Going It Alone or
Going with the Big
Guys

Which would you rather be: Colonel Sanders,who sold out his chicken empire and ended up slicing his profits to the bone; or John Y.Brown, who kept Kentucky Fried Chicken all to himself, became one of the wealthiest men in the country, was elected governor of the state,and married former Miss America Phyllis George?

One of the questions people ask me is "Should I sell my idea to a big company or run with it myself?"

When I found out that the rights to the Wallwalker were available, I had to make a decision fast. Should I buy the rights and manufacture or import the Waliwalkers myself? Or should I buy the rights and then sell them to a big company and have them market it? If I took the latter course, I would cut my risk and need for capital, but I would also make only a fraction of the potential profit from the toy. If I decided to try to keep the rights, should I form a partnership to buy them, spreading the risk over several people and raising capital at the same time? I would cut my risk but also my percentage. What should I do?

The answer for me was simple. I wanted it all. If I had sold the Wallwalker to a large company, I would have made about one thirtieth of what I eventually made. And when you're talking about one thirtieth of $20 million, you're talking about a pretty wide margin. Taking the licensing route would have been very tempting to most people, especially when a major toy company made a big offer, but the decision to take all the risk and see the thing through from beginning to end was the best one I've made in my life.

A lot of people point to the success story of Xavier Robert's Cabbage Patch dolls and Coleco as a good reason to license. But that fad was an anomaly. Not only was the doll priced higher than most fads, it's also rare that a large company has a fad success. At the height of the Cabbage Patch phenomenon, parents were lined up around the block to buy the dolls. This generated publicity, which was great. It also created the hard-to-get aura, which can make a fad even hotter. Coleco was brilliant at running the fad, but when it came to keeping it going, they weren't so smart. Instead of becoming an endangered species, Cabbage Patch dolls might have become American classics with the longevity of Barbie if Coleco hadn't milked them to death.

Then there's the example of Leonard Fish, the inventor of "Silly String," who licensed it to Wham-O about twenty years ago and got a royalty of 3 percent. Wham-O sold $20 million worth of Silly String. So Fish made $600,000. Big deal. He would have been better off if he had never walked into Knerr's office. Or if on the day he walked in Knerr had gotten up on the wrong side of the bed or just didn't get it, or had already licensed his quota of fad ideas that year, Fish would have been out on his ear but eventually up to his gills in money. Having no choice but to market Silly String himself, he would have made a lot more than he did.

Consider the guy out in Minnesota who invented Postit, those now ubiquitous pieces of note paper that have glue on one end. The inventor of Post-it got his idea when he was at choir practice and saw the choirmaster putting little pieces of paper containing conducting direction onto the sheets of music with tiny pieces of Scotch tape. He thought, Why not little pieces of paper with the Scotch tape already attached on one end? He went home and saw that it could easily be done-this is not what you call serious innovation. At this point he had the choice of starting his own company and marketing this item or turning it over to the company he happened to work for: 3M. He didn't want to take the risk, so he sold the concept to his employer. Instead of many, many millions of dollars, he got a bonus, a promotion, and a raise. That guy must be kicking himself now.

The reverse of this is Debbie Fields, the phenomenally successful owner of Mrs. Fields' Cookies. She started small-one store at a time-with a great recipe and a good line of credit. After a few stores it was clear she had a phenomenon on her hands. She could have sold out for millions of dollars, keeping a percentage. But she didn't. She risked everything, keeping total ownership. Not only did she not sell out, she didn't even franchisesell her name and know-how to budding entrepreneurs, splitting the risks and the profits. She is now a multimillionaire with five hundred stores. She wouldn't be if she had sold out.

If you look at the short history of fads you'll see that I'm not the only one who figured this out. Nearly all fads have been created by individuals or very small companies that don't sell to large companies until the fad is over.

Consider the Slinky, something that's been around for over forty years and was started by a couple from Pennsylvania, Richard and Betty James. Richard discovered the marvelous properties of the Slinky when a large torsion coil fell from a shelf and began to move in a lifelike way, He knew immediately he had something very big. He quit his job, and the Jameses devoted all their time and energy to manufacturing, promoting, and selling the toy. Although they were inundated by offers from big companies to sell or license, they refused them all in favor of keeping complete control. As a result, in its long lifetime, the public has never been overexposed to the toy. Betty James, now a widow, runs the company and continues to reap the benefit of sole ownership-a benefit worth many hundreds of thousands a year. In a world of short attention spans, Slinky's staying power is legendary.

Lots of times, of course, it isn't a matter of making a smart decision on whether to license. Many times you aren't going to have the luxury of choosing between licensing with a big company or going it alone. You will be going it alone because no big company is willing to jump on hoard. Think: How many products does Mattel license every year? Hasbro? All the companies together do maybe five products a year. The chances are pretty slim for any one person; most times the fadster is on his own. But remember the positive side of this fact of life: You get to keep the bulk of the profits.

When you do embark on your fad alone, to the extent you keep the rights, you may still not be alone. You may need help. It's rare that any one person has the multitude of skills necessary to run a fad completely on his or her own. Indeed, no one at Mattel could do that. No one at IBM could do that. These people are taught marketing or product development, or finance, or distribution, and stick to that specialty. But a fad is one person. The guy in the garage doesn't have someone on the tenth floor to have a meeting with and decide what to do about promotion.

That being said, I still decided to do it all on my own. That's because I am moderately good at a lot of things, although not an A-plus in any one thing. Usually, one person is a D in financing, an F in distributing, and an A-plus in media. I'm a straight B in everything, which turns out to be enough to get the job done.

Ask yourself whether you are a specialist or generalist, good enough to cover a wide range of activities you need to pull off. Just as important, also ask yourself how important control is to you. It was very important to me that throughout the entire process I maintained 100 percent control, not just because I kept all the profits (although that was very important as well) but also because I remained the crusader, the Moses, of the product. I didn't have to sell any partners, or board members, on my fad. I was the fad. I didn't have to worry whether someone was as committed as I was. I didn't have to worry about whether I could talk anyone else into adopting my marketing strategy. I didn't have to worry about getting approval to build a factory or spending a couple of hundred thousand dollars on a lawyer to keep out the knockoffs. No board could tell me to price the Wacky at 99 cents when I wanted to price it at $1.29. Best of all, in my situation, as it turns out, no one could force me to milk the product to death.

The other great trap I avoided by keeping control was the specialist mentality. The sales rep, the public-relations man, the distributor, the lawyer are all going to look at the fad from their point of view. Imagine if the distribution people were in on the decisions. The minute Wallwalker sales dropped off at K mart, it would be finished from their perspective. I would have been hearing, "Ken, get out." They would be pushing to sell the next two million by dumping them on the market at any price. "Let's`drop our pants,' Ken, and go to three for a dollar."

If the distributor has a 30 percent voting bloc, in the situation described above you drop your pants. Maybe you could get the marketing guy and the general counsel to vote with you and beat him, but that's unlikely. And once your product is on the "Three for $1.00 table" at K mart, it's over. Finished. Why would Kellogg use it as a premium in Rice Krispies, spending millions on advertising, if it's been keeping bad company in the bargain bin?

Even if you conclude you are like me-a control freak-you can still get help in some of these areas, short of licensing or taking on partners (remember hints on partnerships in Chapter 6). Licensing isn't an all-or-nothing proposition. Of course, you can sign one piece of paper and have a company like Wham-O do everything for you, like Silly String, or you can give up bits and pieces. In exchange for a percentage of the profits, you could, for example, get several distribution companies to handle marketing for you or hire a sales company, or join forces with a manufacturing company, instead of building your own plant. Then you are neither giving away voting shares nor giving away the whole ball of wax to a licensing company. You are just giving up some of your profit. You are buying expertise when you need it.

How you slice the pie if you decide to go this route is important. Think negotiable. Everything is negotiable at this stage. Start low, but realize that for the best people you are going to have to pay through the nose. Sometimes people are aghast when I tell them what I pay for some things, but the job gets done well and promptly. Next Tuesday in fads isn't good enough. You have got to get the person who can get results, who knows the ropes. You can't have someone learning on the job. No novices need apply.

Some people you just can't pay. This is a shame in some ways. Better to pay than to give up a percentage but, for instance, distributors don't work that way. Many want a percentage, and all you can do is negotiate. A bigtime distributor is going to want a percentage and some exclusive rights. Don't do it. If you absolutely have to give away national distribution rights to get the best person, make it contingent on their producing and producing big. Get a guarantee. "You want the whole country," I say. "Deliver 10 million in sales in three months. In three months, if you do 9.9 million, it's bye-bye."

If the guy comes back and has 9.9 million, I say, "Close, but no cigar." You have to be tough because the distribution game is a jungle. Believe me, they'll stab you in the back if they can, and in this business it's considered legitimate, even admired. So you can't be a nice guy and hand over the money and say, "Well, 9.9 million. That's close enough." I don't like to play by these rules, but I've been in the business long enough to know that the only way to win is to be tougher than they are. I've shocked a lot of people because I don't seem like the ruthless type, but I only did what they do all the time, only I did it first.

So at this point, you have to say, "9.9 million. Well, that's not so close. You want an extension of a week to make it. Okay. But we jack it up to twelve million." They have no choice but to go along with you at this point.

This is why keeping control is so important. I had one distributor, one of the best in the business, and I really needed him. Behind my back he was trying to get a piece of my rights in exchange for distributing a huge shipment of Wallwalkers. His lawyer tried to slip a clause in our agreement that stated he would approve imports. This meant he could stop my imports from coming in the country at the port of entry. If I had been unhappy with his performance or for any reason wanted to replace him, I would have been stuck because he could stop my imports at the dock in San Francisco. Then where would I have been?

In another instance, I was shipping millions of Wallwalkers to an account. Logistically it was a huge operation. One of my distributors sent me his shipping clerk to help with the paperwork. But he double-crossed me and told the shipping clerk to make all the money payable to him, the distributor, instead of to me. I discovered this after the shipments had gone out and it was too late to do anything about it. So I was in the position of having him pay me instead of the other way around. He finally did after a lot of threats and long-distance yelling matches, but I still ended up losing $50,000 on the deal.

All types of people will try to pull stuff like that all the time, and you have to just keep saying to yourself, "I have got to keep control here." Again and again.