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A concept company exists as an idea in the mind of an entrepreneur. Typically, the entrepreneur outlines his idea, or concept, in a business plan or concept paper so he can explain the concept to partners and investors to raise the initial resources needed to launch the company. Concept companies are often associated with projects that have significant intellectual property prospects, such as pending patents, and deal with venture capital firms.
Investors ordinarily decide to invest in companies based on quantitative measures, such as earnings per share, stock price, net profits or market potential. In the initial stages of starting a business, or when a business is trying to bring an innovative product to market, there will not be any quantitative information for the entrepreneur to show potential investors. This is particularly true in the case of unique products that do not have comparable products already on the market.
In these instances, the entrepreneur must work from a concept. He presents a company on paper that addresses all of the issues an operating company would need to address. The concept presentation may include product diagrams, leadership biographies, manufacturing schedules, budgets and financial projections. It can also include market studies and needs assessments to convince investors of the likelihood of success.
An example of the use of concept companies is in the biotechnology industry, where a doctor or scientist might have a unique idea to improve a medical process or solve a medical condition. His idea may be patentable, but the length of time it would take to bring the product to market could be difficult for an inventor without significant financial resources. The cost of testing the product to get it through the regulatory process may be beyond the resources of any single inventor. The inventor would present his idea as a concept company. On the strength of the invention and the prospect of patent-based exclusivity, venture capital firms and large pharmaceutical companies would fund the concept company until the product could be brought to market.
Another example of the use of a concept company is in educational settings. Some engineering schools run programs that help bring student inventions to the market. A student in the engineering department can develop a concept company to be considered for support. The school may decide to fund the concept, arrange for outside investors and help the student navigate the patent process. Certain schools have adopted this type of program in exchange for a small equity investment in the resulting company that they expect will pay big dividends once the concept company is operational.