For many startups, going all the way from IP development to market launch is often capital-intensive. Many times funding is hard to get because of the high costs and risks involved. That’s where the licensing route is one of best strategies to use.
Licensing out your IP to a bigger player is also one of the fastest ways to get it in the market. But the secret to a successful partnership is making sure that it’s the right fit between you and your partner, especially if they’re a larger company.
A good example is what a small company did with its IP when it licensed rights to one of the largest health care companies. Their technology is a cloud-based patient dose management tracking system. It creates a database which documents doses and then helps the physician find the lowest possible dose for the best results. The value of this IP is it solves a big problem within the health care system – over medication and overdoses by patients.
But they didn’t have the money to finish the R&D and get it into the market, so they turned to licensing to find a partner to help them. And it had to be the right partner with the resources and expertise in their particular market. In this case, the licensee was a big player with the distribution, management know-how and customer base in the medication side of the health care market.
Licensing doesn’t mean giving up all the rights. As part of their licensing agreement, the small company allowed the health care company to re-brand the technology. In return they carved out the right to continue their own development and sales to other markets. Plus they got the added benefit of partnering with a larger company who got their technology to the market faster, and with much bigger market exposure.
It’s not just startups that use licensing to develop and sell their IP. Pharmaceutical giant Eli Lilly has over one hundred licensing partnerships around the world. Some examples are a Belgium-based company to develop treatments for osteoporosis, a Canadian medical group developing a multiple sclerosis treatment, and a Japanese partner to bring a cancer treatment to market (and Lilly kept exclusive rights to make and sell it in the rest of the world).
The best time to license an IP that still needs development is at the right stage of development. If you license it too soon, you wind up with a lower royalty, only to find out later had you finished fully testing your technology, you could have negotiated for more money. On the other side, if you license in rights to a new technology too early, you wind up getting saddled with an IP costing you more in time, money and resources than you thought.
For example, the royalty rate for a new drug or medical technology in pre-clinical testing runs 2 – 3%. As it moves through testing and FDA approvals, the royalty rate increases to 5 – 7%. If it’s in the market generating revenues, it’s worth 8% or more. Or put another way, as your IP moves closer to market ready, the development risk decreases and its market value increases.
If your startup is in a fast-moving market such as medical technology where the commercial lifespan of IP fades fast, the goal is to get to market sooner than later. Rather than spending all your time and money on cost-intensive R&D, licensing lets you tap a bigger partner to finish development and accelerate your time to market. You generate revenues sooner, and it gives you the option to carve out rights to license it in other markets, or make and sell it directly.
Here’s a quick video on How to Find the Right Licensing Partner.