Developing your intellectual property into a viable business opportunity is a complex proposition! In this series of posts, Porticos co-founder and President, Greg Patterson shares his insights on navigating the process. First written ten years ago, these posts revisit (and update) Greg’s original content for a new decade of product development.
Read previous post: All or Nothing
In the context of this series, the Business of Ideas, I use the word “extraction” to define the process by which the inventor derives income from an idea. We have spent a lot of time focused on the invention process itself. We have considered important aspects ranging from how a patent search is performed to how one effectively allocates activities to best utilize the inventor’s skill set. Ultimately, the hope is that there will be a pot of gold at the end of the invention “rainbow.”
This is not a criterion for being an inventor. You could be just doing this for a hobby or perhaps for academic reasons. But if you intend to make this a business, getting paid is a necessity. So what are some options for extraction?
Probably the simplest option (and the most desirable from the individual inventor’s standpoint) is to license the idea or technology to a company that is already focused on the product area or is interested in expanding into that field. This approach presents many advantages to the inventor, among them:
- The financial investment required by the inventor is greatly reduced because he or she does not need to support industrialization and production expenses. Tooling, materials, marketing, sales, and customer support can represent significant costs.
- The liability associated with the sale and use of the product is diminished. That is not to say that the inventor is completely protected. Lawyers look for as many targets as possible, so fundamental design-related negligence will probably find its way back to you. However, higher-risk items like manufacturing quality, user awareness, and consumer risk are the responsibility of the manufacturer or sales company.
- The sales and marketing channels are already in place and supported by the licensee company. Developing these channels yourself can be a costly and time-consuming adventure, to say the least. In many cases, there will be competition already in the market. They are probably better funded and firmly entrenched, which makes entering those markets by yourself very difficult.
Of course there are downsides to licensing the technology as well. The most obvious is a reduction in the potential profit. That makes sense; greater risk needs to yield greater reward to make it worth doing at all. By acknowledging that a straight license agreement has less risk for the inventor, one must acknowledge that the reward would be reduced accordingly. This is not to say that reward can’t be very attractive, but the licensee wouldn’t be buying your idea if they didn’t believe he could make many more times return on his investment.
As I’ve stated before, you really need to consider the services of a reputable attorney to draft and support any license agreement. You and your prospective licensee can and should agree, in layman’s terms, to what you expect from each other. An expert is needed to formulate a fair and legal written contract between the two parties.
At the other end of the spectrum, the inventor may decide to industrialize the technology into a product and then sell it to distributors, thru sales representatives, or directly to end customers. Compared to the straight license agreement, this scenario can yield higher rewards but the risks and costs are greater as well.
My experience has shown that the path you take is determined by a number of factors. The obvious factors are your financial backing and risk aversion. One of the less obvious factors is prototype difficulty. How challenging is it to prototype or otherwise demonstrate the technology so that it can be envisioned as a final product? Not everyone can take the vision from back-of-the-napkin sketches to a final product. The shorter the distance the potential licensee has to extrapolate, the more likely a license agreement can be reached.
It is worth restating: No company that manufactures or sells products (software, hardware, etc.) is going to shell out money for a license agreement unless they feel that the return on investment will be worth it. The only way they will know that is if they have a complete grasp of the technology. The potential licensee must be shown how the benefits of your technology will result in greater sales. Your licensee must see the path to industrialize the technology and, thereby, make money.
I feel it is for this reason that many ideas are not conducive to a simple technology license agreement. Rather, the inventor must pursue industrializing the product himself, with the hope to either sell the product or plan to sell the company after the value to the market is established.
How challenging is it to prototype or otherwise demonstrate the technology so that it can be envisioned as a final product? Not everyone can take the vision from back-of-the-napkin sketches to a final product.
How do you find a potential licensee? The work you did in developing your idea (product searches, marketing investigations, etc., discussed in previous installments) can be useful here. You can use that information to generate a list of potential licensees. Manufacturers, distributors, and turn-key corporations who are involved with similar products or customers are good leads. Be careful how you approach these entities. Make sure solid non-disclosure agreements are in place and, whenever possible, present any material or prototypes in person. Keep a record of who you presented to and when. You want to show enough to generate excitement and facilitate discussions, but you never want to “teach” the prospective licensee how to replicate or, worse yet, circumvent your idea.
Another good strategy is to visit trade shows or conferences in your specific field of interest. This, coupled with a list of potential companies, can lay the groundwork for face-to-face discussions. Another advantage of trade shows is that you will see and be seen by others who might not have shown up in your earlier searches. Be prepared for a lot of cold shoulders and closed doors. What you are doing is akin to the sales calls you try and avoid at home.
Regardless of the approach you choose, don’t plan on it being simple or quick. You will need patience and perseverance to get to the point where you can expect a return on your ideas.
This is a good time to remind you to be realistic with your skills. If you are not well suited for sales and marketing activities, partner with someone who is. You also need to be realistic with the value of the idea and be ready to negotiate. While we hope that all the hard work and research improve our odds of success, the fact is some good ideas never get to the point of extracting revenue. Recall from our first installment of this series, only 1 in 10,000 ideas brings value to the inventor. Yes, you need to maintain your passion but know when to pull the plug and move on.
Extracting revenue from an invention is really where the rubber meets the road. In many ways, it is the defining line between inventing as a hobby and building a Business of Ideas. Until next time, good luck!
