Question

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, only used $1 million) The initial expected present value of potential cash flows was high ($ 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?

Answer 1

John Osher, father of Dr. John's Products Ltd., is known for his breakthrough product battery-operated toothbrush. The Spinpop battery operated lollipop was the roadmap to the making of battery-operated toothbrush. The success story of Dr. John's company is attributed to the key concepts -

To explore gaps in the market or product lines

To mobile capital when you don't need it, so that you will have it when you need

Anticipate competition and plan accordingly

Penetrate into the market with the new product and keep improving further

Osher had a small team with limited budget, this came to an advantage for his success. Also he and his team had unique insights, relationships and experience. They had partnered with a Chinese manufacturing partner, which had a great role to play in creating and production of the battery-operated toothbrush.  

For improving the overall effectiveness of this option to introduce a battery-operated toothbrush, Osher and the team copied the model used for producing Spinpop batttery operated lollipop. The key determinants of the value of option are the cost of the option which is low(the exercise price) , expected present value of potential cash flow was high and The upside(volatility) was very large.

They began with low-cost measures to introduce an inexpensive and indegeneous toothbrush. The team targeted the larger market segments. The battery-operated toothbrush was created to fit into the segment between the high priced electric products and manual toothbrushes. Most importantly, this option was more valuable because of the fact how passionate Osher was to invent new products that affects the quality of human life positively.