Option to introduce battery-operated toothbrush

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Reference no: EM132178102

Options, Opportunities, Experiments, and Value

Entrepreneurs are in the business of creating and managing options, and investors are in the business of buying options. Going back to the company examples in Modules 1 and 2, you can see the process in action. John Osher created an option to develop and sell a battery-operated toothbrush. He convinced some investors to give his company some of the money needed to exercise the option.

At Dr. John’s, you can see the key determinants of the value of the option:

The cost of the option (the exercise price) was low (total capital raised of $1.5 million, of which only $1 million was used)

The initial expected present value of potential cash flows was high ($ hundreds of millions)

The upside (volatility) was very large—billions of people around the world might buy an inexpensive, high-performing toothbrush available through mass market retailers

Dr. John’s had time—perhaps a year or two—to fully commit to the venture and go into mass production and distribution before competitors could enter the market with a similar product and price

The level of interest rates didn’t have a big impact on the value of the option

John Osher and his teammates ran low cost experiments in the beginning to decide whether to proceed. These tests revealed that they could produce the device, it would perform effectively, lots of consumers would buy it at the proposed price, and the company and everyone in the value chain could make attractive profits and generate high free cash flows.

An interesting feature of the Dr. John’s story is that the value of the option to start such a company was probably higher than for other teams acting independently or inside large companies. Osher and his team had unique insights, relationships and experience. Their prior work with the Chinese manufacturing partner was particularly important. They trusted each other. They could work quickly and efficiently together. They had already produced and sold millions of SpinPops, a similar product.

How did Osher and the team improve the value of this option to introduce a battery-operated toothbrush?

Reference no: EM132178102

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