Why some businesses will fail to see the writing on the wall

 
Richard Farleigh

IMAGINE you invent the pen in a world of only pencils. You are so excited – you are going to change people’s lives! Pens are easier to write with, easier to read, and don’t need sharpening. You dream of success.

Mixed in with your excitement is a dose of paranoia. Of course, anyone could steal your fantastic idea. So you protect yourself by applying for a patent and registering the design.

You consider producing it yourself, but decide that life would be easier if a big pencil company introduced the pen under their brand, and just sent you a royalty cheque every month. So you search the web and send out emails to pencil manufacturers. You try to whet their appetite without giving too much away. Despite the global opportunity, you don’t get many replies, but eventually you are invited to a meeting. You’re nervous, but it goes well and everyone seems convinced. “This could be absolutely revolutionary!”, someone says. Well, you think, if they can just crack a tiny share of the potential market, I will make a fortune. Negotiations begin, but they are painfully slow. The eventual offer seems very one-sided. They are not paying much, they want exclusivity, they will not commit to any minimum sales, and if they improve on your pen design, that’s to their benefit, not yours. You haggle without really making any progress, and you start to worry they’re secretly working on their own pen invention. You read about the AppleSamsung patent dispute and realise you could never afford to fight such a battle against a big corporation. And you begin to suspect that perhaps the pencil company doesn’t really want the pen to become successful; perhaps they think it will destroy their pencil sales; perhaps they are just hoping you will run out of money and disappear.

In frustration, you change course and decide to manufacture and sell the pen yourself. You fly to China (which is what everyone does), and look for a manufacturer. Even there, though, you realise it will be expensive to manufacture. The unit cost is very high unless you make a large order, and invest in tooling. But you re-mortgage the house, cut back on family holidays, and produce some stock. And you create a website and start cold-calling stationery stores. With just a few sales, you are welcomed to the world of retail: warehousing, advertising, collecting payment, distributing product, low margins, product returns, warranties. Overwhelmed, you need to hire staff and are continuing to burn cash. You lose a potentially significant order due to a mishap, and a pen leaks in someone’s suit, ruining it. Frustrated and nearly broke, you give up, just as you see something very similar to your pen hit the market.

Depressed? As a backer of early-stage businesses, imagine how I feel – these are my daily struggles. But struggles are lessons we could use. An idea is worth nothing. Brilliance in invention needs to be matched by brilliance in commercialisation. “Day zero” is the day a deal is signed or the product hits the shelves. Most new businesses fail. Sadly, not every new pen is something to write home about.

Richard Farleigh has operated as a business angel for many years, backing more early- stage companies than anyone else in the UK. www.farleigh.com