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 - - - - - - - - - - - - - - - - - - - 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 Murphyism $101,902.50 Real World Start Up Costs....... $441,577.50 - - - - - - - - - - - - - - - - - - - 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. Lets 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 its costs for a Start-up Company? Would you go with Bobs 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 Bobs hard earned nest egg out. Think on this. |
