You’re building your startup, focusing on getting your first product or technology launched in the market. But your IP also has opportunities in other markets, and you don’t have the time, people or money to exploit all those markets.
This is a common challenge for startups. Yet leaving these markets for later is not always an option. Especially in a highly competitive industry, such as medical technology, smart phones and computers, where new technology and products enter the market at a rapid pace. If you delay, a better financed competitor will enter the market with a similar technology, and set up the first mover advantage. While your IP may be better, if you’re not selling it in the market, someone else will.
Many startups I speak with often tell me their IP has other market applications, but they just aren’t ready to go after them now. They are concentrating on one market, building sales and then, at some future point (which they don’t know), they’ll move into another market.
The problem is innovation moves very fast. Customers and markets don’t wait for innovation. They’re looking for it all the time, and when they find something that meets their business goals, they buy, license or partner to get the technology.
Another way to think of licensing is a strategy to build your startup simultaneously in several markets. Except you do it with licensing partners who provide all the money, personnel and resources to make and sell it. Now your IP is generating revenues from several markets, instead of just one.
It’s like holding your place in line. At some point down the road, if you decide your startup wants to go direct in those markets, you’ll have the option to end your licensing agreement. Instead of having to build your sales from scratch, you can capitalize on the customers and market recognition created by your licensing partners.
Just ask Bill Gates. He used this strategy to launch Microsoft. Rather than trying to go after customer markets one at a time, he licensed IBM the rights to use his system in their computers, and carved out the right to sell his operating system directly. Through IBM’s extensive sales and distribution system, the Windows operating system went into both the business and consumer markets as part of IBM’s computer packages. By the time the licensing agreement ended, Windows was the best known and most widely used operating system. Gates simply took over those established markets and went on to build one of the worlds largest software companies.
In many cases, it’s more profitable to become an innovation development/design company, and use licensing to generate revenues from your IP. One of most famous names in cameras is now operating under a pure licensing model. Polaroid transitioned from a manufacturing company to an intellectual property licensing company when the company emerged from bankruptcy. Polaroid now generates an estimated $600 million in revenue through its strategic licensing partnerships and developing new innovative technologies under the Polaroid brand.
Another example is the apparel industry, where many of the biggest brands generate hundreds of millions of dollars without producing anything. Not only do they design and license out their core apparel lines, they also use licensing to reach new consumer product categories and markets. Calvin Klein and Pierre Cardin now generate most of their revenues from licensing. These companies do little manufacturing and license out to underwear, perfume, mens wear and more. 90% of Calvin Klein’s revenues come from its licensed products, which generate over $5 billion in retail sales. The only products it continues to produce is women’s apparel. Pierre Cardin generates more than one billion dollars with over 900 licensing agreements covering thousand of apparel and non-apparel products.
Many business are shifting from their make and sell business models to a create and license model. Some examples include pharmaceutical companies such as Merck and Upjohn, who license out rights to a number of their products to companies in other parts of the world. In 2014, licensing accounted for about 70% of Microsoft 2014 revenues (about $2 billion) and over 90% of their gross margin. Qualcomm generated a third of it’s revenues from licensing, which represented about 80% of their profit in 2013.
Licensing is an ideal startup strategy for today’s fast moving markets, especially if you’ve got multiple market opportunities. Rather than waiting until you have the money and resources to enter other markets, license your IP to companies already in those markets. That generates more revenue and delivers your technology into new customers hands. If a similar technology enters the market, they’ll be playing catch-up with your licensing partner. And if you decide at some point in the future to go direct, you’ll have an established market position and customer base ready to go.