Let's Make a Deal
Licensing your idea to a bigger company can mean fewer hassles--and a lot more money in your pocket.
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Would you like to profit from your idea without having to start
your own company, worry about manufacturing or handle the expenses
of marketing your product? Consider licensing. Licensing means the owner of intellectual property (a patent,
trademark, copyright or trade secret) gives someone else permission
to produce the product related to that property. In return, the
inventor is paid a royalty (typically 2 to 8 percent of sales). One
company I worked with signed a licensing agreement with the
inventor of a vibrating dental scaler. Over 10 years, the
inventor's 8 percent royalty amounted to more than $30 million.
Not bad for an investment of $15,000 for a patent and a rough
prototype. Licensing can be ideal if you don't have the desire or
expertise to market your product. It lets you take advantage of the
marketing power of a large firm and enables you to concentrate on
creating more products instead of working on marketing or
operations. Content Continues Below
On the downside, once you license a product, you have no control
over what the licensee does with it. The company may change the
product, fail to promote it or even drop it after a few years.
There's also the risk that, while investigating your idea, the
licensee may decide your patent is weak and design its own version
of the product. Money Matters
While licensing does save you the expense of launching and
marketing your product, it still requires some capital. Typically
you need, at minimum, a patent, a prototype and research that shows
there is a market for your product. If you can't finance these
steps yourself, you'll need to seek an investor or partner.
Partnering with a product designer, prototype engineer or small
manufacturer can be a good way to share some of the financial
burden while getting help with the design and manufacturing
stages. Virtually any type of product can be licensed. What varies is
the stage at which a company will license the product. You may be
able to strike an agreement quickly if you are already successfully
producing and selling the product. You may be able to license a
product with just a prototype if it meets a clear market need in a
convincing way. In some cases, you may even be able to license an
idea in the concept stage if the product has breakthrough potential
in a major market. The key word is "may." Licensing a
product in the concept stage is highly unlikely. The further along
your product is, the better your chances of licensing success. Try
to take your product as far as you can before approaching potential
licensees. | | INSIDE SCOOP | | To get a license,
you need to learn about your industry-inside and out. Learn who the
major players are in your market and which companies are most
likely to sign a licensing deal. Keep up with trade magazines and
attend trade shows and association meetings. You'll also need a
patent attorney with licensing expertise. Here are some helpful
resources:
- Licensing Executives Society, a
network of licensing professionals, publishes a magazine and other
publications related to licensing; (703) 836-3106, www.usa-canada.les.org
- Thomas Register of American
Manufacturers, available at most public libraries and at
www.thomasregister.com
- United Inventors Association of the
United States of America, P.O. Box 23447, Rochester, NY 14692;
(585) 359-9310; www.uiausa.com
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Originally published in the June 2003 issue of Entrepreneur's StartUps
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