8 years ago investing135Jake

How To Profit From Ideas

I have a lot of ideas, therefore I will be rich.

Heard that before? I know many people who think this way. Not many of them are rich – most even have a lot of financial problems. There must be something wrong with that point of view then. But aren’t ideas the most valuable thing in the world, aren’t ideas what drives the progress, technology and innovation? I think yes, in most cases good ideas power the progress. But only some ideas do it, while most go into the trash can.

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Photo by Felipe Morin at Flickr

Ideas are cheap

I can generate at least ten promising business ideas per month and maybe another ten ideas how to improve the world or our everyday life (it takes a while to turn these into business ideas). I know people who can generate a lot more ideas than that. I am sure you can also come up with that many or even more ideas – most people who try, can do it. If there are only a million people in the world who can generate ideas with such speed, that means ten million business ideas per month.

It’s wrong to think that ideas are something too valuable. They are cheap. Every intellectual product that can be generated in such quantities is cheap. And it is easy to see the reason behind this – most ideas don’t produce real value, because they never get implemented. You may have the greatest idea in the word but if you don’t implement it, it probably costs $0.02.

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So, implementation is what creates the value of the ideas.

How To Appraise Ideas

If you want to invest in ideas, you must tell the good ones from the bad ones. You need to appraise the value of the ideas – and more important, the value of their future implementation. It’s easy to think that an idea is great if you look only at the final outcome that it could produce some day. But there is very little use of such appraisal if you don’t take in mind its implementation.

Implementation simply means how you can turn the idea into something real.

The good ideas are the ideas that can be implemented with reasonable resources and that you know how to implement. You may not need to know all the technical details of the idea’s implementation, but you must know well who can take care for them and how much resources is it going to take.

So, let’s say for example you have the idea to create a flying car. When considering the final outcome, it seems the idea is quite valuable. A flying car must interest a lot of people and probably will sell well. Of course, “probably” is not the best thing to rely on, but at this very early stage of brainstorming it is ok to rely on your guesswork. The idea of a flying car would be great if you could implement it. Maybe you are not an engineer and cannot invent it yourself. Do you know who could do it, how much is it going to cost and how much time is it going to take? Are you sure there is not someone else who is working on the same idea and could implement it faster than you?

The real value of the idea is an equation. On the left side you have the wealth/profits that the idea can generate. On the right side you have the costs of it’s implementation. The more you have at left, the better the idea is.

But even this appraisal is way too simple. Because you need also to consider the probability to turn the business idea into action and to do it better and faster than the competition. So finally the very simplified equation looks like this:

Value = (Possible profit value * Probability to be implemented) – Costs of implementation

If you play with few numbers in the above equation, you will see that the probability factor plays much bigger role in estimating the idea value rather than the costs of implementation.

Let’s get for example a software project that could bring you a million dollars in sales. If you hire a cheap team to develop it, the chances for successful idea implementation yet on the development stage are quite poor. This means that no matter how great the idea is, you will probably not see any profits. On the other hand, hiring a more experienced and talented team will cost you more, but will increase the chances of success and you may actually see the profits.

However, if you simply can not afford to hire the expensive team, then you have only the first option. Which makes the idea much less valuable. If exactly the same idea was owned by someone who could afford hiring a good team, it would have bigger value.

How To Implement Ideas

Since implementation of ideas is so valuable, you must work much harder on your skills for implementing ideas rather than on the skill for generating ideas.

What does it actually take to implement an idea? Said simply, it requires action. When you appraise an idea and feel it could turn into something real, just start action as soon as possible. The first action could be as simple as creating a word document which actually describes the idea. Once you write it down and save the file, you are one step further to actually doing something.

Next good steps are writing a business plan and writing an action plan. An action plan is simply a list of future actions and rough timelines showing when you are going to take them. The action plan will help you get organized and disciplined and actually implement the idea.

Selling Ideas

Unfortunately we cannot afford implementing all the valuable ideas we have. I know for sure that I cannot do it – because I don’t have neither the money nor the time to do it. So if I have ten good ideas, all of them are valuable, and I can implement each of them individually, I still cannot implement them all. This is sad, because we have to let some good ideas die.

One way to solve this problem is to actually try to sell your ideas. Selling an idea in its very first stage makes no sense at all – because if someone wants to buy your idea, they would need first to hear it.

The ideas can be sold at a later stage – at least when there is some business plan created and hopefully even some part of the implementation started. Usually you will not be able to sell your idea in the normal way – like selling some item. Instead of that, selling an idea is done in the form of funding – think about venture capital and angel investing. What angel investors and venture capitalists do is to invest in ideas at the early stages of implementation. They will not be able to give you time, but by giving you money they will let you hire people who can take care for the implementation of your idea.

So usually you can profit from idea by starting a startup. With a promising startup you can seek early stage funding and at a later moment get bought. This is probably the shortest way to selling an idea that you don’t want or can afford to fully develop yourself.

Jake