Money is Fungible; Capital Sources Are Not

Entrepreneurs, especially those in early stages of building a business, focus sharply on finding investors. They do so with good reason: without initial and ongoing capital, many businesses would die on the vine. But I’ve observed that some investors fail to take into account prospective investors’ compatibility with and suitability for their businesses and their own styles, practices, and preferences. In other words, they consider funding from any source—self-funding, angel, VC, other institutional investors—as having the same value. Money is fungible, right?

Wrong. Money is fungible, but capital sources are not. Beyond money, the fit between investor and entrepreneur is crucial to sustainable business success on several dimensions. The separate entrepreneurial efforts of Sam Popeil and John Osher, as discussed in my book Invent Reinvent Thrive (McGraw-Hill, 2014), illustrate the importance of alignment with your investors.

Starting in the 1970s, Sam Popeil (with the help of his son, eventual infomercial king Ron Popeil) built an empire on the backs of quirky consumer products like the Chop-o-Matic, Veg-o-Matic, and Pocket Fisherman. Similarly, serial entrepreneur John Osher has made a fortune as what I call a “reinventrepreneur,” adapting his and his team’s skills to make and market everything from earrings (at a 96% markup) to baby toys to spinning toothbrushes.

Popeil’s and Osher’s success was based partly on the compatibility of their styles with their investors’ expectations—both relied on self-funding and/or individual investors, rather than larger institutional or VC sources —related to two major areas: product and price.

Product

Osher and Popeil made product-related decisions based on their growing experience and intuition, along with their ability to ask good questions. Osher’s wide range of inventions and products is particularly impressive, and included the Rainbow Toy Bar (for baby cribs), Stretch Armstrong action figure, Spin Pop lollipop (over 100 million sold), and Dr. John’s Spin Brush (P&G bought it and marketed it as the Crest Spin Brush). He’s still at work on new items today, including a high-tech B2B product.

Both men decided on new products without deep research or consumer testing. Instead of focus groups, Osher used “fast-and-dirty” research at local drugstores to develop his idea for the Spin Brush. Instead of relying on a brain trust of R&D experts, he used years of experience and transferred knowledge across domains, such as building the Rainbow Toy Bar out of material he’d become familiar with while working as a plumber.

Institutional investors would have expected much more conventional market research to approve such product ideas, slowing down the process and potentially preventing what became high-margin offerings from making it out of the gate.

Pricing

Pricing is another important domain for investor compatibility. As Sam Popeil was preparing to debut his Pocket Fisherman—a collapsible fishing rod—in the early 1970s, his patent lawyer met him at a Chicago-area facility with trout-fishing practice ponds and asked him what the price of the product would be. As there was no comparable product, Sam said “$14.95,” based on the infomercial-industry practice of pricing at seven times product-manufacturing costs. But when the lawyer had his then-5-year-old daughter take an informal poll of people fishing the ponds, she came back saying they would pay about $20. Popeil increased the price to $19.95 on the spot, and the product went on to sell millions of units, with the extra premium helping to fund subsequent products

Similarly, Osher priced his Dr. John’s Spin Brush around $20, much closer to manual toothbrushes than electric ones. He made the decision based largely on intuition, after seeing what was offered in drugstores and talking to friends at major retail chains about sales patterns. In doing so, he created a new category of cheaper but effective electric brushes.

Again, larger investors would have expected reams of research to back up the pricing decisions, rather than what seemed like a whim based on inconclusive evidence. Entire books have been written on pricing, and mistakes can cost millions or even doom a product. But Osher’s and Popeil’s intuition—based on years of experience (see Malcolm Gladwell’s Blink for discussion of this phenomenon)—allowed them to “reinvent” price for success. As I mention in Invent Reinvent Thrive, such decisions “can only be made in certain environments . . . It’s almost impossible to do so if you have institutional investors . . . who will want to understand the risks and balance them against possible rewards.”

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Of course, not every entrepreneur has the experience-based intuition of a Ron Popeil or John Osher. Some less experienced or savvy business-builders may in fact need and benefit from the experience and discipline of institutional investors (and their contacts). Every entrepreneur, regardless of experience, does need to take their choice of investors seriously, recognizing that compatibility on this dimension is often as or more important than the money on the table.

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