Mar

11

The Value of an Idea

March 11, 2008 |

Light BulbVery often, especially during social activities, people start blurting ideas to me on how I can improve my business or new ventures I can undertake to make more money. The idea is usually summarized in one or two sentences, and the plan doesn’t go beyond what a drink can last. It irritates me when the person half jokingly says: “I deserve a commission if you strike rich with that idea“. I also see this very often in talent boards (like the computer gigs on craigslist). Someone saying they have a few great ideas and they want a partner to develop them — just for equity.

I have been a sinner also. I have gone in front of two venture capitalists with just a stack of slides and no prototype or potential clients to back my idea. I have been shown the door politely - which is better than what other people can say.

It seems people put a lot of value on an idea, just for being an idea. It brings me to question how much value does an idea really has?

I think we better define the level of maturity of the idea:

  • Napkin - In my opinion, a simple idea of two or three sentences has negligible value.
  • Business Plan - An idea with a well drafted business plan has some value to it, but usually not exceeding the time and effort put into drafting the plan.
  • Prototype - Someone puts the time an effort to create a prototype that can be demonstrated. It could be a product, a software to test the concept, or anything else that can show value on itself.
  • First Client - Someone actually pays for it and validates that it is worth anything. This is the first time in the whole process where it is proven the idea was worth more than the paper on which it was written - at least to one person.
  • Proven Business Model - You can repeat the sale with increased margin (or decreased loss).
  • Revenue - If the company has increasing revenue, it may be getting ready for an IPO. Just keep doing what you are doing and bring it into the black. Someone will pay millions at the IPO for the idea. Or you will earn millions yourself by keeping it private.
  • Earnings - Finally into the black! There is no point in questioning the value of the idea - it is producing loads of money already.

Somewhere between Prototype and First Client is where I think an idea has some value. Before that, it is just a nice idea to talk about and to ponder about. Before the Prototype I do not think too many people would be willing to invest on the idea. People did, during the .com era - and you know already what happened.

Ideas are worthless. Ideas with a Prototype are priceless.


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