Your idea to make millions is worth much less than you think
PLEASE ensure you’re sitting down because I want to shock you. Despite the popular wisdom, most “amazing” and “brilliant” business start-up ideas and inventions are worthless. Yours, mine, and just about everyone else’s. They have no value. Scream and shout all you like, but after backing over 80 start-ups and reading more than 10,000 business proposals sent to my website, I’m convinced of this. “But that’s rubbish”, I hear you say. “What about Facebook or Skype, or closer to home, Dyson? These were all brilliant ideas, and they’re now worth zillions.” Yes, but I would argue that their value now is due to their fantastic commercial progress and talented management. “Fine, but surely when they were just at the idea stage they were worth something?” Not much. There have been plenty of ideas, just as clever, which crashed and burned. It’s a bit like saying a winning lottery ticket is valuable before it is even drawn.
The general reluctance to accept a low investment value means many inventors and new businesses struggle to get funding or to involve other people. Not long ago, I was presented with the idea of launching an upmarket consumer magazine. I was shown a few sample pages and a draft supporting website. It all looked good and the two founders were certainly talented and very bullish about their idea. Their valuation? They wanted £100,000 invested for 20 per cent, valuing the idea at £400,000. My valuation? You guessed it, zero. I didn’t invest. Similarly, a few days ago I received an email from a fellow in Australia who has researched on-line gambling there and believes he has found a niche to start a new business. He wants Au$250,000 (about £150,000) for half of the company, which hasn’t even been incorporated yet. He gets his half for free, so he’s valuing his research efforts and idea at Au$250,000. Looks like his hourly rate for dreaming up business ideas may be well over £10,000. On-line gambling? Hardly earth shattering innovation. Life wasn’t meant to be that easy, and it isn’t.
I am not saying these ideas won’t work; it’s just that all their risks lie ahead. Interestingly, the businesses are also asking me to give ongoing input and management advice, but they place no value on my time or expertise. They will probably need guidance from somewhere – my view has always been that the bigger role in a company’s success or failure is the quality of the management rather than its product.
I will concede something though. Some research, such as that coming from universities, can be extremely profound. You often have very talented teams of people, leaders in their field, who put in years of work to generate innovation and knowledge. I find that exciting, especially given the quality of research done here in the UK. Interestingly, university spin-out companies tend to raise commercialisation money at modest valuations. Perhaps like me, they know that the real challenges lie ahead.
Since the mid-1990s Richard Farleigh has operated as a business angel, backing more early-stage companies than anyone else in the United Kingdom.
www.farleigh.com