Where do good ideas come from?

March 1, 1999
Q: I am a student hoping to start a business someday. Where do business ideas come from and how does one decide if you have a good idea?
1304qa Chang New

Q: I am a student hoping to start a business someday. Where do business ideas come from and how does one decide if you have a good idea?

A: Ideas can strike like lightning or they can be generated by following a set of procedures. For example, you can generate a lot of ideas by asking ten people every day what problems they would like to see solved. Deciding whether you have a good idea is a lot more difficult. For sure you want to quickly narrow down your choices in order to focus on the ones with the highest potential. With these surviving ideas, you`ll want to do what they teach in business school, such as talking to customers and conducting market research.

You must also concurrently develop some understanding of the resources you can acquire relative to what is required to properly develop the business and maintain a competitive advantage. A good idea for a big company may very well be a terrible idea for you. My advice for people starting off in business is to think small rather than think big; realistically you are more likely to succeed if the business is narrowly focused on a niche, and once you have a success you`ll have many more options. All the while you want to soak up knowledge like a sponge. Not only will you have more tools to generate and evaluate ideas, but that knowledge will also help you synthesize better solutions and prevent you from blindly proceeding into what might be an obvious pitfall.

Q: With my persistence, the (non-US) government laboratory I work for funded the development of my product idea. However, we haven`t been able to generate any commercial interest. Now the project has been canceled and I`m forced into early retirement. I can work without pay to share in any royalty income. What are my options?

A: Your drive is admirable because that`s the sort of attitude that makes champions. I can almost picture your management, faced with your insistence, throwing up their hands and saying, "Okay, do it!" And now they are in effect saying, "Put up or shut up." My guess is that, with all the excitement, not enough effort was put into determining what people need and the market size. Now that you have fewer resources, my recommendation is to focus your energy on understanding the business potential. You want to make an objective decision, instead of persisting stubbornly on what might be a blind conviction. You have many good years ahead of you to work on projects that can have a commercial success.

Q: My start-up company really needs the help of a consultant who is demanding a large number of stock options. How should I negotiate with him?

A: Stock options are for people who make long-term commitments to a company whereas most consulting relationships are short-term by design. But there is no reason why a consultant cannot be an investor. So, you can pay a consultant with shares of stock equivalent to what you would have paid him in cash. This would mean a taxable transaction. Companies get around this issue by granting stock options instead. The number of options is determined by dividing the equivalent cash compensation by the difference between what future investors are projected to pay and the option price. Given that the future value of the stock offering is not determined, arguably there is no deterministic income involved. You should get your lawyer to properly structure the transaction.

Q: How do companies learn the best practices of other companies?

A: Good management practices are generally well publicized and are shared freely in the executive community. Sharing of nonproprietary technical know-how occurs naturally when employees change jobs, attend technical conferences, or meet with fellow engineers. This kind of free sharing is in part what makes Silicon Valley successful, compared to other places where people don`t change jobs or openly exchange ideas. Information of a proprietary nature, on the other hand, is often respected. Most people are ethical and would not knowingly disclose proprietary information; for those who aren`t, the serious civil and criminal legal consequences--both for the individual and for the recipient company--serve as a deterrent.

Q: The founder of the telecom start-up I am about to join stated explicitly that he would keep the company private. Wouldn`t that make the stock options have little value?

A: Yes, if this founder is unwavering. As a practical matter, telecom business is fast moving and often requires significant resources to succeed. It would be impossible for the founder to maintain this wish and still be able to raise capital. Once the company has investors, going public or being bought out becomes inevitable as a practical matter.

About the Author

Milton Chang

MILTON CHANG of Incubic Management was president of Newport and New Focus. He is currently director of mBio Diagnostics and Aurrion; a trustee of Caltech; a member of the SEC Advisory Committee on Small and Emerging Companies; and serves on advisory boards and mentors entrepreneurs. Chang is a Fellow of IEEE, OSA, and LIA. Direct your business, management, and career questions to him at [email protected], and check out his book Toward Entrepreneurship at www.miltonchang.com.

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