Ask Christa! Business Basics Series (2/6) - What's More Important, Funding or Product? (S3E27)

Introduction and Listener Question

Hi everyone and welcome to Ask Christa! the place where you can ask questions about how to work through business challenges and workplace issues. I'm Christa Dhimo and today’s listener question is a chicken or the egg question. Here it is, 

“I have a proof of principle for a product that I think might take off. I’ve done research on whether it’s feasible, and it is. There are only two other products out there that does what my design intends to do, and both are older designs. My design is unique and leverages modern technology based on more recent research than what’s already available in the market.

“Friends of mine are saying I should look for funding so I can develop a prototype, further prove the design, then get MORE funding so I can start selling it, but I’m not sure. 

“Your show popped up in my YouTube feed, and it’s really timely, because I don’t know whether I should self-invest to create the prototype or raise some money to build a prototype.

“My question is what should come first? The product or the money?”

This is a fun question—and of course I’m thrilled to hear that my show popped into a listener’s feed and THAT’s what prompted submitting a question. I encourage everyone to do this! You’ll even receive a note when your question’s episode will air … although… obviously I’d love it if you listened to you know… all of my episodes….”

OK—fun fun question!!! Product or the money? Chicken or the egg? 

Let’s start with where you have the most control—usually THE PRODUCT ….

Product First or Funding First?

There are a few ways to think about products you make and sell—especially if YOU’RE the one who designed it. 

When you’re starting out, you typically start with your proof of principle, which is what our listener is describing. At that point, you’re answering questions like, can this be done? Is it possible? How do we know it’s possible? What are some of the obstacles? 

The listener has gone even further than that and looked at some aspects of the market, too. When we say “market” it’s about how and where and to who (or… whom?) your product will be sold: who buys it, where and how they will buy it, who your competitors are trying to take your customers OR that YOU are trying to take customers AWAY from, then other product-related questions like how long can a customer use it? what are reasonable quality expectations?

What we’ve heard is that the listener has done a lot of that work upfront, and that’s great.

Now for the tough part: the advice. From everyone! Even me, although in fairness, this IS submitted a question, so… 

In a lot of ways, our listener’s friends are right: you CAN seek funding to develop a prototype to further prove the design, thus setting off what might be ongoing funding. Seed funding is often at this stage—just enough to get things going…. Then you go through a series of raises—truly a SERIES of raises: Series A, Series B, Series C… this is all in the world of private funding.

But… there are other options, and there are A LOT of things we can do before we get funded, especially when you have a product YOU have designed that you believe is better than what already exists in the market.

The Value of Intellectual Property

Now, I do not know this listener, and I do not know what this listener has developed, but MY first inclination based on what the listener describes is hold on both next steps: pause deciding about funding or prototype, and instead… think… protection!

This listener has already put an investment into this new product by way of time and energy. They have established—at least in the question—that they likely have a product that meets an unmet need, either because current products are aging or not as technologically modern, or because this new product is simply just… better. Whatever makes it better, if the listener has stumbled onto something that could become SOMETHING, your early early early stage strategy isn’t just about product and funding… it’s about VALUE, and one of the ways you increase value for any product or business is you de-risk the product or business. 

By reducing the risk, you automatically increase the value of your business, or in this case the product, because by definition, de-risking your business enables you and your potential investors to predict the possibilities with fewer hindrances and potential obstacles.. because, you’ve figured out some of them and you can either avoid them, or manage them if they arise.

So what do I mean about protection? I mean, your intellectual property—how your product will receive some kind of protections that at least allows you to make claim that it’s yours. When you do that, you will have what we like to call, “Freedom to Operate.”

Why Freedom to Operate is Actually FREEDOM to Operate

Freedom to operate means you’ve performed some level of diligence and rigor to determine if anyone can swoop in and claim PARTS OF or ALL of your invention, and if the outcome of that diligence is Nope—no one can make a claim, it is yours, ALL yours—THAT is freedom to operate. 

It means you can move ahead and develop your product without anyone making a claim, and if you decide to go forward to protect your product—your invention—and if someone ELSE wants to use anything within the scope of your intellectual property, they have to talk to you about it first because… they WON’T have freedom to operate. They will have restrictions on what they can do with their product because they have to get you involved for permission to use a portion of your invention for their product.

Freedom to operate means exactly as it’s phrased, and it is a big deal when you are building a new product. So, if you have designed or built a product no one else has built and you see a need for it in the market, before you think about your next step with building a prototype on your own or finding investors to fund the prototype, just sit and talk with a good IP Lawyer. 

Find those who work with small businesses and startups—they tend to be very strategic, and they also price their services for those just getting started. I’ll put some additional information in the show notes about intellectual property considerations.

OK, THEN Do I Get Funding?

Once you have an IP strategy as part of your bigger product strategy, you’ll have clearer paths in front of you regarding the prototype build or funding.

A quick note on IP: if your product is too similar to, or is at risk of “infringing” on another product that is already protected, your IP lawyer will help you determine how to move forward. Inventing part of or someone else’s invention happens a lot, though, so don’t be discouraged. You just need to have good people around you to help you with options. 

Once you understand your options for product protections, it’s really about what you need by way of capabilities or HOW you will build the prototype. 

If it’s capitally intensive, then of course—go for early stage funding, but go in knowing it’s about a proof of concept—a prototype. It will need to be based on the viability and feasibility of your research and your designs, and you may have tranches (or funding payments provided to you) as you meet different milestones for building the prototype depending on how complex the design is. 

Be sure to shop your idea to well-matched investors AND seek out the funding model that makes the most sense for you and your product. The next episode of this Business Basics series will review investment models. We won’t cover partnership models that co-invest with you, but that IS an option when developing a product. Maybe someone will ask about that in the future.

But if building a prototype is something you can responsibly finance, then there’s value in self-funding the prototype—which, again, is a Proof of Concept: something that offers some level of functionality that makes the product prove its concept—not just whether it’s feasible, as the proof of principle shows, but whether it’s practical, usable, and can do at minimum what it’s supposed to do.

Plus, the more you own tangible evidence that an asset can work AND there’s a market for it AND you have freedom to operate, the stronger your position when it comes to investment because… by way of your IP and your prototype, you have already begun to build value that de-risks your product.

Speaking of prototypes, let’s talk a bit about that so you also know some options and what to think about to support your product. Here’s where we get deeper into the listener question.

Do You Need a Prototype to Get Funding?

You don’t always need a prototype to gain funding—and in fact, this is where seed funding, that’s SEED as in to plant a seed and watch it grow—often provides capital to, typically, prove the concept: is there EVIDENCE that the product will WORK? (whereas the proof of principle focuses more on the research and design and feasibility, the proof of concept starts demonstrating tangible outcomes that yes, it in fact can work)

Seed funding might come from a small venture capital fund or a small business bank loan or angel investors (generally low money to get things going), or even crowdsourcing. Some investors require a stake in your company proportional to their investment, which is how they support the build and growth of your business and product. Others are willing to offer funds to see you get things moving, such as a friends and family round or certain low-risk crowdsourcing options.

But my advice to all inventors, innovators, and founders, is to protect your product and then build as much VALUE in your product and in your business as you reasonably and responsibly can BEFORE you bring investors on board, because the name of the game with investors—any investors—is VALUE… and specifically, understanding the future value—the POTENTIAL of the product.

For example, if you are building something now that you will launch in three years, and they invest in the development of your product now in support of your launch in three years, your investors will expect THAT future developed product launched three years from now to be worth more (as a fully developed product) than the investment they made today to get it developed.

Your proof of principle, what our listener has RIGHT NOW, means something because you’re able to show the VALUE of your product as something that is FEASIBLE. 

But if you have a prototype that demonstrates the practical application AND the potential of your product in a market willing to buy it and use it, that puts you in a position of strength when you’re asking people to buy into, or invest in, the future of your product.

Because when it comes to investors, they are rightfully looking at the future VALUE of your product.

Final Thoughts: Value Wins the Game

Here are my final thoughts: when it comes down to it, breaking into a new market, establishing a new business, creating and establishing a new product—it’s about VALUE. And when I say VALUE, I’m not talking about quality as value for your product. 

I’m talking about everything wrapped up together as the VALUE of your idea—on not just the value of today’s standards, but the perceived value in the future when your product is launched, and then how it will grow and continue to develop within your market and… increase its VALUE such that it’s considered at the top of its market.

When you can show someone the VALUE of your idea: that it CAN be done, that the design doesn’t belong to someone else yet—it’s really YOURS, that it will work the way it’s designed… THAT’S the value I’m talking about.

After that, it’s about putting into a business model where it can be marketed, manufactured, sold, used with a high rate of joy from customers that give 5-star reviews, and re-purchased by existing customers while new customers can’t wait to use it.

By the way… what I just described… that’s the simple business process we talked about in Episode 25—check it out…

So the way to answer THIS chicken or the egg question, build product or seek funding, is: what will create the MOST value based on where you are today. Funding to get started on a prototype? Or self-funding the prototype and move further along in development BEFORE… you get… funding.

After you determine IP protection… of course.

Additional Resources 

For your resources, I’ve included The World Intellectual Property Organization, which has a lot of incredible resources. If you’re here in the US and you have a patent, you may be surprised to know that while there are international rules to respect and adhere to IP protections, it’s not an easy thing to enforce. If you’re interested in IP overall, this site is a good one for you.

In addition, I’ve listed their page for the US, their page for patents, and their page explaining Intellectual Property. It’s very readable and offers just enough information to become familiar.

I’ve also included a two-minute video from Federal Labs called Understanding Intellectual Property from 2019. I cannot stress enough that setting up product protection early on—and even knowing how to best protect your product, or whether part of your product infringes on someone else’s patent—saves A LOT of time. And again, it also puts you in a position of strength. If you’re serious enough to start talking to investors, then you’re serious enough to understand how to protect your product.

If you do your own research, you’ll find a lot of articles reporting ALLLL the reasons why you need a prototype before you get funded, and I’ve offered reasons supporting that also (the biggest one to me is the value you build is the value you retain), but also remember: it depends. 

You may not need a prototype.

So I’ve included a page from the US Chamber of Commerce, which is one of those sites most entrepreneurs and small business owners and inventors forget we have as a resource. The article, “When to share your invention prototype,” is written by contributing writer Jessica Elliott from March 2023. I like the article because it focuses on the purpose and value of a prototype whereas most articles written about prototypes aren’t really about prototypes. They are about funding. I think it’s better to learn about the purpose and value of prototypes, which of course, includes funding… but there’s more to think about than that.

Wrap Up & Submit Your Question!!

OK, that wraps the second episode in my series Business Basics in Season 3. You can view all of my episodes listed by category on my show’s website, AskChrista.com, that’s Christa with a C-H, and the playlists are up on my YouTube Channel, too. I appreciate your support—so please follow, like, subscribe, comment.

You can submit a question on my show’s website, too by clicking on the Submit a Question button, and sign up for my newsletter, which I release every Sunday night to set you up for the workweek. 

Thank you again for your support. And remember, if you have a business challenge or a workplace issue—Ask Christa!