A small pharmaceutical company stock shot from $14 a share to over $24, increasing more than 71%. What caused the significant stock price increase? Several licensing agreements for its opiate overdosing treatment drug. The agreements projected over $17 million in royalty revenues, and their licensees exceeded these projections, paying over $26 million in royalties. The company now has the money to fund further R&D efforts without having to dilute shareholders by selling more equity to raise capital.

With licensing, there’s no need to struggle to grow your startup or business internally, trying to raise capital by selling more equity and taking on the costly overhead. Instead, you reach out to partners who in turn license your IP for different products and markets, enabling your company to grow with no limitations and unlimited income opportunities.

Licensing is an ideal venture for today’s fast-paced economy because any business can license its IP with little more than a phone and a computer. Unlike building a traditional business, you don’t need to raise capital to license your IP. Licensing won’t distract or detract from your core business strategy. It’s a low-risk option for putting your IP to work in other markets or applications while you focus on your core market. Licensing your IP to another company is an excellent way to establish a relationship with that company, which, in turn, increases your business’ visibility and value.

Instead of raising equity or debt the traditional way, you can secure funding by using your IP and licensing agreements. Some companies, especially those in capital intensive industries such as health care technology, are funding everything from R&D to regulatory approvals and even acquisitions through royalty financing. In this type of funding, you pay back a percentage of your licensing royalties each year until the investor gets back their investment and a rate of return.

In the case of debt, your IP is used to collateralize the loan. Even if you’re not generating any revenues yet, if your IP gets a high valuation, it can be enough for a  lender or investor to commit. It is a growing source of funding and many mainstream banks that once shunned startups and small business are now looking at IP assets as an option to secure the loan.

Many of the world’s largest companies, including General Motors, Kodak, Seagate, and others, use their patents for funding, especially for collateral to secure financing. Global brands and movie studios, such as Universal and Disney, where the bulk of their assets are trademarks and copyrights, have secured hundreds of millions of dollars in alternative financing. These companies receive cash against their often undervalued IP portfolio.

Documentation and valuation are essential, especially if you’re a startup. IP is the bulk of your value and a big part of what investors will be investing in. You must be “due diligence ready,” so you can give potential investors or lenders the right information they need to make an investment decision. A third party valuation of your IP will be required. A valuation isn’t cheap, but if your startup or business is capital intensive with the potential for a significant market payoff, it is worth the investment.

IP as loan collateral and royalty financing are growing alternative funding options that don’t dilute your company equity. When compared with the traditional cost of equity or debt financing, IP funding is a lower-cost alternative. Which financing option to use depends on several variables. These include the type of IP, whether it is still in development, your company size, the funding required, and the market potential for your IP.

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