Making money with your IP means profiting from the value created by your IP. Its value depends on many things and changes depending on what it does (disrupts an industry, improves production, new product innovation, etc.), how close it is to market ready, and how profitable it will be. To tap this money-making opportunity, you have to do something with your IP.
Intellectual property is an asset, just like real estate, and there are several ways of making money with it. Producing and selling products is one option. Selling your IP is a second option, and licensing out its rights is a third way. In this article, we’ll discuss each of these options and some key points to consider when deciding which option to use.
Sell the IP
Selling your intellectual property means permanently transferring all your IP ownership and use rights to another person or company for an agreed upon price. The challenge is figuring out a fair price. If you’re IP isn’t in the marketplace or being used in a significant way, it’s hard to know how much money it will ultimately make, and how valuable it is or will be.
When the inventor of one of the most famous boys action figure sold his patent to the worlds largest toy company, he was given a choice. He could sell it for $100,000 or ”license” it for $50,000 upfront plus a one percent royalty once sales exceeded $7 million. He sold it for $100,000 and lost out on an estimated $20 million in royalties over the next 30 years.
If your IP is average or non-spectacular, and the revenues are not significant, then selling the IP would be a good option if it’s fairly valued or even over-valued by the buyer.
Once the sale is completed, there is no going back. There are no refunds in the world of intellectual property. And this is risky for both you and the IP buyer. The IP owner risk is giving up an IP that later turns out to be very valuable. The IP buyer risk is acquiring and IP that’s less valuable than the purchase price.
Use your IP
The second option is to set up a business to make and sell your IP. This requires developing it into a market ready format, and investing the money, staff and time, and taking the associated risk to reap the benefits if you are successful. After all expenses and operating costs, the balance is profit.
Keep in mind, the odds of succeeding as a startup are stacked against you. Statistically, most startups fail within 5 years. If you go this route, and run out of money, it’s very difficult to switch to another option.
I often speak with inventors who wind up in this situation. In one case, the inventor created a new zipper technology and spent all his money getting patents, developing prototypes, and trying to find customers. When that failed, he tried licensing it to companies he thought would be interested in using it on their products. But he wasn’t successful because all he was doing was throwing his IP against the “licensing wall” hoping something would stick. He spent years doing the same thing over and over only to wind up back where he started – a great IP with no money and resources to get it into the market.
Before starting a business around your IP, consider your tolerance to risk, and whether you are suited to manage the uncertainties, delays and other unknown “issues” that pop-up. If your IP is an industry dominated by large companies, is capital-intensive to develop and build, requires regulatory approval,or will be technologically obsolete in just a few years, starting a business is most likely not your best option.
License the IP
The third option is to license your intellectual property to one or more companies in return for paying you a royalty on sales. This is far easier and less risky than setting up your own business.
Licensing lets you control your IP rights. You rent out (i.e license out) the rights to make, use, and sell it to other companies. Licensing is a faster way to get your intellectual property to market. It can be done in months vs. the average two years it takes to start and grow a new business. Licensing let’s you leverage your IP rights and divide them geographically or by distribution channel. You can also keep some or all the rights for specific markets or product formats. It minimizes your downside risk, and your upside is determined by the royalty rate.
One of my clients used this strategy to successfully launch their product in Europe. We licensed a large distribution company and gave them sub-licensing rights to several countries in Western and Central Europe. In this case, they had rights to produce and sell, and could also generate revenue by licensing other companies in different countries.
So how do you decide which option to use and when? My recommendation is to start with licensing. It decreases your risk and increases the chance for commercial success. It’s a faster track to the marketplace, let’s you tap into companies who already have the wheel in motion, and is a less risky way to make money with your IP.
It’s also a flexible strategy and can be combined with the other two. Licensing a bigger partner is often a first step toward a buyout. As they use your IP, it generates revenues, builds value and leads to a higher buyout price. If you’re a startup, you can use licensing to generate early revenues in other markets while you focus on building your core market. If you’re an inventor and don’t want to run a company, you’ll avoid the time and unknown risks of starting a new business.