The classic model is for an entrepreneur to have an idea (or a novel product concept or a new technology) and then to "build a company around it."

Most ventures that set out to write a formal business plan assume, incorrectly, that this is either (A) the only approach or (B) always the best approach to commercialization.

When the creation of a complete operating company is the chosen commercialization path, the entrepreneur quickly finds himself or herself dealing with issues that may seem pretty far removed from the original venture concept. Packaging design, "slotting fees" (if you intend to sell through retail channels, this is a term you will learn), warehousing and physical distribution ("How many trucks will we need?") and other issues can pop up in a dizzying array. This may not seem like fun.

And even with "all the money in the world" (the "I-just-won-the-lottery" approach to financing your venture), it can still take a long, long time to build a complete self-standing company. And if you haven’t just won the lottery, the process of finding funding can delay your launch for much, much longer than most first-time entrepreneurs expect.

As a result of all this hard reality, it may be useful to look at your options.

Consider the alternatives first

"Licensing out" your new technology or product concept may be an option for certain entrepreneurs. There are special considerations involved here. These are best addressed in a separate article. The first step is to have an early conversation with intellectual property counsel.

The four alternatives to creating a stand-alone company are shown below. They share certain characteristics in common (for example, the first three all involve your venture actually making something).

But they also reflect certain differences in terms of the total amount of money required, sales lead-time and sales risk, and the time required before reaching "cash-flow break-even" (i.e., the point when the venture is depositing more money into its checking account than it is paying out for currently due bills).

Before you start, it may be helpful to think through the commercialization strategy (and lifestyle) that is right for your situation.

Other ways to commercialize

"Private label" deal. The venture manufactures its products labeled for a large company which will then sell them through its own national merchandising and distribution network. Sears uses this model.

The O.E.M. relationship. "O.E.M." means "original equipment manufacturer." As an O.E.M., the venture provides components or sub-assemblies for integration by a larger company into its own products. Example: Chrysler does not make its own instrument panel switches. A supplier does this under an O.E.M. contract (probably, in fact, multiple suppliers).

"Corporate Partnering." A start-up and a larger company enter into a collaborative product development agreement often involving some payment of money "up front" to help underwrite the younger company’s efforts. In return, the larger company gets the right, often exclusively for a period of time, to use the results in its own business.

A straight "consulting" engagement. A large company says to the entrepreneur "Help us do what you know how to do and we’ll pay you for your expertise."
 
 

BLUE ROCK CAPITAL makes long-term equity investments in promising seed-stage and early-stage ventures in the Mid-Atlantic region from the Carolinas to New England. The Fund emphasizes information technology, business services, and related fields. It does not invest in biotechnology, invasive medical devices, pharmaceuticals and certain other situations. For more information, please see www.bluerockcapital.com.