The costs of creating something. Engineers are generally the ones responsible for creating a product. Depending on what the product is, you could have industrial designers, mechanical engineers, electrical engineers, and software engineers. There are other specialties as well, but most products require these as the core.

Engineers are generally well educated and skilled individuals. People with this kind of expertise usually earn an excellent income. So there is a large human cost to product development. And it takes a lot of time, especially if you want it done right.

The costs of making it. Now that the design engineers have created and developed the product, it needs to be made, and you want it made in mass. While the engineers above could certainly make your product, it would not be cost effective.  Therefore, we need more engineers and resources to reduce the product cost by engineering the complexity out of the manufacturing process.  Only then can lesser skilled labor and machines manufacture your product and reduce overall costs. This can range from robot automation, to creating tools to stamp steel or injection molding plastic, to documentation for an assembly work station. This is all before you actually make the first production part. This is one of the single most misunderstood costs in product development. Then you have to actually produce it, which then requires additional raw materials (read costs) for your tools and your assemblers to actually produce the parts and products you need.

The cost of selling it. You’ve invested money into the engineering and the production. Now I am sure you did not want to fill your garage with copies of your product. You want to sell it. While there are many ways to sell your product, almost none are free. Whether it is traditional advertising, a pay per click campaign, or a crowdfunding platform, they all cost money. It will also take a lot of your time, or at least a lot of someone’s time. Factor that in.

The hidden costs. Ah, the unknown unknowns. This is why you go to experts. If you are starting a company, you may have regulations that you need to adhere to. For any electrical product you develop, you need to consider the FCC regulations. If you plan to sell into a big box store, you may need to adhere to a UL specification. Do you want to sell into Europe? You need CE specification. Does your product have Bluetooth? You’ll need to join their consortium. There are all sorts of hidden costs you may need to consider when selling and marketing your product. Some are governmentally mandated; some are industry specific. Research your industry and consult with experts to learn what these hidden costs are so you can plan for them.

The single biggest problem startups and inventors have is not understanding these costs. It is very common to look at a product on the market that costs $10 and expect that it can be designed and made for $1000. A single, simple plastic part can have a tooling cost of $5000 or more, and that is before the engineering or selling part. A good example is a home coffee maker you can buy for $100 (a nice one). It may have cost the company upwards of $500,000 to get the first one to the store shelves. They only make their money back because they are going sell 100,000 of them. You can see quickly here how volume plays a major role in what a product costs. Investigate and understand the costs of product development, then proceed accordingly.

Please check out my other blog posts Engineering Design Based on Volume and The Missing Link Between Prototype and Production for more information.

Here are some Do’s:

1. Do get yourself a clicker and use the space (Time allocated).  Engage with your audience through motion, eye contact and body language. The best presentations are conducted by passionate, animated entrepreneurs who do not hide behind the podium. While presenting don’t forget to target your key audience. These are the people who likely have investment funds.
2. Do provide factual and validated information.  If you are ever caught lying, or perceived as deceitful, you’re dead.  Period.
3. Do rehearse.  Practice your pitch, and get the timing down.  Every group will have a different format.  Sometimes you’ll have 15 minutes to pitch and sometimes you’ll have less.  Sometimes there will be lots of questions with little time to respond.  Other times there will be few questions and dead air.  Tailor your pitch to each time frame and practice.  If you are new, put the important stuff up front.  If you are a pro, you will have your pitch timing down and you won’t run out of time in any situation.  Be a pro.
4. Do tell us ‘Why You’?  Ideas are cheap, execution is everything.  Why are you going to be successful with this idea?  Is your team awesome?  Say so. 

Here are some Don’ts:

1. Don’t throw out large numbers.  Don’t use the size of the market to try to reflect the size of what you think your business will be.  Any major market is in the billions and trying to relate your company revenue to that is just ridiculous at this point when you barely have a validated product.  Don’t suggest that you can even capture 1% of it, that is an unsubstantiated number (since unvalidated isn’t a proper word).
2. Don’t use baseless information.  This is tough, but try to validate information in any way possible.  What have other companies done in the past?  How long did it take them to break into the market?  What market share does the leader have? Have you ever spoken with a customer to see what they think?
3. Don’t create crazy projections.  Be realistic. If you think you can turn your startup into a $100M venture in a niche industry in 5 years, you clearly don’t have any idea what you are talking about.  Refer to number #2.  What have others done?
4. Don’t be sloppy.  Nothing makes you look worse than showing up in jeans and a t-shirt (be appropriate for the venue) or have a PowerPoint deck with bad graphics, and a poor layout.  Do your research and make sure you put your best foot forward.

Most of all though, have fun.  When you get to the point where this starts to get serious and you are raising money, you may give this pitch 1000 times (a number thrown out recently by a very successful entrepreneur) to get what you ultimately want.  You are going to get tired, but you need to keep it real, energetic, and have fun with it.  Good luck out there! 

It may come as a surprise, but you can pay a company or a person for engineering design work, and not own the design that you paid for. It has happened to several of my clients working with other vendors in the past, and it happened just recently and I was compelled to bring this to light.

I refer you to the Copyright Law of 1976. It’s some nice light reading for a Sunday afternoon; it’s rough.  Here is the gist, if you create something, it’s yours. Yes it gets more complicated that than that, but in the case of engineers and other people who are typically in the business of creating, that’s the way it works. So you walk into Joe Engineering, Inc. (no offence, Joe) and pay them to create your new invention for you, they own the design and have every right to protect it. You could still very well have a patent on it, but without any additional contractual terms, they own it.

Now obviously in whatever you signed with Joe, you should have been assigned at least some rights to the work you are paying them to create, but that’s where the devil is in the details. And as I lay out these examples, one isn’t better than the other, they are just different and it depends on the company’s monetization model.

Work for Hire. This is an actual exception to the copyright law above. As I stated above, if you create something, you own it. Well we are all pretty comfortable and understand that if you are an employee of a company, the work you do is owned by the company. This is work for hire. However it gets messier if you work with an independent contractor, company, or freelancer. The entity that created the work for you owns the work, unless rights have been explicitly granted to the entity doing the hiring.

So you walk into Joe Engineering, Inc., sign the agreement, they do the work, you pay them, now what? If the agreement states that the work was a ‘work for hire’ or that you are granted full rights to the design, then you can do whatever you want with the work. If however if a ‘work for hire’ was not agreed to ahead of time, they could very well present you with a set of drawings and say thank you very much. Heck, they may not owe you anything, it just depends on your agreement. Typically they would just offer you the output documents (files to produce the product, but not change). Which brings me to the key point of this paper, read and understand your contracts.

This isn’t about the companies being mean, it’s just the way they chose to do business. What typically happens, is if a contracting company sells and assigns the entire rights of the design to the client, they have to charge more. They are selling their work at full price. On the other hand, if you have a company which tightly controls their intellectual property and maintains ownership of their designs, they generally charge less as they intend to monetize their costs other ways (manufacturing, change orders,etc.).

The typical case when a client finds out about the details of their agreement is when the client is no longer satisfied with the work of the engineer and wishes to split their paths. The client explains that they need all of their design files. These are the files used to create the design. They could be source code, solid models, schematics, etc. And you want the files used in the native software so they are easily editable so you can have someone else work on them. And the engineering company tells you no, you don’t own those files. You don’t have a lot of options here. You are either tied to that engineer on this project or you can pay another engineer to re-create the design for what might be a simple change at a significant cost.

As I said above, read and understand your contracts. You may get three bids from engineers on your development project and one is just so much lower, this may be a reason why. Sure, as an entrepreneur and/or startup company money is tight, but be careful of the long term implications.

Disclaimer. I’m not a lawyer. Seek good legal advice. I own an engineering company and have seen these issues played out numerous times when new clients want to use us instead of their other engineer. 

IP Strategy

Intellectual property (IP) is a big buzz word these days.  It’s important stuff.  If you can convince the US government (or other government) that you have an original idea, they will help you protect and give you exclusivity of it for a period of time, generally 20 years.  That sounds great, doesn’t it?  You can also file a provisional patent that is kind of places a foot in the door which discloses that you are working on an idea, but you aren’t ready to file a patent yet.  If you file a patent based on your provisional, you’ll get an earlier file date. 

Ultimately what you want is a Utility Patent.  You want to patent the actual utility of what you’ve created.  Those are the good ones.  There are other types like Design Patents, but they are more easily circumvented.

Above while I was talking about the government helping you protect your idea, they will only do so much.  The patent office does try, and they do a decent job, of making sure the patent they give you is unique, however they are not the only opinion that matters.  In the case where two issued patents have overlap, people can go head to head for years dumping tons of money into lawyers trying to get injunctions or other compensation in place.  Alternatively, you may have protected IP and someone else is selling a product which infringes on your patent.  It will cost a good bit of money to make them stop. The old line is that a patent is only as good as your pockets are deep.

So why patent at all?  It’s a reasonable question.  In general, patent what you can with the finances you have, but don’t go overboard.  Or, you can always take advantage of some other techniques like “first mover advantage” or “first to market”.  Coke doesn’t have a patent on the drink itself, but people can’t copy the true ingredients.  Coke has a trade secret on their recipe and they have proven that they go through extraordinary efforts to protect it.  The proof of how hard they protect it, and it actually being unique, provides them protection.

Footnote: I’m not a big fan of patents.  Not because I don’t think a patent is cool, but that they get way over used and big business has ruined it for the common inventor.  I do think they are very good for impressing your mother, and who doesn’t want to do that.

General Protection Mechanisms

So you are going to need to talk to someone about your ideas, as no one can do it themselves and you have to build a team.  So the first step is to have a Non-Disclosure Agreement (NDA).  This is a basic agreement between you and to whom you are talking to that they will not disclose your discussions and they will not benefit from them (unless you end up hiring them in some way).  These are basic agreements.  You can download them for free/almost free.  They are a good first step.  If nothing else, it sets a clear expectation that you expect your conversations to be between you and the other party.  If you don’t trust the other person, the NDA probably won’t mean much.  Also, many people won’t sign them.  Investors typically won’t as it exposes them to risk, as they tend to see a lot of deals and ideas.  They may already know 3 people working in that space.  The suggestion here is start out slow, and make sure they have a legitimate interest.  As the relationship grows, they may sign an NDA and get more involved with your venture.  On a side note, most professionals only have their integrity and reputation.  We know not to talk about other people’s ideas or to try to leverage information given in confidence.

Keep your mouth shut.  Not everyone at the bar on a Saturday night needs to know about your whiz bang idea.  Be careful about who you speak to about your idea.  Think of it as a need to know kind of thing.

Also, as you getting started with your team, you may be thinking, “We’ll figure out the money later” type of thoughts.  No, do it now, while there is nothing to argue about.  Money makes people weird.  At the very least create a rough operating agreement that you sign with your ‘friends’.  Talk about the ownership distribution, who does what, and how a person can leave or come in.  Just get some basics out of the way.  If the money starts rolling in, the last thing you want to do is start fighting with your co-founders about who owns and does what.  It will be over before it begins.

Also, keeping ownership straight, everyone should read up on the Copyright Law of 1976.  It talks about who owns things when you hire a contractor if not otherwise agreed to.  Make sure you understand the agreements you sign with contractors, especially dealing with ownership and rights. Yes, it is possible for you to pay for something and not own it or full rights to it.  There are all sorts of variations here where a contractor may become part owner (sweat equity) or a manufacturer may partner with you.  The key here is to make sure you understand the agreements.

Read the next installment.