Many entrepreneurs believe their business strategy will center on licensing their protected product or technology to generate revenue from royalties. In truth, however, licensing is a fairly low probability for a startup. Startups are born based on ideas for products, but companies do not license ideas.
An idea, no matter how strong it may appear, will not interest another company unless there are customers who will pay more than it costs to make and sell a product incorporating the idea.
This means licensing for technology entrepreneurs can occur only if the startup’s product is demanded by a customer who will pay for a product that incorporates that idea in an amount that provides a suitable profit margin. There are two ways for this to happen:
- The startup company develops the idea into a product that shows promise in that customers exist today and will continue to exist in increasingly larger numbers in the future.
- There is an existing customer/market where revenues can be enhanced by integration of the startup’s innovation into the company’s products.
The first scenario occurs when the startup entrepreneur does the hard (and expensive) work of developing the idea into a product and successfully brings the product to market. A license can then result if a larger company seeks to buy access to that now-existing customer or market.
The second situation occurs when a larger company with existing customer and market expertise, seeks to satisfy an unmet need by acquiring an innovation that fills a gap in its product suite. MotionX, a company with core motion sensor technology for wearable products, has developed its technology into a functioning product and is now licensing its well-protected innovation to a number of companies.
Atlanta startup United Sciences is an example of a company that does not make a product but, rather, is generating revenue from licensing by targeting its well-protected 3D imaging technology to create new innovations in existing product categories. United Sciences’ licensees are OEMs that seek to improve their established product categories by integrating the innovation to drive sales.
However, in neither of these situations is it the idea that is licensed; rather the licensee is buying access to a new product or innovation that aligns with a validated business model–either that of the startup or its own. When licensing is broken down into this framework, it should be fairly clear why licensing does not occur as often as conventional thought would make it appear. This is a tough reality for startup entrepreneurs to accept, but going into the process with open eyes is a lot better than the alternative.
There is much more to successful licensing by startups. On Nov. 17, I will present insights, tips and tricks at ATDC to entrepreneurs who wish to increase their probability of establishing a successful exit from licensing. You can register here.