I was approached recently about partnering/investing in a new invention.
Get your wallet out of your pocket, verify its contents, hold it tightly, and run away fast.
Here's a contrary look at the proposition: If this idea is so hot, then why do they need you? Why aren't bankers fighting to lend them money? Why aren't angel investors & VCs lined up at the curb with limousines waiting to pitch them?
My "partner" who I don't know too well claims there is NO other product currently on the market. He tells me he has a patent, as well. Naturally, I will verify this.
You'll get to know him very well through the due-diligence process, which includes having a patent/IP attorney review his patent. Then you have to decide whether the patent belongs to him or to the company he wants you to invest in. If the patent belongs to the company then you have to decide if it has any value if the inventor walks away from the company. And finally you have to decide how easy it is for other companies to weasel their way around the patent.
You want scary patent stories then read about the copier (Xerox), the television, and the MRI machine. It took the copier inventor nearly 25 years after his first patent (which had been expired for years by that point).
If there's no other product currently on the market then the inventor is facing a tremendous effort of consumer education and buyer's behavior modification. It's unbelievable how people will stick to the same old less-efficient ways of doing something, no matter how "cool" the "new" product may be. Even getting on Oprah's Favorite Things is not a guarantee. It's just one more product that somehow has to gain traction, even if it's the next Segway and your inventor is Dean Kamen's smarter brother.
If he's planning to use his patent to make/market/sell his product then he's going to need an unbelievable pile of cash-- probably in the millions. If he's planning to license the patent then it's slightly less effort (and a bit less money) to attract the attention of someone who'll make/market/sell it for him. Even then there's the risk of another company legitimately sidestepping his patent, and the very real expenses of patent defense.
A huge mistake of enterpreneurs/angels is to focus on the product. No matter how cool it is, you don't give a crap about the product. You give a crap about the business plan and how much money the enterprise is going to make off the product. For the average bright idea you'd like to see returns of 20:1 within seven years. For business plans you want to see previous success, enterpreneurial experience, professional management like a contract CEO/CFO, a professional's product assessment, financial results on similar products (no invention is totally unique), and how much ownership your investment will buy. Then you want a timeline with specific milestones and penalties, such as having your equity shares double in value or you getting board control if the inventor doesn't achieve a milestone.
I was told today by someone else that "product liability insurance" is VERY important with ANY new invention.
Every product has liability insurance as part of its manufacture & sales. You shouldn't have to care about it. That's the company's responsibility and if they need you to teach them about product liability insurance then you need to find another investment.
Regardless, I realize the risk with new inventions and would welcome any and all comments, suggestions, advice, etc...
Your chances are somewhere around 1:100, only maybe not that good. Frankly you'd have better odds of going out in a thunderstorm, standing in a puddle of water, holding a three-iron over your head, and waiting for lightning to strike.
But that's the whole idea with angel investing-- making a lot of 1:100 investments and [-]hoping[/-] waiting for one of them to yield 500:1. For more on the process (including how to lose money at it) you could read an excellent book recommended to me by ClifP:
"Angel Investing", a harshly realistic look at the process and its returns (or lack thereof).
