2 X $1) return on investment X 50% (odds) = $1 value of bet

In other words a $1 bet is worth $1 if it pays 2X and the odds of winning are 50%. If you were a machine you would be indifferent between making the bet and keeping $1 in your pocket.

Let’s look at the lottery. Is it ration