Why Licensing Takes the Guess Work Out of an Exit Strategy

When planning an exit strategy, most often, it's the best guess, especially for startups where a solid exit strategy can make a difference in attracting investors. That's when creating an exit based on a well-thought-out licensing strategy provides investors with the confidence they need to invest.

Recently, a company specializing in fabric technologies for stain, odor, and moisture resistance acquired one of its longest-running licensing partners. The licensee is a textile company that makes various products using its fabric technology, including upholstery, bedding, wall coverings, and drapery.

In this case, the licensor uses the acquisition as a market expansion strategy, investing in the acquired licensee's production capabilities to increase production to expand into new product categories using its fabric technologies.

The licensing acquisition exit strategy is a realistic target because often, the IP is the asset that the company or licensing partner is missing, such as a great product or technology, management, team, and customer list. But most entrepreneurs and startups don't think of their IP this way.

Yet in today's IP-intensive economy, intellectual property value and importance are skyrocketing as companies such as Apple, Google, Microsoft, and Facebook, acquire IP as part of their growth strategies. This, in turn, is creating ample exit opportunities for startups. Other industries that use licensing as an exit strategy include big pharma, where licensing and M&A are the ultimate exit strategy for most biotech startups.

Licensing is also gaining more attention as a core investment criterion for VC and private equity firms. One example is a venture-capital firm that focuses on investing in startups with disruptive IP in the clean-tech industry. The investment firm sources its startups from various places, including federal labs, incubators, and universities. Their strategy focuses on startups with technologies ready to enter the market through licensing agreements and other strategic alliances that provide the exit window for their investment.

Don't overlook licensing as an exit strategy. Once your startup launches its IP into the commercial market, consider switching to a licensing strategy to partner with one or more companies. At some point during the licensing term, if your IP is generating significant royalties, your licensing partner will most likely want to buy you out. You'll have several years of sales and royalty payment history to determine the buyout price.

Now you've got an exit strategy that leverages licensing partnerships and provides investors with the “realistic” type of exit they need to jump on board.