How To Sell Your Company for Maximum Value – The Robin Hood for Small Businesses – John Warrillow
Posted by John Livesay in podcast | 0 comments
Episode Summary
Today’s guest is John Warrillow. He has a value builders system that creates a score on whether your company can sell and for how much. The key factors that he look for when he funds a startup is that the founder has humility, resilience and discipline. He looks to hear a story of showing those attributes. Be sure to find out how he decides what valuation things he looks for when he’s looking to decide whether he’s going to fund a startup or not. There’s wealth of information on how you need to know your numbers. Enjoy the episode.
Listen To The Episode Here
How To Sell Your Company for Maximum Value – Interview with John Warrillow
Hello. Welcome to The Successful Pitch. Today’s guest is John Warrillow, who is the author of not one, but two amazing books. It is called The Automatic Customer: Creating A Subscription Business In Any Industry. Also, Built To Sell: Creating a Business That Can Thrive Without You. He’s an Angel investor and the founder of the Value Builder System, which helps startups and anybody figure out how much their company is worth and how to increase it when they want to sell. John, welcome to the show.
Thanks for having me.
John, I always am fascinated to find out what is it that causes people to get started. Before you became an author, before you became an Angel investor, take us back to your own strategy of this is what I want to do and how did you get there.
Built To Sell: Creating a Business That Can Thrive Without You
I wrote Built To Sell after having been involved in a few startups myself and literally made most of the mistakes you can make in creating a startup. Writing the book helped me codify some of those mistakes and get them out on paper. I didn’t really have a business idea to … A lot of people have a business and they write a book to support the business. In this case, it was the opposite. I wrote a book and a business plopped out at the bottom of it where we put together a questionnaire that would allow business owners, readers to figure out how their business stacked up using the same lens we talk about in Built To Sell. In other words, how an acquirer would value and look at your business from the outside. The questionnaire was super popular. We built a business around it, we licensed it to advisors and now we’ve got something like 600 advisors around the world who use the platform. That’s a circuitous way to getting started.
Wow. Tell us about the first book that was Built To Sell, that was the first one and then out of that was the second one?
Actually, I wrote a book years ago, 2001, called Drilling for Gold, which is about how big companies can market to small companies. At the time, I was running a market research business where we had a unique niche. We worked with very large companies. American Express and Citibank, Intuit were all customers of ours. We help them reach the small business markets. I wrote a book about that topic. In that case, it was really to credentialize the company. That was a book that I wrote back in 2001. Built To Sell was written in 2011.
Got it. What is the big message in Built To Sell that you want readers to take away and why would somebody … Obviously the big lesson there?
Sell Your Company for Maximum Value: Just chasing profits is not the same thing as building a valuable company.
One big lesson is that so companies are not built to sell because they’re too deeply dependent on the owner. I think in a lot of cases, entrepreneurs build … I think we confuse profits with value. We assume what will make us more profitable will also make us more valuable. If you just look at a company like Uber as an example, a company worth tens of billions of dollars, $80 billion last time I checked, something like that, it doesn’t have any profit. Clearly, just chasing profits is not the same thing as building a valuable company. I think one of the things we tried to communicate in that book was that for your business to have value, an acquirer really has to see how it’s going to operate without you. Of course, to buy you, they’re going to get rid of you. The next question is, how things are going to run without you? That’s if you were to distill 200 pages into one thought. It’s how you’d get it structured to work without you.
[Tweet “Sell Your Company for Maximum Value: Don’t confuse profits with value.”]
It’s a great tweet right there, “Don’t confuse profits with value.” I love it. What have you found, is 90% of people who buy a company and the founder doesn’t stay? Is that right or is it even more than that? Sometimes founders do want to stay, yes?
Most buyers want the founder to stay for a period of time. Most founders hate that experience. If you talk to an entrepreneur, it was one of the worst, lowest days of life. It was grinding your way through a two year earn out where you go from being in charge of your destiny, the founder making all the decisions, getting all the accolades, to reporting to the regional director of such and such who reports to the senior director, reports to the vice president. Brutal. You go from really being the king of a small castle to being a cog in a very large wheel. It’s horrible. Nobody likes it.
Let’s talk about the next book after that. What motivated you to write it? The whole concept of automatic customer. How do you create a subscription business in any industry? That’s what’s fascinating to me because usually it’s, “I understand it for this but would I do it for XYZ?”
The Automatic Customer: Creating a Subscription Business in Any Industry
When we looked at the kind of big drivers of company value, there are eight of them we discovered. One of them is recurring revenue. It is the one where a lot of entrepreneurs fall down. Some of the other ones are things like growth potential and how customer concentration and specific forth. We were seeing a lot of businesses, in particular non tech businesses, really struggle with recurring revenue. Because everybody thinks about SaaS companies and they say, “Sure, if I had a SaaS company, a software as a service business or a cloud based application, sure I can understand how it create recurring revenue. What if I own a distribution business or retail company or a manufacturing company? How on earth am I supposed to create recurring revenue?”
That’s really what the book’s about. It’s about we discovered nine different subscription models. The premise of the book is no matter what industry you’re in, you can create some recurring revenue, applying one of these subscription models to your business. The postscript is, that’s going to make your business more valuable. It’s also going to make it a lot more predictable. That’s really the reason we wrote the book.
Let’s have you put your Angel investor hat on for a second. What do you look for when you hear a pitch in terms of do they have a plan for recurring revenue?
I look for the LTV to CAC ratio, which is a very technical term. It stands for lifetime value to customer acquisition cost. What I’m looking for as a potential investor is at least a three to one LTV to CAC ratio. Meaning, for simplistic terms, imagine you have a subscription where over the life of the subscriber, she’s going to pay you $100 a month over twelve months. Your lifetime value of a subscriber, if that would be the average, would be $1200 or $100 times twelve. Your allowable cost to acquire her as a subscriber could not exceed $400 all up, including all your sales and marketing expenses, including your salaries, your software, your marketing if you’re buying lists and so forth. What I’m trying to look for are subscription models where the LTV to CAC ratio is better than three to one. Lots of companies fail to reach that threshold but the ones who are at least three to one have the potential to scale.
[Tweet “Sell Your Company for Maximum Value: What’s the lifetime value of your customer?”]
Two incredible takeaways right there. Number one, you have to understand the concept. If you get asked that question, you’re not deer in headlights. Some people think, “Oh, if I just know the cost to acquire a customer, I’m good.” It seems like it’s a little more sophisticated than that. Number two, I love how you broke it down to the three to one ratio. The cost to acquire is $400 and the lifetime value is $1200, there’s a three to one ratio. Did I get that right?
That’s right. Yet, if your cost to acquire is $700 and your lifetime value is $1200, clearly you’re underwater and you can’t scale.
Exactly. What I really love about what you said John is don’t just count how much money you spent on Facebook for example, to get that customer. You have to also account for all the other things that you suggested, overhead, salaries, etc. that I don’t think a lot of people realize goes into that cost to acquire a customer.
Just to be clear, the cost to acquire a customer would include all of your sales and marketing expenses. Not all of your overhead, not your office space, etc. but it would be all of your overhead associated directly with sales and marketing. If you had a VP sales for example, his or her salary would be part of your cost to acquire customers. If you have a subscription to HubSpot, it would be part of your cost. Your office manager would not be included in that calculation.
Got it. Thank you for that distinction. Do you see that that’s a mistake that a lot of people make, that they don’t include those sales, salaries and they just include the cost of the marketing?
Probably the classic mistake would be to not include the time of the owner. Most owners are the best pitch people for their company. If you’re paying yourself, whatever, $100,000 a year and 90% of your time is dedicated to sales and marketing, then 90 grand should be incorporated into the annual cost associated with marketing attributed directly to your salary. That’s probably the most common thing that’s left out of the calculation.
[Tweet “Sell Your Company for Maximum Value: Owners are the best pitch people for their company”]
Thank you for that deep dive on both of those amazing books. Let’s talk about what made you start the Value Builder System and what problem are you solving and for who?
Three out of four small companies in the United States, and the number is the same in virtually every western economy, are planned exit their business in the next ten years. When they go to the negotiation table to do that, on the other side of the negotiation table, they will be faced with a mercenary business buyer, a killer, a shark. Somebody who’s trained to buy that business for as little cash upfront as possible. There are schools that teaches, there are techniques and sleazy, disgusting ways that they go out and buy businesses for less than they’re worth. For a lot of business owners, they get completely hosed in that situation because for most of us, we don’t have the opportunity to think about selling all day long. We’re making widgets, we’re hiring employees, we’re doing all the things that entrepreneurs do. It really only is one or two times where we actually get the opportunity to go through the sale of a business process.
Sell Your Company for Maximum Value: We want to defend the rights of the entrepreneur from the predators of which there are many.
What we’re trying to do at the Value Builder System is really tilt the world back in favor of the entrepreneur, is give entrepreneurs the tools, the resources, the content to really get them armed to go into that negotiation from a position of strength so that they’re not taken advantage of when some corporate development person had a big company or when some private equity partner offers you some massively under-weighted earn out or some huge vendor take back with horrible terms or when some venture capitalist frankly, comes in and says, “We wanted a 2x preference on our investment.” These kinds of things happen every day. We were trying to defend internally, we don’t usually talk about it too much publicly. We think of ourselves a little bit like the Robin Hood of a business. We want to defend the rights of the entrepreneur from the predators of which there are many.
I’m going to tweet that out. “Meet the Robin hood of small business.” The Value Builder, how soon should a small startup start using this? Before they even pitch to get funding so that there’s some strategy in place for an exit strategy? What do you recommend?
[Tweet “Sell Your Company for Maximum Value: Meet the Robin hood of small business.”]
Anybody’s welcome to do it. You can just go to ValueBuilder.com and complete the questionnaire. Ideally, you’ve got some revenue. Ideally, you might have an employee or two before you do it. I can tell you that the majority of our users are business owners that have revenue between a million and $20 million and annual top line revenue between $1 and $20 million. You don’t have to have that but I can just tell you, that seems to be the sweet spot. Beyond that, you’ve typically got some sophisticated money people around the table, be it a CFO or outside investors. Below that, it’s usually the owner who again knows everything there is to know about making whatever widget they make but often doesn’t spend a lot of time thinking about what are my exit options, how do I value this, what are the ways that I can monetize this. That’s where we really play a role.
Let’s talk about cash flow, because that’s one of the things in your Value Builder System, is this valuation teeter totter. How does that work and help people improve their cash flow?
When you buy a business, if you can wear the hat of the acquirer for a moment, you’ve actually got to write two checks. Most of us, as entrepreneurs, we focus on the first check, which is the one that is written to us. The actual acquirer has to write a second check, and that is to the business that they are buying to fund its working capital. Working capital is MBA speak for, how much money does the business need in the bank the day that the new buyer takes over? To me, that’s immediate obligations.
If you have a model where you’re just sucking up a lot of cash, constant contact, had to dilute themselves a lot because they just sucked up a lot of cash, then that’s going to depress the value of your business in the eyes of a buyer because the buyer, although they write two separate checks, they’re both drawn on the same checkbook, the same account essentially. The more cash your company sucks up, you need a lot of inventory to run your business. You’ve got a really weird subscription model where you capture the lifetime value of the customer over years and get no money upfront. Those are situations where you’re underwater and then it takes a lot of time to recover the cost to acquire the customer. In those situations, your business is going to be discounted because somebody’s got to fund that working capital. In that case, the acquirer would.
Now, putting your Angel investor hat back on for a minute, what are some of the best pitches you’ve heard actually with somebody referring to the Value Builder System, ideally? I’m guessing there’s a story that somebody smart enough to have used that when they’re pitching you, yes?
Interestingly, no. Because we run the platform. Meaning, the platform is the software application, a set of tools and a set of lessons. We actually got to go to market through a network of advisors. We’re actually not directly serving the business owners that use the system, we license the platform to advisors who in turn will use the system with their clients. I can’t give you a pitch example from Value Builder. We’ve got lots of examples of companies that have used the system successfully. One comes to mind is a woman who ran a home cleaning service. She was in the business of basically holding yourself out as a home cleaning service. She had a few cleaning people who went out and clean people’s homes, very very low tech, analog business. She was doing it on a break-fix business model or a transaction business model, which is running advertising, waiting for the phone to ring, somebody had a party, they need a home cleaning service and she would dispatch a team to go clean the home. Of course, it’s a very difficult business model.
Through the Value Builder System, she learned that recurring revenue is going to A, make her business more predictable, also make it a lot more valuable. She changed the business model. It’s a very simplistic example but she just basically created subscriptions for home cleaning. Now, in her staff, she will sign up on a subscription, they then clean the home in the same week, in the same time every week. She’s built a recurring model that comes scales beyond her initial team, much more predictable, she knows how many cleaner she needs.
Sell Your Company for Maximum Value: They went from having a transactional business model, which was very expensive to stimulate demand to one where the lifetime value of the customer is measured over a year.
Another example, is a guy who runs a corporate cleaning business. I don’t know why I’ve got cleaning on my mind today. Maybe I’m feeling kind of dirty. Anyways, this cleaning company based in New Jersey, they would sit around waiting for the phone to ring, buy lots of advertising to try to get you to click on their ad when you needed your rugs cleaned. What they did is instead built a VIP Gold program where twice a year, without fail, they would come in a clean the carpets. The pitch was, “Look, the health of your employees is at risk if you don’t clean your carpets at least every six months. We’re going to take care of that for you, make it very predictable. They went from having a transactional business model, which was very expensive to stimulate demand, to one where the lifetime value of the customer is measured over a year. A couple little examples.
What type of startups do you like to invest in? What are you looking for when you hear a pitch?
I’ve spent a lot of time focused on SMB, small-medium businesses. For me, that’s just the space I get and know. I’m curious when I see businesses that have that as a target market, SMB, small-medium business. It’s usually an area that’s horribly misunderstood because we think of, the United States for example, the SBA boasts that there are 30 million small businesses in the United States. Reality, 22 million of those have no employees. They are home based, often times shell companies setup by lawyers to avoid taxes. The real market is something closer to eight million. Whenever I see a pitch that shows the SMB market as 30 million and we’re going to sell XYZ widget for $5000 to 28% of the 30 million, I know we’ve got a problem because it’s just a misunderstanding of the SMB market. For me, I look for B2B companies, business to business companies that have a specialization and focusing on the SMB market. Mostly just because my former company, we did a lot of market research in that area so we kind of have a bit of a sense of what it takes to get a company like that off the ground.
Interesting. It doesn’t have to necessarily be tech related or does it?
Sell Your Company for Maximum Value: That’s okay, if you’re not a bleeding edge technology company to be targeting SMB.
No, it doesn’t have to be by all means, no. SMBs buy in large are usually not as tech savvy as their large enterprise customer. One of the beauties of targeting SMB is you don’t have to be on the bleeding edge of technology. You don’t have to have the latest, coolest wiz bang technology. Intuit is a good example of that. Intuit, $28 billion market capitalization. They make QuickBooks and you could make a very good argument that QuickBooks is perhaps, on a feature to feature basis, less easy to use than Zero. You might make the argument that that’s okay because their customers are somewhat technology laggards. They’re not going to be adopting technology the same way as a larger enterprise company. That’s okay, if you’re not a bleeding edge technology company to be targeting SMB.
John, what do you look for in a team when you’re hearing a pitch to invest in?
I’m probably not really the right guy to ask that question in the sense that I think the founder is probably 90% of the equation. I think teams come and go. I think the one person that is going to make or break the business is the founder, or founders if there are multiple founders, then by all means, I’m evaluating them.
Let’s talk about what you evaluate in a founder or founders. What’s important for you in those people?
Competitive drive. What did they do in school for sports and how competitive were they. That usually says a lot about their resilience, their desire, their ability to overcome, their ability to be disciplined. A lot of humility. I like it when people say, “I don’t know the answer to this question but here’s the three ways that we’re planning to find that out.”
[Tweet “Founders need competitive drive, discipline and resilience.”]
Nice.
It’s pretty quick. I don’t I’m alone in this. I think it’s pretty easy to sniff out vapor ware and a superficial pitch. You wouldn’t need the money if you had all the answers. I like the pitch where there’s a hypothesis but there’s still a lot of questions on the table and a lot of humility among the founders, their desire to find out the answers.
I’m fascinated. I’ve never heard anybody describe the resilience story that you could tell about being in sports and school as a way to show how you have discipline and resilience. What a clever way to bring that to life during your pitch. Are you geographically agnostic?
For the most part. Obviously, I’m based in Toronto. Toronto base is a lot easier practically. Toronto is certainly not the only town that’s got great company. No, I don’t do deals in Asia or South America. First of all, I don’t speak the language. Second of all, there’s plenty of stuff to do here in North America.
You do speak French I noticed on your profile. Let’s talk a little bit about your podcast before I let you go. What would people learn listening to Built To Sell podcast? I got the name right?
Sell Your Company for Maximum Value: Listen to Built To Sell Radio.
It’s just called Built To Sell Radio where we interview once a week an entrepreneur who has sold their company. I ask them the nitty gritty plumbing of what was the deal structure like. How did you sell it? Who did you sell it to? Who made the first move? How did you figure out what it was worth? How did you negotiate a better price? How did you play one offer over the other? All the mechanics of selling a company. We don’t talk about how do you build a company, how do you start a company, how do you grow. Lots of good resources for that. We’re really focused on how do you exit successful. I just interview a different entrepreneur every day. The current one that I just did this week, we talk to a guy who had a $5 million software company. These aren’t massive companies, these are real businesses ran by real people. It’s not Mark Zuckerberg and Elon Musk, it’s real entrepreneurs who have, in many cases, this is their lifework, this is their retirement, this is the wealth they will create in their lives. We ask them how they did it and what mistakes they’d avoid.
I love it.
They’d recommend others avoid.
Really, The Successful Pitch podcast and your podcast are the perfect bookends, the beginning, how to get your pitch going to get funded, and then you’re the great one to go to figure out how to sell what you’ve created.
I think they’re even more aligned. I don’t know if I’d characterize them as bookends as much as peas in a pod in the sense that I think for a startup, to know what your exit strategy is is important. Because as we talked offline John, for anyone investing, whether it’s an Angel investor, venture capitalist, corporate buyer, they want to know what the exit strategy is. They want to know how they’re going to get out. That’s the only reason they’re going to invest. It’s not because they have some passion for your business or because they think you’re going to change world. It’s because like, “I want to make a dollar I invest in your company worth $10 in five years’ time.” Explaining in very clear terms how you’re going to make it worth $10 and how you’re going to exit, I think it’s very important. I’ll give you a quick example.
[Tweet “Sell Your Company for Maximum Value: Buyers want to know the exit strategy.”]
Please.
I interviewed a guy who had an ice cream company. He came up with a cool new ice cream concept, low fat ice cream. He wasn’t sure how to sell it. He started to create some retail stores. He also started to forge distribution relationships with big grocery stores. He went out and over 15 or 20 year period, he built 60 different ice cream stores, retail stores. Had to dilute himself, give up equity to finance it, had to hire all these people. A complete spaghetti ball mess of nonsense to create all these retail stores. He went to sell the business after 15 or 20 year run and he found that the only thing anybody who would be a likely buyer for his business cared about was his wholesale distribution network.
Sell Your Company for Maximum Value: Know what you’re acquirer is going to value from the earliest stages of your business.
Anybody buying the business would immediately shut down the stores and focus exclusively on his relationships with Kroger and Safeway and all the big distribution companies, the big box retailers. That’s exactly what happened. He sold his business for a very low multiple because he wanted to be valued for all of his business, not only the retail distribution but also the wholesale distribution. But a buyer wasn’t willing to pay for the 60 stores because they’re going to shut them down. It’s one example. I think knowing what you’re acquirer is going to value and really being clear about that really from the earliest stages of your business I think gives you a really good place to start with your pitch.
We’ve come full circle, haven’t we? You started with don’t confuse profits with value and now you’ve closed with a fantastic example of someone doing just that.
That’s exactly right.bui
How fantastic. John, what is your Twitter handle? How can people follow you on Twitter and other social media?
It’s @JohnWarrillow, or Facebook it’s just Facebook.com/BuiltToSell.
Nice. It’s been fantastic having you. Thank you for sharing all your insights and wisdom on not just how important it is to have an exit strategy, but the details that need to be understood before you even enter into getting your first round of funding. Certainly, everybody should get your books and check out the Value Builder System.
Thanks, John.
Thank you.
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Secrets of Equity Crowdfunding – Interview with Nathan Rose
Posted by John Livesay in podcast | 0 comments
Episode Summary
Nathan Rose is from New Zealand but calls himself a digital nomad and lives all over Europe. He’s written a new book on equity crowdfunding, not only for the US but multiple countries across the world. He also gives out a tool at the end to use for equity crowdfunding that you’re want to be sure to listen to and start using right away. Nathan talks about how fund raising and marketing can be done simultaneously with equity crowdfunding. However, there are some downsides compared to Angel Investing and he goes into what those are.
Listen To The Episode Here
The Secrets of Equity Crowdfunding – Interview with Nathan Rose
Welcome to The Successful Pitch. Today’s guest is Nathan Rose, who is originally from New Zealand, currently talking to us from Budapest, and calls himself a digital nomad, which I just love so much. Nathan has a background in investment banking and he went to school in New Zealand and now is the director of Assemble Advisory, which has raised over $11 million. They are equity crowdfunding experts. He takes information and modeling and makes it easy for company founders. They know the market, they know it works and most of all, they can get you results. He is the author of a new book coming that is called Equity Crowdfunding: The Complete Guide for Startups and Growing Companies. Nathan, welcome to the show.
Hi, John. It’s a great pleasure to be here.
Nathan, I always like to ask my guests, how did you get into crowdfunding, in your particular case? When you were studying at university, crowdfunding was probably in its infancy and certainly nowhere it is today. How did you go from being investment banker to being an expert in crowdfunding?
What I really saw when I founded Assemble Advisory was that these startups weren’t being adequately served well enough.
The path of crowdfunding that I help with is actually quite similar to investment banking. When I was working in New Zealand, we would do a variety of deals, some bonds, some rights offers, but the path that I really enjoyed most was the early stage initial public offerings. That was growing companies, entrepreneurs with big dreams and big ambitions. Equity crowdfunding has a lot of similarities with that. It’s startups at an earlier stage. What I really saw when I founded Assemble Advisory was that these startups weren’t being adequately served well enough. The investment bankers wouldn’t generally bring their skills to bare because they needed to pay for the big expensive officers in downtown. Startups couldn’t afford those sorts of fees. There was this ground swell of entrepreneurs coming through with equity crowdfunding, which weren’t being served. That’s where I saw the opportunity to provide the services around that.
We’re always talking about who do you help and what problem do you solve when you give a good pitch. Can you describe what you’re doing in those terms?
I suppose a good example would be an entrepreneur from a sales background or from a technical background who wants to do equity crowdfunding but doesn’t know the market, doesn’t know the different platforms. Because there are a lot of them, especially in equity crowdfunding. The rewards crowdfunding which is important to distinguish here, the Kickstarters and IndieGoGos, which most people are familiar with. Really you would use one of those two platforms in the majority of cases. With equity crowdfunding, it’s much more country specific so therefore if you’re a UK company, you use one platform, if you’re a US company, you use another platform, if you’re a New Zealand company, you use another platform. It’s all subject to different securities regulation. The typical case of who I’d help would be an entrepreneur, a growing company that wants to do equity crowdfunding but needs some help to in terms of communicating their story, approaching the platform and ultimately getting funded.
What would be the main reason somebody would decide to get funded through equity crowdfunding versus an Angel for example, an Angel group?
I think there are advantages and disadvantages to both, we can go into that.
Yes, please.
I think one of the big advantages of equity crowdfunding over Angel groups is the ability to do fund raising and marketing at the same time. When you think of the startup, those two things, getting marketing exposure and raising funds, are usually number one and number two on the list of things to do. Until now, they’ve always been viewed as separate activities. When you pitch into a VC or to an Angel, you’re inside a closed shop and there’s not a lot of publicity there. When you’re doing an equity crowdfunding campaign, it’s out there in the public and a lot of people can be attracted, not just through their investment dollars but through other partnerships too.
[Tweet “Equity Crowdfunding has the ability to do fundraising and marketing at the same time.”]
Great. All right, let’s take a deep dive into this because it’s fascinating to me. I believe it will be to our listeners. You have the choice of doing friends and family obviously, then you have maybe you actually do a little rewards crowdfunding to get some proof of concept. Now, you have to decide whether you’re going to pitch to Angels with a pitch deck and all that good stuff and do it live ideally with a warm intro. Or if you’re going to use an equity crowdfunding platform in your particular country. Is there only one per country? Tell us how do people find where to go.
That’s a very good question. There are multiple crowdfunding platforms in each country. As it turns out, they tend to have network effects happening with each platform, as in the bigger ones tend to get bigger because they attract most of the investors and they attract therefore most of the biggest companies and end up getting bigger by that process. How to find them? That’s actually a really difficult thing right now. It’s something that I’m trying to solve in terms of helping people to get more knowledge about which platforms are out there and what the different strengths and weaknesses are. In the US where most of your listeners may be from, there are a couple I can talk about. There’s WeFunder, which is by far the largest right now. They’re responsible for the first title III crowdfunding offer to raise a million dollars. There’s also Republic, which is born out of Angel List as the equity crowdfunding phase of what Angel List do.
Let’s just take a minute on that. How fascinating is that, everybody? That a lot of people think, “I’m going to put my little pitch deck up on Angel List and hope for the best.” But now Angel List has said, “Ooh, we want to get into the equity crowdfunding business as well so we’ve birthed our own called Republic,” if I heard you correctly.
That’s right.
Are a lot of people doing both or do you recommend people do one or the other?
In terms of?
Doing a listing on Angel list and a listing on Republic equity crowdfunding.
I see. Generally, you don’t really have to choose.
That’s what I thought.
You have to decide which platform makes the most sense because running concurrent offers gets really messy really quickly. We can maybe talk about some of the disadvantages.
Sure. Let’s talk about what’s the downside if it’s all, gosh, if I’m going to raise money and get marketing, why wouldn’t everybody be doing that and not do anything to Angels anymore? There must be a reason to not do it and just do the Angel route. What are your thoughts on that?
You got to do a lot of the things in the background before you get ready to go.
I think the biggest reason is if you’ve got one Angel who’s ready to write a check for you. It can be done a lot more quickly. An equity crowdfunding is not just a case of putting your campaign on the sites and waiting for the internet to shower you with money. There’s typically a two or three months process that goes on behind that to put together all the author material, the video, drum up your supporters. It’s a launch, it’s a marketing campaign. You got to do a lot of the things in the background before you get ready to go. Whereas an Angel can be a lot quicker and cleaner for the companies.
Interesting. I’ve heard the phrase from my business partner, Judy Robinett, that with crowdfunding, you have to bring your own crowd. Do you like that? Do you think that’s true?
I think that is true for some platforms but not for all. This is one of the things that I always tell the entrepreneurs that I work with. There’s a really big difference in between the various platforms because the real value add of an equity crowdfunding platform is the audience that they bring to you. Bring your crowd along, that’s great. Any crowdfunding platform can do that and facilitate the payments and the process and then all that stuff. The bigger platforms are going to give you the added benefit of having their investors who are sitting there waiting for new investment opportunities to come along.
Instead of crafting a pitch deck per se, when you’re going to pitch an Angel group or VC, depending on whether you’re seed or series A, you’re talking about having videos created on the equity crowdfunding platforms, correct? Is that in lieu over the pitch deck?
It’s more as well as I think.
As well as.
You’re still going to have to put together a pitch deck and actually that pitch deck takes more of a longer form because the idea is that you’re seeking small amounts of money from lots of different people. You have to be able to tell your story completely. Because when you’re pitching to Angels, you’re in front of those Angels and they’re getting to ask you questions. There’s still that ability in the online forum but the information has to stand on its own much more in equity crowdfunding because you can’t go around shaking hands with everybody who’s going to pledge $100 at a time. That’s why the videos are so important.
A pitch deck for an Angel group typically, it’s ten slides, ten minutes and a ten minute Q&A. How much longer is a pitch deck that you recommend on an equity crowdfunding and how long should the videos be?
[Tweet “You need to be able to capture people’s attention quickly.”]
I’ll say about two to three minutes is right for a video. You need to be able to capture people’s attention quickly and then convince them to go into the offer in more detail. The video is like the hook if you like. You don’t want to make it too long, you need to make it attention grabbing. I think if there’s one area that you should spend a bit of money on, which is never a thing that startups like to hear especially when they’re trying to raise funds, get a professional video done for sure. It makes the big difference.
Nathan, would you agree that it’s really important not to spend your two minutes, three minutes on a video giving just a product demo? That’s not what people want to see in a pitch for Angels. I’m assuming, that’s not what should be in a video for equity crowdfunding. Am I right or is it a product demo?
I think you’re absolutely right. You’ve had a lot of experience with this too, John. Of course founders are very very experienced normally talking about the features of their product and selling their product but they’re least good at selling their whole business model. You’ve got to excite people about the investment opportunity too.
Terrific. One of the things in chapter three, you talk about is equity crowdfunding right for your company. You’re quoting Nathan Lawrence who raised over 800,000, is it New Zealand dollars on Snowball Effect?
That’s right.
He said, to raise that kind of money, I don’t think people think about equity crowdfunding as raising that seed round of money. When you raise it with an Angel group, that can take a while too because you have to get in front of the right group and then there’s due diligence, which is anywhere from, I don’t know, 45 to 90 days depending on how fast you go back and forth and come up with the terms. How long is a typical equity crowdfunding to raise that kind of $800,000 mark, let’s say?
It’s fairly interesting. There are I think three phases involved. There’s the phase where the offer is actually open. That would be 30 days or 45 days typically. For a lot of people, that’s all they see and they don’t see the preparation that went into that to get that campaign to go live. Before that 30 to 45 days, there’s a preparation phase where you’re putting together the video and getting all the content together. I would say that would be about two to three months that you need to budget for that or up to six months. It can easily blow out depending on how much resource that the founder can put into it and answer emails and so on. An interesting anecdote that I’ll share with you is a company called Monzo in the United Kingdom. They actually closed their crowdfunding round for a million pounds in 96 seconds, 96 seconds it was done. They’d raised their one million pounds.
All right. Let’s hear how that happened.
When you think of who was investing, it was their customers.
The funny thing is, that makes a nice headline. 96 seconds, a million pounds. Really, it was a year in the making that whole campaign. When you think of who was investing, it was their customers. Having that user engagement at the core of everything they did was what enabled them to ultimately raise in that 96 seconds.
That’s really the bring your own crowd in action right there. Your own crowd is your customers and anytime your customers become your investments in any kind of platform, you have a win and other investors want to join in because they figure if your customers want to invest, you really have figured out something that people want.
The parallels with Angel Investing are quite strong in that regard. No one in Angel Investing wants to be the first one in, but once the first one does go in or they can sense that there’s some kind of momentum in the offer, then everyone jumps in really quickly. When I said before that for the bigger platforms you can rely on their audience to some extent, that’s true but you got to generate your own momentum first. If you’re working with a big established platform with a big audience, if I could just throw a number out there it would be something like 50-50 in terms of the crowd you need to bring yourself and then the rest of the crowd will follow along with you. If you can bring that initial momentum to bare.
Let’s go back to this 800,000 round. I’m sure that wasn’t just a bunch of people pledging 100 bucks. Because typically when you raise 800,000 with Angels, it’s 250 here, 300 there, that kind of stuff. Is that how it works or is it much smaller amounts that add up to 800,000?
It can be both is the short answer. There’s a company called Haughton Honey again in the UK who raised very large numbers of small amounts of money. But there are other ones out there who put their minimum investment amount right up at 20,000. That means that you’re not going to get the crowd to come along and you’re going to just effectively do an Angel round or VC round but do it through the efficiencies afforded by the crowdfunding platform.
Would you say that when you’re raising that kind of money, 800,000, that it is typically one or two people starting off on 100,000 and then other people following with similar type sized offers?
I would say there’s a very well established thing in the equity crowdfunding world which is the concept of a lead investor. Crowdfunding absolutely has a higher rated success when you can bring an Angel investor along into the round. Effectively, they anchor the round, they might put in 25% of the round themselves and before the offer has opened, they’ve done things like negotiate the valuation, negotiate the offer terms. Make their name and the experience they have in the industry public. In that way, the people who want to just chip in $100 or $1000 can say, “Hey, there’s this really smart Angel investor here who knows what he’s talking about, who’s put their own money behind it and come up with a valuation that they’re happy with.” For mom and dad investors who find it difficult to value early stage companies, and even the professionals do find it hard, they can then follow on and invest with the Angels, which I think it’s a really good way to do it.
If I understood you properly, one way to go is to do the normal route of have a pitch deck, use your network or hire someone to get you in front of the right Angel investors. They come in and they say, “You know what, instead of having my Angel group fund this whole round, let’s go with an equity platform and I’ll give you this amount of money. I’ll be the lead investor for equity platform as opposed to the lead investor for other Angels.” From there, you start getting other people in.
Yup.
Now, doesn’t that make the cap table very complicated because you’ve got all this people putting $100, $1000 there and you’ve got to give equity each of those people? Does it cost you to have to give away more equity when you do it this way?
The valuations being achieved through equity crowdfunding are somewhat higher than pure Angel or VC rounds.
I think there’s two questions there. It doesn’t mean you have to give away more equity. I think the answer’s no. I think actually in general, the valuations being achieved through equity crowdfunding are somewhat higher than pure Angel or VC rounds.
That’s good to know.
The reason for that is when you go through an equity crowdfunding platform, often there’s more standardized documentation and you as the entrepreneur can set your own terms and then the crowd either follows along or doesn’t. The successful rounds are sometimes getting better terms. The other part of your question was about the messy cap table. There are ways to mitigate that. One of the ways is through a nominee structure, as in all of the smaller investors will end up becoming a holder in a nominee company, which I’m going to explain quickly. It means that that nominee company will vote and make decisions together. If you’re a company founder and you need some kind of shareholder resolution or you ultimately going to sell the company, then there’s just one nominee company that needs to vote and the provisional nominee manager will take care of all the investor communication for you.
Interesting. Now, is that based on a majority rules or is it the one guy who’s supposedly the professional decides for everybody?
Generally, it’s majority roles.
Got it. Let me ask you also about the cost because you write about this. There’s a price tag attached to using an equity crowdfunding agency. Is that like a broker taking a percent of the money they help you raise with Angels and VCs?
The crowdfunding platform will take a cut but generally that percentage is based on success. The fees that founders are really concerned about are the upfront costs, like getting your video done, legal work, anything like that which will be charged regardless of your success or not. It really depends on how much hand holding you need. If you can find the platform yourself, you’ve got a huge email list, which means you can just get the investors to come along or maybe you had someone in your team who’s good at the social media and the video and you can self produce all of that. The cost can be very low. If you need more hand holding by professionals, then yeah, the costs can mount up to, I’d say that maybe in the US, something like $15,000 or $20,000 might be typical, maybe less than other countries where there’s a less a restrictive regulatory regime.
I wanted to ask you one of your earlier comments about don’t expect to just put your stuff up on the equity platform and expect the magic of the internet to do all it’s work and people are just going to find you with your cool pitch deck and engaging video. What else do people need to do besides bringing their own crowd to that platform to market this?
I think you need to make the investment itself step up because you’re going to do a lot of outreach in an equity crowdfunding campaign and people need to see something good there when you direct them to the page. Otherwise they’re going to click away, never to return. I think being good at telling your story, this is exactly the same stuff as you’ve talked about on your podcast many times. Having a clear story about what the problem is, how your company solves it, why people should get excited about your uniqueness and your positioning, how it’s going to make money, all that good stuff.
[Tweet “Have a clear story about what the problem is and how you solve it.”]
Bringing your crowd to the offer, there’s so many ways to do that. I think one mistake that people make is they rely on social media too much. They think that it’s got the word crowdfunding in its name so you can run it exactly like a Kickstarter or an IndieGoGo campaign where if the product is itself just cool enough it can go viral through tweets and shares and likes and all that stuff. I think in equity crowdfunding, it’s more important to go to pitch events that the crowdfunding platform will organize.
Got it. Let’s take a moment and just pause there. That’s a really good piece of information. A lot of people will say, “I know there’s Angel groups that have meetings,” but there are actually equity crowdfunding meetings that you can go to and encourage people to go check out your platform without having to literally pitch them. I’m guessing you’re probably going to have to pitch them a little bit to intrigue them enough to want to go check out your platform. Is that right?
Yeah.
Those events?
The way that one of those events would typically work, there’d be maybe you and five other company say that are giving a short introduction and you hope that you can excite people and that audience enough that they go into your page. By the way, at those events, they do get the chance to shake your hand.
How do people find out about those events, Nathan? Is it just googling it or are there something to belong to?
Those events are organized by the platform themselves. Again, the US is a few years behind some of the rest of the world, which is unbelievable really given the home in Silicon Valley and the whole startups scene. The UK and the rest of Europe is actually quite a bit more advanced in terms of this sort of thing. There’s some places that you can find these crowdfunding pitch events. If you’re in London for example, you could sign up to the Seeder’s Blog, Crowd Cube, Syndicate Room, those are three of the big platforms in that market, or else just ask your local startup incubator or accelerator.
That leads me to the question about your insights on the title III law passing here versus what’s going on to the rest of the world. What are your thoughts on that?
It’s fantastic firstly that the US is now part of the equity crowdfunding revolution. A title III crowdfunding allows a startup to raise a million US dollar in any twelve month period. There are a few extra restrictions compared to more liberal regimes like New Zealand and the UK, but at least it’s a start and we are seeing some money being raised. One of the things that’s in place in the US for example is that ordinary investors who don’t make the sophisticated high net worth threshold, as in people who basically aren’t really rich. They can only put in $2000 maximum into each crowdfunding offer, or five percent of their annual net income. That’s in place. I guess that means that if you were in a comparable market, you could have more people putting in amounts greater than 2000. In the US at least, retail investors can only put in that 2000 in each offer.
Typically within an Angel group, if they already have one type of person they’re investing in, they won’t take on a competitor. Is there anything within certain platforms in equity crowdfunding that they say, “Oh, we’re already funding something that is in healthcare for, whatever, Doctors on Demand. We can’t have another one going on concurrently.” How does that work?
Because they’re on the site, they can see your offer too.
This is a bit like the IPO window back from the investment banking days, which was that each company would try to find a slot where they’ve got the attention all to themselves. I actually think the opposite is true in equity crowdfunding because if you’re on the platform at the same time as a bunch of other offers are, then it’s actually positive because you’re going to get the benefit of everybody else’s outreach efforts and everyone else’s audience that’ll maybe go to the platform for your competitor or for other companies, which aren’t even related to you but are just crowdfunding at the same time. Because they’re on the site, they can see your offer too.
Is there some barrier so your competition isn’t seeing all of your secrets? Because a lot of founders are so paranoid. Obviously investors don’t sign non-disclosure agreements, but do they say, “We already have this. You can’t come on here.” I’m not 100% understanding the yes or no to that.
I think the answer is no, that you will be subject to other companies coming on at the same time.
You have to put enough out there without giving away your “secret sauce”. You can say how, you can say what you’re doing, but you don’t necessarily have to go into that much detail on how you’re doing it unless you want are competition to see it. Would that be fair?
Right. We talked about advantages and disadvantages of equity crowdfunding. I think this is another of the disadvantages. If you are not comfortable with your business’ whole revenue projections and business model and what you think of the market and what you’re doing and strategy being out there in the public domain, then equity crowdfunding isn’t for you.
Got it. Much like people go from a seed round from Angels to series A with VCs, are you seeing a lot of people go and get their seed round up to a million dollars from equity crowdfunding and then VCs are more than happy to fund that just like they would an Angel round?
I think there is still something of a negative stigma around it from some Angels and VCs, as in if the cap table is messy, like a nominee structure hasn’t been used, then they might be a little more hesitant. But I will say that their perception is changing. Some Angel and VC companies, this is just true of the economy in general, some people just don’t like new ways of doing things. In Europe at least, we’re seeing that they’re becoming more comfortable with us. If they want to get access to the best companies and some of the best companies are using equity crowdfunding. Ultimately John, a VC will invest in a company no matter how messy all the structuring is if the company is a great company.
Has a huge potential and traction and a good team and all the other good stuff. I love storytelling, Nathan. I’ve saved your story about how you wrote the majority of your book in a small town in Georgia. Tell us that story.
That is Georgia, the country. Not Georgia the state.
Okay. Tell us where Georgia the country is for those of us who may not know.
Georgia is located north of Turkey and south of Russia, around the Caucus mountains, just between the Black Sea and the Caspian Sea, which is not the typical place to hang out. The reason for going there was to get away from it all for a couple of months while I wrote the majority of the book. It was successful. Two months in a little hideaway where no one knows you, it’s a good way to get a lot of work done.
I bet. Really focused. Nathan, how can people follow you on social media? Do you have a website you want to direct people to?
Sure. The website is AssembleAdvisory.com and within that is the page on the book, which is out now, AssembleAdvisory.com/book. That’s Equity Crowdfunding: The Complete Guide for Startups and Growing Companies. If you’ve heard this podcast episode and you want to know more, then now that’s available on Amazon.
Great. What is your Twitter handle?
My Twitter handle is @Assemble_ADV.
Okay, let’s repeat that for everybody. @AssembleADV.
Yup, short for advisory.
All right, great. We’ll put all this in the show notes. Nathan, thank you so much. Is there any one last bit of advice or thought you want to leave our listeners about equity crowdfunding or just being an entrepreneur in general?
I’ll share one tool if that’s okay, John.
Yes, please.
The tool is Thunderclap. Thunderclap allows you to prearrange social media shares. If you’ve got a crowdfunding campaign coming up and you want people to share the word on Facebook and Twitter, you can get them in the weeks and months leading up to your company actually launching to pre-commence on Thunderclap. That way when your campaign goes live on the arranged date, everyone tweets and Facebook shares at exactly the same time.
Brilliant. That’s a great, great thing to do. That’s bringing your crowd to the crowdfunding. There it is. Love it. Thank you for that great tool. Thank you for writing this book. Thank you for sharing your expertise with us. It’s been a pleasure.
Thanks, John. Thanks for the podcast and everything that you do too. It’s been great.
Thanks, Nathan.
Links Mentioned
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John Livesay Funding Strategist
Equity Crowdfunding
Assemble Advisory
Nathan’s Twitter
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Apple v Samsung – Tom and Tracy Hazzard
Posted by John Livesay in podcast | 0 comments
Episode Summary
Tom and Tracy Hazzard are product designers and design experts of Hazz Design. They’ve collectively designed and developed over 250 products, which has generated over $1 billion in revenue for their retail clients, and counting. Their entrepreneur experiences are taught in a Harvard Business review course in 26 universities around the world. Tom and Tracy are the hosts of the 3D printing podcast, WTFFF?! They are the experts in talking about everything to do with innovation and design. In this episode, they talk about the latest ruling by the Supreme Court in Samsung V Apple and how that impacts people who have a design patent and their valuation.
Listen To The Episode Here
Apple v Samsung – Tom and Tracy Hazzard
Today, The Successful Pitch, I have a bonus episode of two really smart and really nice people named Tom and Tracy Hazzard. They’re based in Orange County, California, just down the road from me in LA. They’re product designers and design experts of Hazz Design. They’ve collectively designed and developed over 250 products, which has generated over $1 billion in revenue for their retail clients, and counting. They hold over 37 utility and design patents with an unprecedented 86% commercialization rate, which is double the national average.
Their entrepreneur experiences are taught in a Harvard Business review course in 26 universities around the world. Both Tom and Tracy have their products in all the major retailers, wholesale clubs, electronic boutiques and office super stores. Their bestselling mesh office chair has been in Costco for over four years straight.
Tom and Tracy are the hosts of the 3D printing podcast, WTFFF?!, which you have to know 3D podcasting to understand what that is, which is ranked number one in iTunes with over 45,000 listeners monthly. Besides being featured on numerous podcasts and publications like Entrepreneur, Forbes, Wired, Fortune, Small Business and CNN Money, Tracy pends a regular featured Inc column on innovation and I’ve been fortunate enough to be in one of her columns.
They are the experts in talking about everything to do with innovation and design. I asked them to record a special episode with just the two of them talking, as if you’re eavesdropping in on their personal conversation like you would on their 3D podcast. In this case, they’re talking about the latest ruling by the Supreme Court in Apple v Samsung and how that impacts people who have a design patent and their valuation. I think you’re really going to love this episode. Enjoy.
It occurred to me the other day that listeners of The Successful Pitch podcast, especially the founders that listen to the podcast all the time might be very concerned about the Supreme Court ruling, Apple v Samsung, about design patents and its affect on their valuations and their pitches.
I think it’s a valid thing to be concerned about, especially because there is, as of now, no real official test yet as to how liable Samsung is for their infringement of Apple’s patent.
Or how much less Apple gets in the process.
Apple v Samsung: This has been a patent battle playing out in the system for several years now.
Let’s go over it a little bit. This has been a patent battle playing out in the system for several years now. Most recently, I think in the summer of 2016, Samsung was held liable for patent infringement of the iPhone with their Samsung phones. This is over a design patent, which really dictated the outside ornamental look of the Apple iPhone. Samsung was found to have infringed on that patent with the outside ornamental design of one of their Samsung phones.
Then Apple was awarded a huge sum of money. We’re talking very, very large. In Apple v Samsung, Apple was awarded a huge sum of money originally, a staggering $548 million. Samsung was hoping to get $400 million of that back. They’ve appealed it to the Supreme Court saying, “Just because the outside design is the same, we shouldn’t have to be liable for all the profits of our Samsung phone because there’s so much more in it in terms of electronics and software and other things that really represent a lot more of the profits that they make on their phone.”
The idea is that something that’s an ingredient in the sales process and one of many reasons why somebody would buy an Apple phone and then Samsung happened to copy, in this particular case, isn’t a reason to get 100% of the profits of the sales of those items during that time period. That’s what they’re talking about, whether or not they should sub cut up the profit, divvy it up based on the percentage that that might have an impact on.
Honestly, that seems reasonable to me as someone who has a lot of patents and understands what goes into a patent and how big a role it plays in a product. It seems to me logical that just because Samsung copied, intentionally or not, the look of the iPhone, doesn’t mean that that look was completely responsible for all the profits they got. They have their software, their technology, their user interface, operating system, etc.
Exactly. There’s lots more reasons why you buy an iPhone versus a Samsung phone. The thing is though is that right now, while this was actually a very, very quick ruling by the Supreme Court and the decision was very clear. The process by which it’s going to be determined and used as a rule of thumb as to how to divvy up the profits and how to decide what that percentage is that’s liable is now been dropped down to the lower court that made the original ruling, which is leaving a lot of uncertainty. That’s maybe why there’s a little bit of concern, anxiety in the founder community, especially those that are depending their valuations on these patents. Because the decision here changes the valuation that your design patent, if you have one, might be valued at in that process.
The Supreme Court, I guess, declined to issue a ruling on a test or a measurement. How do you decide how much of the profits should be owed to an infringer who infringes on a design patent that represents a portion of the value of the profits of the product? The lower courts are going to have to resolve that test. That’s going to take sometime. Eventually, they will come out with a test. I’m hoping that will be a very good thing because then we’ll all know what the potential liability is in this kind of a situation.
Apple v Samsung: We’ve always treated design patents as more of maybe an offensive strategy or even a defensive strategy in certain cases.
It’d be great if it’s extremely clear. That’s hopeful thinking though. I really want to step back and start talking about this from our perspective. We have 37 patents pending and issued in the mix and probably I think close to 25 of them are utility and ten or twelve of them are design.
We don’t really rely heavily on design patents. They’re there, they’re in the mix. In practice, we’ve never treated them with a high valuation before. We’ve always treated design patents as more of maybe an offensive strategy or even a defensive strategy in certain cases where we’re plugging some holes and surrounding the utility patent with good other patents. We call it a patent fortress strategy.
That’s where we’re really building a large base of intellectual property around a certain product. Sometimes there’s a utility patent involved and other times we want to add design patents to that to make it a stronger defense against a potential infringer. Other times, there are appropriate situations where you may just want a design patent on your product. They are limited in what they can protect, but if the ornamental look of your product is really critical to the identity of your product and the success of your product, then a design patent maybe very useful for you.
We use that patent portfolio or fortress strategy that we use, we use that because it builds a higher valuation across many things. It’s like a risk assessment on a portfolio. When you have one single patent, then there’s this higher risk factor that gets mixed in by whoever is doing the valuation or the investment valuation and considering it and looking at that. When you have a mix of things that are in various states of issue, some of them might be provisional, some of them might be filed, some of them might be issued, when you have a mix of those things, it makes it harder for them to assess you at that high risk state. Some of it is more balanced here, some will likely issue, some will likely be defensible. It gives you more options and it gives you a better valuation overall and that’s what we found.
This Apple v Samsung lawsuit does show us that design patents can be very valuable.
Still, what this Apple v Samsung lawsuit does show us is that design patents can be very valuable. Even if the courts end up saying, “Apple, you have to give back some of that $548 million to Samsung because you don’t deserve all the profits they got from their phone,” certainly, Apple is going to get to keep a lot of the money that they got. At least $100 million probably or more. It was certainly a worthwhile endeavor to those who …
Worthwhile patent to have filed.
To have filed and then also to litigate. Samsung, let’s face it, the major competitor to Apple, probably did want to make their phone look as much as an iPhone as they could because they didn’t want the look of their phone to be something that would keep people from buying a Samsung phone.
In this case, once you’ve defended this once, it’s also a deterrent to future infringers and more knockoffs get settled quicker than go to court. That’s really the other important part of what they’ve done here. I want to go back to as a founder or a patent holder standpoint, really what you can do to help yourself and protect yourself and address some of these valuation issues that you’ll have as you go into that.
Really the thing that we found over time is that when you go to file a design patent and when you include a design patent in your patent portfolio is to dial it in and make it very specific on one element. You might file, and this is exactly the case of what Apple did, is they filed one on the shape of the overall phone, they filed another one on the shape of the icons. They had a different design patent for the shape of the icons that were on the home screen of the phone. By divvying up all of those design patents and not doing all in one is an extremely important strategy. We learned this the hard way on office chairs.
We have.
Or our clients have, I should say.
Us and our clients have both learned, for sure. We have experienced a client that had a design patent on the entire ornamental design of an office chair. Mostly, especially on the upholstery stitching of that because that was a unique look that they wanted to protect. They filed it, the design patent got issued and then a competitor knocked off that chair completely with one slight detail difference.
Which what constituted about a ten percent or less change. It wasn’t really major.
I would say less, quite honestly. From my perspective at the time, I thought this is really enough of a knockoff that this company will surely be found to have infringed by the courts. This case actually did go all the way to court, to trial, the whole thing because both sides, I guess they wanted to fight about it and they couldn’t agree. There was just one difference in stitching on the back side of the chair, because this design patent included not only the appearance of the upholstery from the front but also the back. There were many, many drawings covering all the elements of this design. The competitor added one stitch seam on the back side of the chair to the knockoff that did not exist in the original. Very surprising to me, the jury came back and said that the competitor did not infringe on the design patent because of that one additional stitch change, that it was not considered the same design. Personally, I didn’t agree with that. That’s what the court found.
Apple v Samsung: All the elements are broken up into multiple design patents.
Since then, the strategy has always been, in this particular case with office chairs, is we file one patent for the chair back, another one for the chair seat if necessary, the arm pad design if it’s different, the base of the chair. All the elements are broken up into multiple design patents. Now, it’s more costly to file, but in this particular case, you would have, now, with this new ruling, you would have more of an opportunity to stop someone from infringement based on just an element.
Or certainly a better ability to recover damages from a company that clearly did copy your design. By breaking it down to the upholstery on the upright back cushion of the chair, and you can even break it down into the front side, the front face of that cushion design if it’s really unique, and then the back side separately or don’t even file a patent for the back side if you don’t want to, that if somebody then incorporates that design into their design, the rest of the chair could be different and they could still infringe. We had made a recommendation to another client of ours at a later time to do the same thing. We came up with a unique design for an upholstered pattern. It was the hallmark element or signature design element of this chair design that ended up being a very successful design in Staple stores across the country. We then recommended to our client they file a design patent for that.
They refused because they thought design patents weren’t that valid, weren’t that valued. They refused on it. A year later, Staples decided to buy direct and cut our client out of the loop. They lost $4 million of value for that one single chair because they didn’t file a design patent and couldn’t stop Staples from making it. What would’ve been a few thousand dollars, under five probably for filing a design patent, they lost $4 million a year.
It was really a short sighted decision. Our client learned the hard way unfortunately. Going forward then, they were all the wiser. If they think they have a product that is going to succeed well and it has a unique element, then they could protect it. Because it’s true, we have witnessed a company like Staples. In fact, actually Staples, even though they wanted to go around the supplier and direct source of product, if there was a patent involved, they stayed away from it and they didn’t do it. In this case, they probably would have kept buying the chair from our client had there been a design patent.
It just would’ve been too risky to go at it.
Very unfortunate.
That’s where we talk about offensive and defensive strategies to using patents. In this case, I think that this ruling actually only reinforces it. Even though it’s not known what the test will be by that lower court yet, we think this is really critically important for those of you out there pitching and worried about valuations, which are so fuzzy anyway at the early stages of business when you’re really in your early seed stages or just beyond your market proof stages. These kinds of things create the company value that someone’s buying into.
They’re buying in more to the idea, they’re also buying into something that’s an asset of the company. Having these patents and having multiples of them, including design patents, make or break that valuation for you and that investment for you. We really want to encourage you to continue to do those. Don’t be discouraged by the design patents, that they have lower value and they’re not worth doing. There are so many reasons that they are worth doing and you should continue and move forward with that plan.
Apple v Samsung: Intellectual property portfolios, patents in particular, add tremendous amount of values to a corporation.
Absolutely, I agree with that, Tracy. There’s just all kinds of evidence, certainly in our experience and in other business experience that you can read out there in the media, that intellectual property portfolios, patents in particular, add tremendous amount of values to a corporation, especially when they’re seeking to be acquired. We encourage really an offensive and in some cases a defensive patent strategy. I agree with you. This case just shows that there is a value for the patents, that the courts do recognize them. They’re just talking about where does it begin and end.
Semantics of dollars.
Having that defined at some point hopefully will be a very good thing and it won’t be so ambiguous. Unfortunately, if any of you end up in a patent litigation at some point, it won’t be as much of a unknown. “If we get down this and get a ruling in our favor, is there really going to be any money there?” I think there can be and there will be proper tests for determining what that value is.
Clarity of standards can always help settlements happen quicker so that there’s less likely to be litigation involved in the process because it’s been ruled all the way up at the top, at the high courts. We want to encourage you to do that. We really hope that you have a successful pitch and that patents become a strong part of that asset that creates that success level that you have. We thank John for inviting us on the show and we really appreciate it. If you need to contact us in any way or ask us questions about that, please reach out to John directly and we’d be happy to answer them for you.
Thanks for listening everybody. Hope you enjoyed this. This has been Tom and Tracy on The Successful Pitch podcast.
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