Section 7 Investment cost

January 30th, 2013 Leave a comment Go to comments
WINNERS = Products which require very little capital to get to market, with a good chance of recapturing the investment quickly.

I consider a product to be successful only when it ends up netting more money for the product developer and investors than they would have made if they had left their money in a certificate of deposit in the bank or similar investment.

By netting I mean the amount of money in your hand after all of the expenses of the product’s development, manufacturing, marketing and sales have been paid back in full.  In order to be considered a success, the product, after paying all expenses must return a reasonable (or better) reward for efforts and risks undertaken.


Normally expenses include:

  1. Prototype development…labor and materials
  2. Patents, trademarks, copyrights, licenses, Incorporation fees
  3. Facility and storage rental, pilot plant costs
  4. Market research & regulatory research
  5. Testing and or certifications
  6. Production/fabrication drawings
  7. Equipment, tooling, fixtures
  8. Labor (direct and indirect), medical benefits, profit sharing plans, etc
  9. Materials, & packaging for production runs
  10. Expenses for setting up Reps & distribution channels, postage, telephone etc.
  11. Advertising, promotion, “slotting allowances”, sales literature, brochures, trade shows
  12. Displays or racks for point-of-purchase
  13. Interest paid to investors
  14. Insurance costs, liability, vehicle, workman’s comp, performance bonds
  15. Initial inventory & stock
  16. Freight and shipping costs
  17. Vehicle & fleet expenses
  18. Office supplies, invoices, letterhead, labels, envelopes, business cards, etc.
  19. Accounting, bookkeeping, and legal expenses
  20. Taxes

Since every new product is an “unknown” to some degree, the evaluator must estimate these costs in order to assess the potential profitability.

Naturally the investment size will vary greatly depending on whether a new company will be started, to produce the product, or whether the capacity of an existing facility will be utilized, or whether the new product developer will use contract manufacturers.

There are many creative ways to keep initial investment costs down, and the evaluator or new product developer should explore every angle.  I have negotiated with suppliers to finance the entire first production run and tooling expenses in return for a sole-supplier agreement.  I have negotiated a similar deal where I had several suppliers, but I gave them each long term manufacturing contracts in return for fronting the tooling and first production runs.  I have had suppliers pay for all of the tooling for a project in return for ten cents more per-part-ordered until the tooling cost was paid off, with no interest.  I have negotiated with suppliers to make additional inventory for me, and store it at their facility, and let me pay for the additional inventory as I used it, so I did not have to come up with all of the cash at one time.  Negotiations such as these are as valuable as getting cash in hand from an investor, and sometimes MORE valuable if you can cut a deal with NO interest.

By far the biggest pitfall is under-estimating the total capital requirements of the project.

The wise evaluator checks all the figures presented by the new product developer, to be sure the developer is living in the real world instead of “fantasy land”.

My advice is to add 20% to even the most conservative real world numbers to cover unexpected set backs.

The wise investor never invests a lot of money in a new product or technology before being reasonably sure that the “perceived value” of the product, in the eyes of the buyer, will cover or exceed the cost-of-goods-sold, cost of rep and sales commissions, and profit margins for all parties involved.  The wise investor never invests in any new product or technology without searching applicable patents, trademarks etc. to be sure they will not be infringing on anyone else, before funding the project.

If you are a new product developer, you must remember that your time is a major investment that must be considered just as carefully as you would consider investing dollars.  As the old and true saying goes, TIME IS MONEY.  The enthusiastic entrepreneur or inventor who blithely spends unending hours of thought, toil, etc (uncounted) to reap a meager harvest might (if he could count better) flip hamburgers at the local burger stand and come out ahead because he’s really laboring for next to nothing, nothing or worst of all, is actually losing money.   Finding out such facts is just one of the rewards of evaluation before the game is over.

NOTE:   If you are a product developer and you are looking for investors, before approaching any lenders, venture groups etc., put down in writing the following information:

  • What you need the money for  (itemized list. Get 3 firm quotes for each item)
  • How much you need
  • When you will need it – (Develop a monthly and yearly cash influx schedule)
  • When you intend to pay it back  (with dates)
  • How you will pay it back (out of what funds)
  • What you are willing to give up in return for the money. (equity, percent of gross profit, percent of net profit or interest rate, etc.)
  • Your business plan, cash flow projections, proforma, balance sheet etc.


A good source of information on how to prepare a proper business plan is the free guidebook prepared by DELOITTE TOUCHE entitled “Raising Venture Capital, an Entrepreneurs Guidebook”.   Deloitte Touche, (formerly Deloitte, Haskins, and Sells) is an international accounting firm with over 425 offices in 70 countries.  You may obtain one of these free guidebooks by calling any of their offices in any large city, or by writing to:

Deloitte Touche

555 Mission Street, Suite 1400

San Francisco, CA 94105

Phone  (415) 783-4000

As soon as your business plan is complete, you can begin beating the bushes for possible lenders and investors.  I suggest you contact:

The National Venture Capital Association

1655 North Fort Myer Drive, Suite 850

Arlington, Virginia   22209

(703) 524-2549                  Ask to purchase a membership directory.

If the product is related to recycling or energy savings, try contacting “The Innovative Concepts Program” which provides “seed money” to innovators who are finding new ways to save energy and increase industrial productivity.  The ICP also provides non-financial support by helping innovators publicize their concepts and by introducing them to potential sponsors.  You may reach the ICP at:

Department of Energy

Innovative Concepts Program at

There are other innovative concept grants, venture groups,  non profits etc.,that may be able to assist you

here are a few:

I am not specifically recommending any , just pointing you in a few directions.

One way to find the latest information on the programs is simply to go to the internet, go to and type your areas of interest.

I also use a secure search engine called which does not allow certain sites to take my information. This is accomplished by doing a “ secure search”  You can tell when a website is allowing a secure search because the prefix will be “https/” instead of http/.  If you look at the links above you will see examples.

Another great source of revenue for new product developers is the private investor.  These people are usually businesspersons who have made money in their own business and are willing to gamble some money on the chance that a product will be a success.  The best way to reach these individuals is by placing an inexpensive ad in local papers, in the classified section, under the headings “investors wanted”, “business opportunities”, “investment opportunities” etc.. Your ad should be simple and to the point.  Here is an example of an ad that worked well:



 Protectable finished product to secure

untouched segment of an established market.

 Jim Riordan   530-676-4729


Note: Some states have “Blue Sky” laws which are enforced by, among others, the securities and exchange commission, see and these laws make it illegal to offer investors a percentage of profit in return for investment funds. You may be able to offer them a percentage of ownership of your patent, which can work out to be the same net result.  Be sure to ask your attorney how to structure your offer in the states in which you will advertise.



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