Saturday, November 12, 2011

What kind of business vehicle?

Vehicle 1

A Board Meeting is coming up on Monday, and its making me think hard about business vehicles.

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No, not that sort.   It would be nice to trade up from the Fiesta, but they’d never go for it…

Vehicle 2No, the vehicle I’m thinking about looks a bit more like this

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Back in 2006, my academic advisor and I were debating the principles of new business formation. 

Classically, you start with a market need, a product or service that can fill it, a business model that can profit from it, buttressed with good people and abundant funding.

As an exercise, though, what if you built the structure ahead of the product?  Put together a process for transforming undeveloped ideas into refined ones, add people with good generic skills in a few key project and financial management roles.  Qualify a good list of supporting service providers, from legal and regulatory through laboratory and fabrication.  Then find something to apply it to.

In short, build the vehicle before loading the cargo.

It’s a lot like building a house on spec: take undeveloped land, manage a project to put a house on it, sell it onward.

But there’s a danger to that analogy too: market conditions.  What if the process succeeds, but the buyers aren’t there?

I suppose, having built the house, we could live in it, rather than let it lie fallow or sell it at a loss. 

Similarly, having  created a prototype product, validated it, and run it through regulatory approval so that it’s ready for market, we could simply start selling it.

Take that a step farther: should we be making revenue shipments?

And this is the core of the thinking – maybe the whole idea of building a great product, then giving it to someone else, is flawed.

It’s all about what the business should be when it grows up:

A. A vehicle, creating and selling a portfolio of assets needed to make the product: it’s formula, test results, CE Mark, and patents.  License revenues are reinvested into building the next spin-out prototype.

B. A company, manufacturing a product to sell through distributors.  Profits are reinvested in market development and product improvement.

Either way, it’s a sustainable business, one run as a process irrespective of the product, the other focused on product without leveraging the process.

I’ve been thinking about how the business would develop under each scenario.

We’d need more people and plant for Plan B, producing higher revenues but lower percentage profits. 

We’d be more flexible and profitable under Plan A, but its risky to depend on repeated success of early stage projects. 

Plan B creates jobs and tangible assets to float on a stock exchange; Plan A is a partnership that deals in intellectual property.

I haven’t figured this out yet.  We definitely validated the model, creating a successful vehicle.  The question now is whether to drive it or trade it in.

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