Leaving the Roller Coaster
(Photo of Thrust Air Coaster from Coasterpedia)
Today’s post is anonymized truth about one version of how lumpy money in a roller coaster pattern can turn into the holy grail of a big enough sum for retirement. I’m not going to bother with the familiar story of someone who builds up a business and sells it for a vault full of cash. I’m especially not going to bother with the familiar story of doing that with the advantage of starting out with a thick cash cushion.
This is a very specific version. Most who attempt it fail. Those who attempt it entirely by themselves almost always fail. For the few who succeed, the payoff at the end is indescribably delicious. It’s like being in a fairy tale. So…
Once Upon A Time
Once upon a time there was a postdoc researcher, an independent inventor, a mechanic with a knack, a university professor... Their job paid enough to live on, but their passion was an idea knocking around in their head for an invention. It’s what they spent their spare time on they way other people spent time on hobbies.
For our story, we’ll follow a postdoc researcher named Lila. She envisions combining plastic waste with Roman concrete (which becomes stronger instead of weaker with age and is hydrophobic) and strategically embedded other materials to make a new type of interlocking building block that is much faster to build with than brick or conventional concrete block, has superb insulating qualities, bears loads well, makes a floodproof bond with adjacent blocks and is resistant to all but the most spectacularly powerful earthquakes.
The university that employs her runs seminars about protecting intellectual property. From these seminars, she knows not to publish about her idea. She knows better than to discuss anything about her idea with anyone unless they work on it with her directly and sign a tight non-disclosure agreement. She hasn’t yet met anyone she is willing to work with, so she plods along on her own.
Her first prototypes are expensive to make and their performance is disastrously bad. She would be embarrassed to let anyone know about her terrible prototypes even if she could.
No Longer a Postdoc
Eventually Lila lands a post as an associate professor at a different place, Acme University. It’s known as a good place for innovators. Wile E. Coyote gets a lot of his equipment from companies that spin out from the university with new inventions.
Lila has access to better lab equipment at Acme than she had as a postdoc. Most of her time is taken by teaching and publishing research papers about other things she investigates, but she still tinkers with what she now thinks of as her magic building blocks. Year by year, they are getting better. As time passes, she moves up to full professor, gets tenure and builds up a modest pension.
A few years from the point where she could take early retirement on a reduced monthly pension payout, she begins to ponder whether she should do that. If she does, her pension won’t quite be enough to live on.
Lila’s magic building block prototypes have become almost usable. They don’t do everything necessary to make them fully ready for use and the cost of making them is slightly higher than the cost of conventional building blocks, but putting up a building with them would need less labor.
Should she carry on at Acme or take early retirement to put more attention into her invention?
Early retirement would be difficult. She couldn’t afford to make her own laboratory. She would need to find consultancy work to supplement her pension. She has never needed to do that. Occasionally a little consultancy turns up on the side, but it always comes in through the university. She doesn’t know how she would find such work on her own. It doesn’t look like lumpy money. It looks like practically no income to bolster her pension.
She also has no idea how to launch a business to market her building blocks, raise the financing to build a factory, market the blocks, supervise a workforce… Really, everything about turning her invention into a commercial venture would be completely new.
The safe decision would be to carry on at Acme until full retirement age when the monthly pension amount would be enough to live on reasonably well.
All of this goes around and around in her head. She can’t decide what to do. She’s glad the decision point is not too close yet.
Rose Enters the Picture
A few years out from the early retirement marker on Lila’s calendar, Rose approaches Acme with a proposal. Rose has a long history of crafting unusual, highly successful business deals and building businesses around intellectual property. Rose wants to do it one more time before she retires. She wants this time to produce a hefty lump of money. Her problem is that she isn’t an inventor. Would Acme be willing to let her team up with one of its innovators to commercialize their invention and use their facilities until it fully launches? Acme can have a slice of the financial proceeds if they say yes.
The university loves creating spinout companies that provide money to it. Rose is proposing to take care of the businessy side of it, the part Acme struggles with the most. She has a good track record at it. Of course they say yes.
Rose and Acme sign a non-disclosure agreement so Rose can review what is being developed within the university. After the legal department assures Lila that the NDA is watertight, she hesitantly provides an outline about her magic building blocks for the review. Out of 150 projects, Rose believes Lila’s has the best commercial prospects.
Hurry Up and Wait
It’s exciting to be chosen, but then it seems like nothing productive happens.
First Rose has to negotiate with Lila and Acme to set up the spinout company Better Building Blocks Inc. It’s complicated. The university wants BBBI to bring in work projects for Lila to do in the lab, for which it will bill BBBI. Acme also wants to have some shares in the company, for which it will get dividends and a portion of any buyout if BBBI is sold entirely. Rose wants Acme to take responsibility for any patents about Lila’s invention. Rose knows patent searches, legal fees, filing fees and maintenance costs would amount to thousands for BBBI with a patent specialist. BBBI has no cash yet, but Acme has in-house expertise and deep enough pockets to handle it without difficulty.
Lila is amazed that just getting all of this settled takes more than a year.
For the next few years, Rose approaches large target companies capable to manufacturing Lila’s blocks and marketing them to an existing customer base in the building design and construction industry. She brings in three pilot projects during those years. The clients pay tens of thousands to the university, of which Lila barely gets a token amount alongside her salary. Those projects help her refine her formula, design and processes, so she doesn’t complain... much.
The university files two patents. Rose advises that although having these patents will help to persuade bigger targets to treat the building blocks seriously, the rest of the know-how about making the blocks should be protected by keeping it secret. Patents are published a year and a half after they are applied for. Anyone can read patents. If they come up with ways to do things a little differently and go to the market quicker or more strongly than the inventor, they can crowd out the owner of the patent. If the interloper doesn’t change enough things and infringes on the patent, defending the patent in court would be expensive and take precious time. BBBI has very little money from its couple of projects and Acme might decide not to defend Lila’s patents. Keeping some trade secrets in reserve, unpublished, is the best defense.
Retire Early or Wait?
It's time for Lila to decide whether to take early retirement. This is a scary decision. Her teaching load and publishing about other research leaves less of her energy to put into the building blocks than when she was younger. If they are ever going to get out into the world and be used, she needs to give them as much attention as she can, and that won’t happen while she is still a full time professor.
Rose always sounds like landing the big target they need is just around the corner. Each time they talk, Lila feels buoyant, optimistic, ready to take a leap of faith even though her rational mind knows she shouldn’t get her hopes up.
Lila sells her house, uses the proceeds to buy a smaller one in a less pricey area, grits her teeth and takes early retirement. The terms Rose negotiated for BBBI allow Lila to continue using Acme’s lab facilities whenever BBBI has an active project. Between projects, Lila can think about her invention but cannot do any lab work on it.
Lumpy Money is Frightening
After a lifetime with a regular salary, Lila now needs lumpy money to get by. It’s harder than she could have imagined.
Lila thought finding some consultancy work to fill the gap in her finances wouldn’t be as tough as it is. Rose is busy trying to find the right commercial partner for BBBI, so Rose is not much help with the search for contracts. Pilot projects for BBBI don’t come in often enough, and the clients never decide to go any further when their projects end. Lila gets a few weeks of work at a time, usually with a few months in between. Despite belt-tightening, the gap between her pension and her living costs gradually erodes the modest cash cushion from downsizing her house.
A year passes this way. Two years.
It’s making Lila anxious. Sometimes she is in a panic about her finances. They get better when she has a consultancy contract or BBBI has a project and she feels ecstatic then, but they worsen in between. The overall trend is down. Lumpy money is a frightening roller coaster ride.
One More Client
Rose lands another project with another target. To Lila, it seems like the earlier ones. Rose says this time it’s different, a stepping stone to the type of deal they ultimately want, but Lila doesn’t believe her. She’s heard that before. At the end of the project, they’ll probably go away like the others did.
Lila has been working on this project and not getting any money for it yet. She knows the client paid the first invoice Rose sent to them. She asks Rose to change her terms with BBBI. She would like a low base salary plus pay at a modest rate for any work time she puts in on the project. That would ease her financial crunch and give her some certainty. The uncertainty of not knowing how much money she will have, and when, gnaws at her sanity.
In a long, uncomfortable conversation, Rose explains that BBBI built up modest debts since the previous project. Most of the first payment for this project had to go to paying those bills, ordering materials and paying Acme what they are owed for use of the lab.
Rose implores Lila to be patient a little longer. BBBI doesn’t have the cash yet to pay a base salary plus a labor rate. Within three months, the situation will change so much that the new terms Lila wants would actually shortchange her. If she can hold on, the next two invoice payments will come in. A minor amount needs to stay in BBBI for operating costs. The rest can be split between Lila, Acme and Rose. Lila’s portion will be a few thousand more than she would get from the new terms she requested.
Better than that, this client has already asked for a follow-on project and is interested in licensing Lila’s intellectual property.
BBBI is structured so that Rose has all the decision-making power in the company. Rose is careful not to rub it in and makes it seem like Lila is making a choice when she backs off from her demand for new terms, but really, Lila has to go with Rose’s judgement.
Rock Bottom
Lila’s cushion is gone. She has been building up credit card debt for months now. If she sells her little house, she can see how quickly she would run out of money to pay rent except in the most miniscule and run-down of places. It’s hard to concentrate on the BBBI project, but the project is the only respite from the way money woes spin around in her head, so she works and works on it.
It takes four months for the next payment from the client to come in, not three. It takes another month for the third payment to come in. This lateness isn’t the client’s fault. Despite diving in like a madwoman, Lila found it hard to make the specific refinements she had promised to deliver before those payments could be made.
But she cracked the technical problems. It simply took a little longer than planned.
Turnaround
The client paid BBBI.
BBBI paid Lila. First it knocks her credit card debt down to a level that lets her breathe again. Then it clears the credit cards.
Then the client started the second project they’ve been discussing with Rose.
Rose meant what she said! The second project starts a fresh cash cushion for Lila. It also wows the client. With subtle encouragement from Rose, the client no longer wants a license deal. They want to buy it all. The patents, trade secrets, know-how… everything!
If they were talking directly with Lila, they would name a price and she would probably accept it without much haggling. Lila understands the materials science behind her building blocks more deeply than anyone can imagine, but she doesn’t know business. Instead the client has to talk with Rose, who only understands the technology of the building blocks enough to market it but knows business and dealmaking the way Lila knows science. Rose sees how the client can make money with Lila’s building blocks, and how much money.
Rose negotiates a deal that gets BBBI a hefty initial payment for the patents and secrets of the building blocks, a nice salary for Lila to spend a year teaching her know-how to the client’s key personnel, and a slice of revenue from sales of products made using any of the intellectual property for the next 8 years (with a minimum that the client has to pay even if they don’t sell anything).
Most of this is split between Lila, Rose and Acme. Lila’s portion is an order of magnitude more than what she probably would have accepted if the client made the deal directly with her. Lila can live comfortably to beyond her hundredth birthday on her portion. The salary for a transition year is a cherry on top for Lila, and for the client it ensures that they have time with her to truly learn how to make and use her building blocks properly.
Unlike the people with the 149 projects Rose didn’t choose, Lila got the holy grail of people who live on lumpy money. Lila left the roller coaster.
And in future years, somewhere people will live and work in buildings made of her magic blocks, well insulated, well protected from floods and safe in all but the worst of earthquakes.