The question of when to sell or even to share an
innovative idea with another party becomes an important issue for most
entrepreneurs during the commercialization process. When forming research alliances, pursuing
venture capital financing, or selling an idea outright, timing is a key
factor. Selling early allows
entrepreneurs to realize financial benefits early in the process and limits
their own capital investments. Waiting,
however, allows the entrepreneur to develop the idea more fully, reducing the
risk of appropriation and potentially resulting in higher profits.
In a PhD thesis funded by the Kauffman Foundation (an executive
summary of the dissertation is available here;
a working paper version is available here), Hong Luo uses data from the film industry to compare the costs and benefits of
selling an innovative idea early in its development versus waiting until the
idea has more specifics and depth. Her 2010
thesis, “Markets for Ideas: Theory and Evidence from the Movie Industry,”
considers when Hollywood screenwriters choose to “pitch” a storyline for an
original movie idea to movie studios and production companies or to “spec” a
completed script. A pitch simply
involves the presentation of an idea, including themes, basic plots, and
characters. If the pitch is sold, the
writer is then paid to write a complete script. In contrast, a spec requires the writer to develop the idea fully and
write a complete script, with no guarantee of compensation.
Pitching, then, involves considerably less effort than specing
and limits the amount of time the writer spends on an idea that may not ever be
purchased. Pitching may also, however, open the writer to more risk that the
idea will be appropriated, as legal protections are stronger for more fully
developed ideas, and may result in a lower overall return.
Using sales data on the number of successful specs vs.
pitches, as well as information about writers’ previous successes and the
returns to their sales, Luo analyzes 1,638 original movie ideas sold between
1998 and 2003. Luo finds that less
experienced writers find it difficult to sell pitches because studios are less
interested in meeting with them. These
writers are most likely to spec. Writers
with the most experience have less difficulty arranging meetings with
buyers. Luo finds that these writers
will pitch certain ideas, but will spec for ideas they believe have a higher
value in order to protect their intellectual property. The most successful writers spec more often. Finally, writers with a moderate amount of
experience are more likely to pitch, as they are able to access buyers, but are
less confident that the idea will sell. The table below illustrates these conclusions:
|
Writers’ experience in the
previous five years
|
Predicted likelihood of a
spec sale
|
|
No major writing credits
|
0.59
|
|
Writers with one credit
|
0.37
|
|
Writers with two credits
|
0.42
|
|
Writers with three credits
|
0.63
|
|
Writers with four or more credits
|
0.74
|
Luo also finds that for more experienced writers, a spec
typically performs better than a pitch, if the movie is released. Other things being equal, a spec, on average,
performs at least 60 percent better than a pitch at the U.S. box office, and
takes at least 13 months less time to get to the theater.
While this research is, of course, specific to the movie
industry, I suspect that many of the conclusions are widely applicable. Entrepreneurs from any industry must consider
the following when they contemplate the sale of an innovative idea:
- Access to a desirable audience. Entrepreneurs
generally gain greater access to the buyers of their ideas as they become more
successful and develop stronger and deeper networks. Entrepreneurs with limited access will likely need to develop
an idea more fully before selling it.
- Confidence in the idea. Entrepreneurs who are
confident in an idea’s future success should develop the idea further before
selling. Experienced entrepreneurs may have more confidence in their judgment
and discretion, but newer entrepreneurs, too, may choose to develop a great
idea more fully.
- Costs of fully developing the idea. This
consideration may be very important in industries where the costs of idea development
or the opportunity costs of working on an idea are even higher than the costs
of writing a script. Entrepreneurs facing higher costs may choose to sell
earlier.
- Appropriation risks. A court is more likely to recognize
that an idea has been stolen when the idea is specific and fully developed. Entrepreneurs
need to be aware of risks they face when they share their ideas.
While these considerations may balance out differently
for different entrepreneurs and for different industries, the trends largely hold true for all entrepreneurs. Inexperienced
entrepreneurs will likely need to develop their ideas more completely in order
to attract buyers. Experienced
entrepreneurs may share a few ideas early, but successful, serial entrepreneurs
will often benefit by developing their best ideas more completely in order to
maximize their profits. As entrepreneurs
accrue experience, they can leverage their knowledge, networks, and expertise
to develop their ideas more completely before selling them.
