Inventing for Money - Step 4
Prospect: Identify potential licensees of your idea
Identify Potential Licensees
You’ve protected your invention with a provisional patent. You’ve made a working prototype that you can use to demonstrate to an investor or licensee. You’ve studied the market and you’re convinced that you have a dynamite invention. The next step? You’ve decided not to venture, but to find a licensee to purchase the rights to your invention.
The first thing you need to do is identify the top two or three companies in the industry relevant to your invention. Generally, large, publicly owned companies are the safest ones to work with and will have the biggest distribution channels. However, the bigger the company, the greater is the internal inertia. You may find success with a smaller, more nimble company that is willing to move quickly and take greater risks.
There are a few keys parts to this step that will help you identify the companies that will pay the best price on the best terms for your invention. Chances are, you’ll be pitching your idea to a company that has deep pockets and the resources to effectively manufacture and market your invention.
Here are a few words about those big corporations that could either make you rich or drive you crazy. Or both.
It’s Not Easy Being Big
Life as a Fortune 500 company is not easy. The company’s huge size makes it hard to maneuver quickly. Ponderous bureaucracies built through years of focusing and creating efficiencies for a single product family or a single market can make development of new ideas exceedingly difficult.
Large companies are generally conservative. Investors in large corporations demand predictable investment returns, leaving little incentive for the corporations to make significant changes. Employees are often well compensated, with nice benefit and retirement packages, and there is little upside to taking individual risk or exerting extraordinary individual effort. Those entrepreneurial employees with visions of change and growth are often quickly squelched and either “reprogrammed” or banished from the corporate kingdom. Others give up thinking outside the box after repeatedly getting batted down by corporate planners, like so many fleas-in-training slamming against the lid of a Mason jar.
Besides the fixed inertia of the corporate culture, costs are often incredibly high in large corporations due to bloated overhead structures and high labor costs. Few brass-ring incentives exist in established corporations for motivating employees to exhibit the type of personal sacrifice that is commonplace in scrappy corporate startups. Where it’s expected at a new company to see founders pulling sequential all-nighters on their new projects, the vast majority of hours dedicated to any project in the large company setting are paid for at fully loaded hourly engineering rates. The lowest-level technicians in large companies, and in many companies even the rank and file engineers, are often covered by labor agreements negotiated based on core-business profitability models resulting in pay and benefit packages that could never be considered by a new startup. Surprisingly, it is often just too expensive for big corporations to consider new venture areas, especially where rapid development cycles are required.
Moving quickly is not just a cost problem in large organizations. New projects generally require long startup review cycles and budget plans corresponding to regular quarterly or annual windows. Getting a buy-in for a new idea requires layers of meetings, approvals, and proposals, and endless market testing.
The personal consequences of project failures in a big corporation can be professionally devastating for the individuals involved, who may have years of service or careers invested with the company. Individuals and small ventures can tread with abandon where professional managers and other bureaucrats would be terrified to go. Every step in the big company must be planned, scripted, budgeted and approved. Few employees in a large corporate structure are willing to take the individual risks often essential for the success of a new venture.
For these reasons, it is difficult for large companies to compete efficiently against nimble entrepreneurs in area of rapid innovation.
Corporations As Good Citizens
Beyond the issues of competitiveness, large publicly held corporations take great pains to avoid stealing ideas from others.
First of all, most large corporations try to operate ethically. That is not to say that such companies will avoid playing hardball or be anything but extremely competitive, but most well-run corporations will avoid lying, cheating, or stealing in the operation of their businesses. They do so because it is the right thing to do. Corporations are often owned by tens of thousands or more shareholders; such companies have a duty to the shareholders to operate in a way that is good for the company and good for those who have invested in the shares. Most boards of directors take this responsibility to heart and require that the company’s management operates with a high degree of ethics in all dealings, whether it be with employees, vendors, competitors, or the general public.
Businesses operate ethically because it makes good business sense. Companies that double-cross vendors, partners and employees eventually face consequences that negatively impact efficiency and profitability. A company that treats its employees poorly will eventually suffer labor problems. Businesses that steal ideas and inventions from those individuals and companies who seek partnering relationships with the company will eventually find that the flow of new ideas into their company is being diverted to the competition. Nowhere is it more true than in business that “what goes around comes around.”
Infringing upon the technology of others can be costly from a legal standpoint. No large company wants to be dragged before a jury by a small inventor claiming that the behemoth company stole his idea. Juries and reporters are just too unpredictable in these cases.
When you approach a big company, remember with whom you’re dealing. Think of it as like getting into a boat. When you step into a little speedboat you can start the engine and go. But when you walk up the gangway to a huge ocean liner, you’re entering a floating city that is built to travel in a straight line across vast oceans.
Find the Market Leaders
Most of the time, licensees will want to be the only company that manufacture and sell your product. If you are then going to have a single licensee of your product, it is only logical that you should chose the licensee that can sell most product and is most likely to provide you with the greatest return on your invention. You want to team with the top company in the relevant market.
If your product is a knee brace, then find the two or three companies that have the largest catalog of other related products, the largest distribution chains, and produce the greatest revenues from the sale of these products.
With the Internet, research of publicly held corporations is extremely easy. Visit a business website and within a few keystrokes you will find much more information than you will probably care to process. A good website for corporate research is freeedgar.com, where years of Security and Exchange Commission filings on every publicly held corporation can be easily searched. For a modest fee, information on privately held companies can be found using such resources as Dun & Bradstreet at dnb.com/us/.
Knowledge Is Power
Once you have identified the market and the leading potential licensees in that market, it is imperative that you take the time to prepare for selling the licensee on the benefits of your invention. This is one area where many novices fail. In order for a company to willingly risk resources on your product, you must convince the company that the rewards far outweigh the risks. The only way to convincingly make this argument is to thoroughly understand the risks and benefits and to be fully prepared when the time comes to present your case.
A key question in presenting to any potential licensee is to understand how the licensee will be able to make a product out of your idea.
Do Your Homework
Prepare for selling the licensee on the benefits of your invention. And be prepared to answer these questions:
- How will your licensee use your invention?
- What is the estimated wholesale price of the product?
- What is the production cost?
- What margins and volumes can be expected?
- What do other similar companies pay in royalties for similar inventions (a patent attorney can help you with this; there are legal treatises that keep track of such data)?
It may be that none of these companies will ultimately be interested in licensing your invention, but it takes just as much work to negotiate a contract with poor company as it does a rich company – you might as well try the rich companies first.
Getting Mugged by a Big Corporation
One fear that paralyzes many new inventors is the specter of some 800-pound corporate gorilla from New York or Hong Kong or London finding out about their creative marvel and either quickly mass producing and selling the product at a significantly lower price, or in some devious way gaining rights to the technology and suppressing the invention.
There are some simple but critical steps you can take to protect your idea as you work to license your invention:
- Keep careful records of your invention in an inventor’s notebook or file.
- Conduct a patent search.
- File provisional patent applications on new inventions, where possible, prior to disclosing them publicly.
- Register copyrights where appropriate and use a TM logo.
When and if you choose to enter into a dialogue with an established company, make sure you:
- Conduct discussions with all companies in writing. After oral discussions, enter discussion notes in your invention notebook.
- Make liberal use of non-disclosure agreements.
- Send a follow-up letter. It’s like a backdoor NDA stating this is what we discussed, and that the information is proprietary.