You probably read quite a few articles on how to answer this question. You have heard extreme things like, “your idea is not worth anything unless you implement it” and “this is how you calculate the true value of your idea”. Well, I am not going to spend anytime addressing this question from that perspective. Instead, I want to share my thoughts on what I think an idea is worth during a firm’s lifetime. I believe the value of an idea diminishes as time passes and instead, is replaced by the value of its execution.
Day 1: Firm’s value = The idea’s value
On day one, all of you have is the idea. You do not have a product, customers, revenues and of course profits. Most likely, you don’t have a team either. The firm’s value is same as the value of your idea. It could be $0, $1000, or a $1,000,000. Whatever that number is, your firm’s entire value is the number.
Fast forward to product launch: Firm’s value = Value of Everything Else
From the time you thought of the idea to the time you went live with the product, you have accomplished a lot and managed to build firm’s value. This value is a combination of the team, the product, the operations, may be some IP, your knowledge of the market, the competitive landscape, your plans on how to grow your customer base and how to make money. As you can see the idea makes up very little or none of this added value.
In fact, I think the idea’s value has diminished significantly. Your competitors know about it and are already thinking about how to do the same and other entrepreneurs are hatching plans to replicate the idea. That means the idea is out of the bag and on its own has zero value.
Don’t worry! From here on now, it is all about execution. The more you execute and the better it is, the more value you accumulate and the harder it is going to get for people to catch up with you. It is no surprise that venture capitalists will prefer a seasoned management team and an average idea over a great idea and an inexperienced management team.
So, the next time you hear from people say: “I had thought about the exact same idea two years ago or somebody mentioned this idea to me a year ago”, just listen to them politely and keep executing.
September 22nd, 2008 at 11:57 am
Prasad,
Interesting post. I’m not sure that I agree with some of it (which is good, because otherwise our blog would be boring!)
I think your definition of idea is a bit limiting – it almost sounds like “idea” means product. Some ideas also are about changing distribution channels or attacking new customers with a relatively older technology. These ideas all have value too, but may not decrease in value as time goes on. If your idea = your vision, then you probably have a huge idea that is just barely touched when you launch your product.
Day 1 – Your firm is also worth YOU. YOU + IDEA is a better indication of what your startup is worth. However, other things can factor into this as well, which I won’t get into here. However, my main point is don’t forget the importance of YOU in what your startup is worth.
Launch – I do not agree that your idea is worth nothing the day you launch. I think you are assuming that you launch with a fully developed product… this is usually not true. Usually, you are launching with a product that is good, but not 100% feature rich – you will still have rooms to reach the full “idea” that you had when you began to design the product. Secondly, markets often take some time to realize that the new product is what they need. As the market realizes how great your idea is then the idea becomes more valuable, even if you are in the execution phase of your business plan. Again, if your idea is a huge vision then you have not achieved it when you launch, but you are merely on the 1st step of a long road.
I guess I feel that your idea shouldn’t be static. Your idea will grow and change as you get better market intelligence, as customers play with it, and as the market (hopefully) shifts to your view of the world. I bet the idea gains in value and doesn’t decrease over time – assuming that you’ve got a great idea.
Healy
September 22nd, 2008 at 11:32 pm
This is a very interesting format you have.
My experience has been that Day 1 and launch valuations are very subjective. Just like you guys are arguing, I found that most of the funding guys never agree with the valuation.
I think you are both approaching the issue form different view points. When Prasad says that an idea’s value decreases over time I think he means that you have this idea but you havent been growing it. Healy I think you are coming from the view that you have been testing the idea and tweaking it for the market, getting valuable customer feedback and so the idea has been growing.
September 23rd, 2008 at 11:07 am
LVS,
Yes, I agree. Ideas change over time because as products/services get closer to customers the vision can change – hopefully it gets better and bigger, but sometime it just becomes more pratical.
Healy
September 24th, 2008 at 2:52 am
I’m surprised that you neglected to mention increasing the core value by creating barriers to entry, which in effect insulates the value of the idea.
From my perspective, the value of the “idea” is, on the day you launch, equal to whatever it was the day before. The only thing that has changed is the opportunity for other’s to realize that value. And this is where execution comes into play. I would say execution becomes a multiplier of the idea’s intrinsic value, and turns a 1m dollar “idea” into a 300m dollar “company” -so of course the smart money is betting on the multiplier and not the base, because the base is transferrable; it is portable to other teams who might execute better and achieve a higher multiplier.
This is why barrier to entry, insulation, become paramount. How does a startup strategically position itself to block another team from attempting to execute on your valuable idea? Off the top of my head, in the web service space, I would say:
-your relationships with your customers
-your “Brand Name”
-Patents & Trademarks
-ability to generate buzz
-overall sentiment in the marketplace
September 24th, 2008 at 11:11 am
Hi,
This is fantastic method to measure the worth of an idea. I like this article very much. Thanks for sharing such wonderful things…
September 24th, 2008 at 11:22 am
Assuming that there was work required to launch, then you hopefully have created some value at the launch. In other words, if you’ve accomplished something technically difficult in creating your product then you likely have created some value.
Barriers to Entry/Exit are also important. Some are built realizable immediately, like patents. Others that you’ve pointed out are built over time, like brand name. I guess these could be considered part of the vision/idea – what do you think?
September 24th, 2008 at 7:43 pm
Yes, the execution of an idea…if only we could all do it.
I have learned to always follow through with research on my ideas to see if something already exists – sometimes execution is warranted, sometimes it has been executed to death.
September 24th, 2008 at 9:39 pm
I love the commentary on this post and sorry for not responding earlier. I have been traveling and did not get a chance to respond. On the other hand, I am glad I waited as the comments are quite rich and have given me a lot to think and digest.
All of you have made excellent points and agree with them all. When I wrote this post, I deliberately kept the definition of the idea simple. Most people, who are not entrepreneurs or VCs, think of an idea as just an idea. They do not think of it in terms of barriers to entry/exit, marketing strategy, features, patents, trademarks, incremental innovations or other elements of execution. IMHO, these are just details. Don’t get me wrong. They are very important details.
I have experienced this firsthand many times. When I tell what Pixily does, people ask me how I came up with the idea? These are friends, customers and even the media.
December 2nd, 2008 at 11:34 am
[...] This makes it even harder for the startup entrepreneur seeking venture capital know what their startup is worth. I’d like to highlight a particular phenomena that may come into play when VCs are valuing [...]
July 6th, 2009 at 7:28 pm
Hello, can you please post some more information on this topic? I would like to read more.
September 24th, 2009 at 12:28 pm
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A definite great read..Tony Brown