Many people have great ideas for inventions. These
thinkers amongst us may have a new innovation, better mousetrap, or a
totally new concept. Perhaps you have an idea you would like to see
come to life and receive the royalties for it and live happily ever
after. Unfortunately many folks who have such ideas spend their life
savings going after a dream of their own invention. They fall in love
with their idea and want to see it come to fruition and mass marketed
to the world.
It is wonderful to see so many garage inventors
coming up with so many nifty gadgets. But it is also important before
you risk you hard earned dollars to be very careful with what you wish
for. Bringing even the simplest product to market is not cheap and very
few actually succeed. In this case study we will analyze the reality of
a seed to weed concept and look into the formation of a small business
to make, market, and sell this product. The fictitious product or
widget as they call them in MBA school is called a JoggingLight. It is
a relatively simple invention, a light, which is powered by the human
motion while jogging rather than a battery, so people can work out
after dark and have light while they do so. Now then, first we start
out with some real world costs below;
The JoggingLight
Financial Requirements
Prototypes:
Parts $ 8,600.00
Modification Costs 2,000.00
Tools 1,250.00
Work Shop Set Up 1,500.00
Misc. Equipment* 2,000.00
Installation 250.00
Back Up Generator (Honda) 1,200.00
Vacuum 200.00
Injection Molding Engineering 12,250.00
Plastic Cover Prototypes 25,200.00
Human Testing 800.00
Ergonomic Testing (Cal TECH) 10,000.00
Research Paper (Interns) 10,200.00
Digital Photos and 3D Renderings 8,800.00
Sales of Original Prototypes……………<2,000.00>
Sub Total $ 82,250.00
Business Set Up:
Incorporation $ 1,500.00
Parasite Lawyer Retainers 8,000.00
Federal Registration of Trademarks 1,875.00
Concept Patent Filings, Modifications 35,000.00
Procurement Business Registration 4,800.00
Miscellaneous Legal Docs 675.00
CA Trade Marks 1,500.00
Patent Defense and Negotiation Fund……...…..35,000.00
Manual Creation for Consumer Product 1,000.00
Manual Creation for Industrial Product 3,000.00
Business Licenses/F.N.S. Etc. 500.00
Travel Expenses for Business Set Up 2,000.00
BBB and Chamber Memberships 1,500.00
Finish Products Liability Insurance (DP) 3,675.00
Business Insurance Down Payments 1,800.00
Sub Total…….…………….$101,825.00
Start Up Costs Before Marketing……..……..….$184,075.00
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The JoggingLight
Financial Requirements
Post Business Formation and Prototype
Marketing Costs:
Repayment of Loan for Website Creation $ 2,900.00
Television Infomercial 54,400.00
Art Work for Logo 1,400.00
Stationary, Business Cards, Etc 500.00
Additional Website Ongoing Work 8,000.00
Air Time for Product over basic package 20,400.00
Travel Sales Costs…………………………….… 5,000.00
Promotional, Sponsorships……………..………. 5,000.00
Sub Total $93,100.00
Salary Costs:
Bob Smith Founder (one year) $50,000.00
Health Care Costs……………………………….. 6,000.00
Casual Labor 6,500.00
Sub Total $62,500.00
Total Anticipated Start Up Costs:
Total From Marketing and Salary...………… .$155,600.00
Total From Prototype and Legal……… …… $184,075.00
Perfect World Grand Total Start Up Costs… $339,675.00
30% Fudge Factor and Murphy’ism……… …$101,902.50
Real World Start Up Costs……………...….... $441,577.50
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Indeed
what seemed like a really easy to make product turned into a complete
nightmare for Mr. Bob Smith the founder who needs a $5,000 per month
income to survive or even be able to quit his job. Already now we have
the first one year expenses at over $440,000.00, which is not chump
change for the guy who just invested a very useful and needed product
for walkers and joggers to stay in shape with.
For first year
startups considering only the prototypes being sold and no actual unit
sales, which is possible, but unlikely we see that what seems like a
great product is hardly cheap to make and bring to market. Let’s say
for instance that at 50% gross profit margin per widget sold or $15.00
of the $29.95 target price, that means year one to break even would be
24,439 units would need to be sold. That seems plausible. So on a "Go
or No Go" choice it appears to be a viable business, even with some
mistakes along the way as you roll with the punches and fouls. You
could also make a few dollars on the handling labor costs and thus add
$5.00 per unit profit there if you did in-house fulfillment and charged
$10.00 thus cutting down the number of units need to be sold by
approximately 25% to 18,110 units for a year one ROI kill date.
If
you were able to stay out of our fudge factor, unless needed for real R
and D next generation stuff, you might be able to also cut 20% off that
$339,675.00 figure or $271,740.00 and made your $15.00 per unit profit
plus $5.00 for in-house fulfillment or $20.00 per unit then you could
be home free at 13,587 units sold prior to end of year one, from the
day you cash the investors or Venture Capital check. That seems very
doable indeed.
Not the easiest business in the world, but if Bob
will walk before he runs run here, you can see he might find it
possible to shatter these goals prior to end of fiscal year one. Should
we throw this case study in the trashcan? Is this a feasible endeavor
for Bob, father and husband in a family of five? Should we further look
at a better case scenario than the one listed which many could consider
next to worse case scenario above? Do we sharpen our pencils for Bob
and continue, keep assumptions or quit? We need to be honest with Bob
too, because "falling in love" with a business or product can make you
dead or broke. This should only be about winning and making money, as
Bob Smith the founder of the JoggingLight has built up a nest egg for
his family, should he risk it all on this new widget; The JoggingLight?
What
are your thoughts on this Case Study; in analyzing a prototype project
and it’s costs for a Start-up Company? Would you go with Bob’s project
or reject it? Do you as a business student think it is feasible? What
is the basis for your answer? Are there real life places you could
shave costs? Remember it would be better to be wrong on the downside
than out of business with an unforeseen blindsided problems that could
wipe Bob’s hard earned nest egg out. Think on this.
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