In a recent article, The Provisional Application, we outlined a cost-effective strategy to get a product to market via Licensing. The downsides to Licensing are 1) the initial costs (which the provisional application can minimize), and 2) a limited prospect set. (There are only a limited number of product-line manufacturers selling into any given market -- many, many, many fewer than there are potential customers in that market. Obviously, the fewer the customers you have to sell to, the lower your probability of making a sale.) Since the alternative to Licensing is Venturing, the obvious next question is "Is there a cost-effective strategy for getting a product to market via Venturing?" The answer is definitely "yes" -- for those willing and able to get out and hustle.

Venturing has its downsides too, the primary ones being 1) capital (which this article will suggest means for minimizing), and 2) the time, energy and ability to get out and sell. Most entrepreneurs consider the former to be their main problem, whereas it's almost always the latter. Even if you have the capital, you're not going to be able to hire someone to do your selling for you. You can't hire someone to sell something you've never sold before simply because you don't know what to expect. If the product sells less than expected (which is likely), you'll have no idea whether you have a product or pricing problem -- or an incompetent salesman. (Keep in mind that the one thing every salesman sells best is himself.)

Venturing vs. Licensing

For suitable products, it's likely you'll make more money Venturing than Licensing -- provided you make no serious mistakes. With Licensing, you're passing 2/3 to 3/4 of the potential profits from the product to the licensee in return for their investing their knowledge, effort and money -- and taking the risks -- to bring that product to market. If you can successfully bring the product to market yourself, you'll not only capture all of those earnings -- but you may well be able to turn around and sell your company to that same licensee for a substantial multiple of those earnings -- but don't underestimate the risks in doing so -- or the time, work -- and luck -- required.

Venturing Decisions

If you choose to bootstrap (i.e., proceed without investors), the next decision you'll have to make is whether or not to seek patent protection. Unless you're sitting on some basic (i.e., clearly licensable) technology, my recommendation is that you not -- on the basis that most small businesses simply cannot afford to defend their patents. Any product that sells very well is going to get copied whether it's patented or not. All a patent is is a license to sue. And a typical patent infringement suit starts at like $250,000. And the better the product is selling, the more infringers you'll have to sue. If you find this decision difficult, try to find a patent attorney who'll give you a written guarantee that he'll defend his work against all infringers -- on spec (i.e., without fees, but with a major portion of any proceeds resulting from such suits). If you can find a patent attorney who's willing to take that bet on your technology, it's likely worth betting on. If you can't, it's likely not -- and the decision is made for you.

So... for purposes of this article, we've decided no investors, no patents. What we're going to do is try to get the product into the market as inexpensively as possible, try to make some money -- and worry about competition if and when it comes.

Contract Manufacturing

To find contract manufacturers, start with a good Industrial Directory. Thomas Register is the bible, listing all manufacturers in the U.S. in 20-plus volumes. However, you'd like one specializing in your State, and there are several publishers of such directories (e.g., Harris Publishing, in Twinsburg, OH, 800-888-5900).

If you know (or can find access to) someone who works in a Purchasing Dept., you can probably get them to loan you one (or even give you one that's a duplicate, last year's, etc.) And if you can get them to mentor you, so much the better. Recognize that what you're doing in this phase is what purchasing agents do for a living. A good purchasing mentor can save you many hours, many mistakes, and much frustration.

The state directories are typically organized by city, listing all manufacturers in that city with address, phone number, names of people, data on company size (sales, employees, sq-ft, etc.) -- and typically a short description of the kind of work they do. Look first at the manufacturers in your own city. If there's someone listed there who looks like they might do the kind of work you want done, call them. If they do that kind of work, make an appointment to go in to meet with them. If they don't, ask if they know of anyone in the area who does. Bouncing back and forth between referrals and the directory -- and spiraling outward from your city -- you can find as many as you wish.

Always approach contract manufacturers "looking for a quote" on tooling and piece-price at various quantity levels, e.g., 100, 1,000, 10,000 pcs. You can, and should, approach them as early as possible -- even if all you have is a rough sketch.

Recognize that every contract manufacturer was started (and most are still run) by a skilled tradesperson who had enough on the ball to start his own business. These people know their particular manufacturing process(es) better than most engineers. When you meet with them, be prepared to "pick their brain": Is there a better approach (or process, or material) for making this? What are possible manufacturing problems? What trade-offs between piece-price and tooling costs are available? Etc.

Pin them down on what data (drawings and/or specs) they need to give you a good quote. If there are parts of generating that data that you don't feel competent to do, ask if they know of anyone who can do those parts. Every contract manufacturer has a network of outside tradespeople and professionals that they can call on when they need related work that they don't do in-house.

If you're inexperienced with juggling the trade-offs between design and manufacturing processes -- or working with contract manufacturers -- you should try to get at least a dozen quotes. You'll learn something new from each one. And be prepared to cycle through them several times as you pin down your design and specs.

But be sensitive to their time. They're busy trying to make a living and can't afford to spend hours with you in rambling discussions. Prepare for your meetings -- with written materials you can leave them, with questions you want to ask -- and try to conduct those meetings as efficiently (and professionally) as you can.

If you're worried about disclosing proprietary data to them, most contract manufacturers will sign a non-disclosure agreement. Such an agreement basically says, "In return for my showing this to you, you promise to treat it as confidential material, not disclose it to others, not to use it yourself". With such an agreement, you are as protected under contract law (at least with that party) as you are with a patent under intellectual property law. Suitable forms can be found in most inventor books. If you're going to ask that such an agreement be signed, be sure to verify that they will before setting up a meeting.

My own personal opinion is that such agreements are generally an unnecessary hassle and impediment to doing business with contract manufacturers. Of all the risks facing a new venture, having a product copied by a contract manufacturer -- especially a product whose sales have yet to be proven -- has to rank way down near the bottom. Contract manufacturers sell manufacturing services. They're comfortable selling those services -- and are very aware that selling products is a whole different bag.

Once you have your quotes -- if you have the money to pay for the tooling and initial inventory -- do so. Then take that inventory out, sell it, and use your proceeds to go back and buy more.

However, if you don't have the money to pay for the tooling and initial inventory, then cycle back through the contract manufacturers who quoted -- and try to work a deal. I've seen inventors talk contract manufacturers into doing their tooling and initial inventory on nothing more than a promise to buy from them for a couple of years. I've seen others go into 50-50 partnerships with them -- "you do the manufacturing and I'll do the selling". And everywhere in between.

Recognize that contract manufacturing is a service business. Like all service businesses, they have minimal control over their workload -- everybody wants everything at once and then nobody wants anything. But they're a very high-overhead service business -- during a downswing, they still have to pay rent on their facility, still have to make lease payments on their machines, still have to pay their utilities, still have to keep their key people employed. During a downswing, it literally costs them nothing more than raw materials to do your tooling and initial inventory. Otherwise their machines would be sitting idle and their people would be sweeping floors and cleaning shelves.

However, recognize that you have to sell them on doing this for you. They've all been burned by "deals" in the past -- or know someone who has. And selling at marginal costs sets a bad precedent for their other business. But a part of them really wants to be sold. A stable product-line can be a godsend to their service business -- during downswings they can simply build product into inventory to smooth out and buffer their workload. Bottom line -- you have to convince them that -- if they invest in making you your first batch -- it's 100% that you'll sell them -- and quickly. And if you have trouble convincing them, that just means you're not ready to get out and sell that product. You still have some serious homework (or soul-searching) to do.

Selling

If your product can retail at 4x your manufacturing costs, you can sell through retail stores and some catalogs. You'll sell to the stores at 2x your cost and they'll sell to the end-user at 2x their cost. If your product can retail at 6x your manufacturing costs, you can sell through wholesale and all catalogs. There's enough margin there to fairly cover all intermediaries in most distribution channels.

These numbers are rules-of-thumb. They can vary considerably in different markets. To refine them, get out and talk with a few of the people you expect to sell to and find out what markups they operate on. For your own markup, project your expected operating costs (selling costs, engineering costs, general & administrative costs) and desired pre-tax profit. And be conservative -- these costs are almost always underestimated by the inexperienced.

With price established, now get out and sell. Most entrepreneurs initially target the major accounts in their market, e.g., the mass merchandisers (Wal-Mart, K-Mart, etc.) for a consumer product. That's generally a mistake. First, it's very unlikely they'll buy. Their business strategy is to sell the 5-10 best-selling lines in each of their product categories. They have many proven lines available to them -- it's unlikely they'll choose yours before it's "proven". Second, even if they have interest, they'll prove to be impossible to negotiate with. They'll look at what they could make that product at in one of the developing nations, add a couple of percent, and tell you to take it or leave it. Third, by initially targeting those who could be high-volume users, you're collapsing your "proving" phase. It is almost certain there are bugs in your product, in your packaging, in your promotion materials, in your business systems. The greater your volume, the greater the probability those bugs will prove fatal.

If you want to follow this strategy (i.e., bootstrapping), you might as well face up to the fact that you're going to start at the bottom and work your way up. With a consumer product, the place to start is with a few local (i.e., within driving distance) owner-operated stores. Sell your product into those stores if you can. Put it in on consignment if you have to. Then help those stores sell your product off the shelf. By doing time in the store if they'll let you. By getting the local paper to do a PR piece on you (with mention of where your product's available). By placing an ad in the local paper, radio station, cable TV, etc. Getting your product into the store is only 10% of the problem. Getting it out (at a profit) is 90%.

Once you have several local stores making money on your product, they'll point you to the sales rep or distributor who sells them that type of product. You can now likely get their attention. In sales, what sells is success. Until you've "proven" that stores can make money on your product, the people selling to those stores won't have much interest in your product. Like the mass merchandisers, they want the 5-10 best-selling lines in the market they're servicing. They have plenty of proven lines available to them. And they're going to spend 90% of their time selling the 10% of the lines that are making them 90% of their income.

Once you have their attention, then you'll work with that rep or distributor helping them sell more stores. Once you have them making money on your product, they'll point you to a rep or distributor in an adjacent territory. Then you'll work with them until they're making money. Etc. Etc.

Once you're selling widely and well in the owner-operated stores and small chains, the large chains will approach you -- and now you have some negotiating power (if in fact you still wish to sell to them).

Conclusion