The classic model is for an
to have an idea (or a novel product concept or a new technology) and then to "build
a company around it."
Most ventures that set out to write a
business plan assume, incorrectly, that this is either (A) the
approach or (B) always the best
approach to commercialization.
When the creation of a complete
operating company is the chosen commercialization path, the entrepreneur quickly
finds himself or herself dealing with issues that may seem pretty far removed
original venture concept. Packaging design, "slotting fees" (if you intend
to sell through retail channels, this is a term you will learn), warehousing and
physical distribution ("How many trucks will we need?") and other issues can pop
up in a dizzying array. This may not seem like fun.
And even with "all the money in the
world" (the "I-just-won-the-lottery" approach to financing your venture), it can
still take a long, long time to build a complete self-standing company. And if
haven’t just won the lottery,
the process of finding funding can delay your launch for much, much longer
than most first-time
Financing: Key Documents
As a result of all this hard reality,
it may be useful to look at your options.
Consider the alternatives first.
out" your new technology or product concept may be an option for certain
entrepreneurs. There are special considerations involved here. These are best
addressed in a separate article. The first step is to have an early conversation
The four alternatives to creating a
stand-alone company are shown below. They share certain characteristics in
common (for example, the first three all involve your venture actually making
But they also reflect certain
differences in terms of the total amount of money required, sales lead-time and
sales risk, and the time required before reaching "cash-flow break-even" (i.e.,
the point when the venture is depositing more money into its checking account
than it is paying out for currently due bills).
start, it may be helpful to think through the commercialization strategy
(and lifestyle) that is right for your situation.
Other ways to commercialize
"Private label" deal. The venture manufactures its
products labeled for a large company which will then sell them through its own
national merchandising and distribution network. Sears uses this model.
The O.E.M. relationship. "O.E.M." means "original
equipment manufacturer." As an O.E.M., the venture provides components or
sub-assemblies for integration by a larger company into its own products.
Example: Chrysler does not make its own instrument panel switches. A supplier
does this under an O.E.M. contract (probably, in fact, multiple
"Corporate Partnering." A
start-up and a larger company enter into a collaborative product development
agreement often involving some payment of money "up front" to help underwrite
the younger company’s efforts. In return, the larger company gets the right,
often exclusively for a period of time, to use the results in its own business.
A straight "consulting" engagement.
A large company says to the entrepreneur "Help us do what you know how to do and
we’ll pay you for your expertise."