DSL created a multi-billion dollar industry. It was launched into the market by a startup who licensed the technology from a top US university. The IP changed the internet and catapulted this startup into a world leader in digital modem technology, leading to a $300 million+ acquisition by one of the world’s largest semiconductor manufacturers.
For startups, developing an IP from the ground up is an expensive and risky activity. But there is a better way to launch a startup. By licensing in a proven technology, your startup then focuses its resources on getting the IP into the market.
Sources for finding IP include universities, research labs and large corporations with big patent portfolios. The trick is finding the right type of IP on the right terms. Some key considerations include the type of technology (disruptive or incremental), its market potential, your management teams’ experience, and securing the rights with as little upfront cash as possible.
That’s why the type of IP you license must be thoroughly researched and answers the following questions:
1. Is it ready to attract investor capital?
Timing is everything when it comes to attracting capital. The closer an IP is to market ready, the more likely it is you’ll attract investor capital. One of the biggest investment risks is R&D. Sometimes it turns into a black hole, costing more in time and money than planned. By licensing an IP that’s ready to launch into the marketplace, you’ll significantly reduce this investor risk.
2. How will you capitalize on its market opportunities?
Is it an incremental or disruptive technology? One is an improvement to a product or technology, the other creates a new market. What problem does it solve or solution does it offer? The bigger the problem, the more valuable the IP is to the customer. Is it better, faster or cheaper than the competition? More importantly, is it exclusive to your startup, giving you a competitive advantage in the marketplace? The better you show how the IP meets the market needs, why it’s valuable, and how that translates into sales, the more likely it is you’ll succeed in attracting investor capital and launching it into the marketplace.
3. Do you have the right team?
Licensing a market ready IP requires having the skills and experience to manage, produce and market it. Investors will ask if you’re the right management team. They are investing in your ability to successfully covert the IP into revenue, and scale up the business to give them a big return on their investment. If not, it puts your startup on the wrong path, ultimately leading to declining sales, poor performance and bad marketing decisions, leading to spending valuable financial resources in the wrong places.
4. What are the licensing terms?
This last point is critical. Securing rights to the IP is your startup foundation and investors want to know it’s done right. In addition to exclusivity and field of use, one of the most important terms is the licensing fee payments, and whether it’s negotiated in a way that won’t drain your financial resources.
There are several ways to do this.
The first is to get an option to license. You control the rights for a specified time for a small payment. That gives you time to test and confirm the IP and its marketability. Then you can negotiate a longer term license agreement with payments over the term of the agreement.
The second is to offer equity instead of cash. This is a great option when licensing from an institution, such as a University. The license fees are negotiated as a percentage of equity, such as 5% of series A. This saves your valuable cash, and gives the licensor a bigger upside from a successful exit event.
The third is to structure payments based on achieving certain milestones. Rather than paying licensing fees upfront and/or at certain date intervals, you tie payments to milestones, such as market launch or first product shipment. Now your payments will be timed closer to or when you’re actually generating revenues. I experienced this first hand with a client several years ago. We licensed several big movie franchises and knew the studios were notorious for sudden management changes, which if it happened, could delay our approvals and market entry. So we tied the approval milestones to the guarantee payments. Sure enough, that’s exactly what happened at one studio, and it saved the company from getting drained by the guarantee payments.
In each of these cases, the goal is to keep your capital for marketing and selling the IP into the marketplace.
Launching a startup doesn’t mean spending millions of dollars trying to develop a new IP. Licensing a market ready technology reduces your R&D risk, is more attractive to investors, and let’s you focus your resources on getting into the market faster. In many cases, a big licensor offers other resources, such as marketing, sales and production, which significantly reduces the amount of money you need to launch your startup.