You need to consider how you’re actually going to make money out of your invention. You have three main choices: royalties from a company (from now on known as licensing), or becoming an entrepreneur, or forming a joint venture. They can be quite different options but you should make the same strategic move whichever you choose: start a business.
Don’t panic if the last thing you want to do is run a business. Most inventors will prefer, and be right to prefer, licensing. So point one: the business you’ll start will be low cost and relatively risk free. And point two: if you don’t do it your chances of a licensing agreement with a company will range from not very good to nil.
There are basically three ways of exploiting your idea:
Like most individuals, few inventors have much desire to be entrepreneurs. All they want to do is find one or more companies willing to pay them royalties for the use of their idea.
Or, more accurately, for the right to use their IPR. The terms on which those rights are given and received are enshrined in a legally binding licensing agreement. For most inventors, a licensing agreement is the holy grail.
The main reasons why licensing is often the most sensible exploitation option are:
A licence is a form of permission granted by you and backed by law. It allows the licensee (the person or company to whom you have granted permission) to exploit intellectual property which is legally recognised as yours. In effect it allows you to lease your IPR for an agreed period to someone - usually a company - who can then use the IPR to protect them while they make or sell products incorporating your inventive step.
It’s possible to have several licensing agreements (with different companies or for different countries or applications) running at the same time for the same IP, as long as no agreement breaches the terms of any of the others.
Broadly, a licence:
If you’re not the only legal owner of the IP, all owners must agree to the granting of a licence. No agreement, no licence. You might think it would be in every owner’s interest to agree, but we know of several licensing agreements that were lined up and then didn’t happen because a co-owner took his or her bat home. Advice: if it’s a shared idea, consider buying out early any co-owner who shows signs of being awkward. If it’s your idea alone, don’t share legal ownership. Reward others in different ways, for example by giving them shares in a limited company set up to exploit the idea.
Few companies now have the R&D resources to originate all the ideas they need to stay in business, so it’s in their interest to look for low- cost, reduced risk ideas elsewhere. It’s also a duty of management to increase shareholder value, and one way of doing that is to acquire and exploit promising IP. Putting the two together adds up to licensing opportunities for the right inventors with the right ideas.
For a company that wants to be seen as innovative but needs to prove to shareholders that it’s not taking unnecessary risks, licensing in can be an attractive proposition. It can boost company performance, by:
Many inventions are equally suitable for licensing or entrepreneurship, so the final choice may depend largely on your circumstances and preferences. Some though may by their nature fall more readily into one category than the other.
Types of invention that may be better licensed include:
Any type of IPR can be licensed. But if all you have is an inventive step with no market track record, only the strongest forms of IPR will interest stakeholders. At this stage a trade mark won’t have much clout. In some cases knowhow, copyright or a registered design may be strong enough. But in most cases it’ll take a baseball bat to convince stakeholders that anything other than a strong patent will protect their investment. This could put you at an immediate disadvantage if you don’t want to patent or are unlikely to be granted strong claims. If you have nothing else to entice stakeholders, entrepreneurship may be your only realistic exploitation option.
Warning: if you’ve considered patenting (Project 5) and concluded that it isn’t justified, don’t be tempted to change your mind and patent just to make your idea appear more licensable. You’ll kid no one for long, so you risk losing money and credibility for no gain.
Important though patents are to licensing, excluding from a licensing agreement any other forms of IPR you may have - even if at the time they seem piddling by comparison - could be a serious mistake. Even if you have the world’s strongest patent, a licensing agreement based only on that patent risks becoming devalued or worthless, perhaps quite rapidly. This is because it’s impossible to predict how the different components of your IP might change in value over time. For example, the relative value of a patent and a trade mark could end up being reversed in a few years as technological advances render the patent obsolete but the brand gets bigger and bigger. When companies which own major brands are sold, the price paid for the trade marks alone frequently far exceeds the value of any other assets, including patents.
Lesson: when considering licensing your idea, a patent will be the star in the short term but don’t underestimate any valid IPR because it could have slow-release value greater than the value of your patent. It’s quite possible to have a blockbuster agreement that includes a separate licence - and thus a separate royalty - for all the forms of IPR you own. More on this in Project 10.
What do you do if you can’t interest a company in a licensing agreement, yet you’re still convinced your idea is a winner? You can give up, or you can consider starting your own business.
We stress 'consider' because not everyone is cut out to run a business and there are many risks even for those who are. Self-employment can be liberating but it has drawbacks too. If you really want to change status from solid citizen to wobbly credit risk, becoming your own boss is a good way of doing it.
That said, becoming an entrepreneur to get a product that you believe in to market should be seen as a positive option, not a last resort. Nor need it mean abandoning your goal of a licensing deal with a company. It can simply mean going out into the market-place for long enough to prove that your product really does sell. Then you go back to companies with the evidence.
Entrepreneurship, enterprise, self-employment, starting in business - call it what you will, there are plenty of books on it so there’s no point duplicating them here. From our own experience only three things really matter:
Entrepreneurs are often lauded as risk-takers. In fact, good entrepreneurs limit their risk as much as they can. In particular they create escape routes so they can exit fast if things go wrong. In the words of one, who started his engineering business in a hen shed and is now a multi-millionaire, ‘If you want to be successful you must do everything you can to avoid failure. You can’t hope to get it right if you don’t first reduce your chances of getting it wrong.’
Your initial goal should therefore be a cautious one: to operate a business for only as long as it takes to find out if your product sells. You’re out to prove a point, not make a profit or build an empire. If the point turns out to be unprovable you must be able to shut down instantly with minimal loss. You should be able to run such a business in your spare time.
Three preconditions are important though:
Work from home if you can. Many successful businesses start in spare bedrooms, lofts and sheds. The simple ability to communicate with people is half the battle, so you may not need much more than a phone, computer and printer. You also need a business name or logo (usually worth having professionally designed) which is printed on A4 letterheads, compliment slips and business cards. The lowest economic quantity is usually about 500 of each, which ought to be ample unless you need to do a lot of mailing out.
If you have home workshop facilities, keep them for testing or demonstrating your product. Unless your product gives you very high profits at very low volume, don’t do your own manufacturing. You won’t have time. Your main role will be to mastermind sales and marketing while other businesses physically produce the goods.
Following on from (2), take time to find the right manufacturers and don’t let price be your only consideration. The ideal is a low quote from a small local company, but will they also deliver the right quality and on time (perhaps the two biggest risk areas)? Can they ship orders direct to your customers? Can they give you time to pay or do they need cash on the nail? Many small companies offer better service than larger ones but it’s possible you’ll need
a bigger, pricier company to get the supply reassurances you need to trade effectively. This may eat into your profit but remember that for the time being you’re not in it primarily for profit.
If your product has several components you may need more than one supplier. This can raise problems but overcoming them is what being an entrepreneur is all about.
Only consider premises if there are key things you absolutely can’t do from home. Never buy. Rent by the week or month and look not necessarily for the lowest rent but the least tying contract (the ‘flexible’ terms claimed by some landlords in both public and private sectors are often anything but when you examine the small print). Look out for problems that could turn cheap space into expensive space: for example heating costs, vehicle access, security at night and weekends. Ask other businesses if they have spare space to rent. They may appreciate the money, be more flexible than a formal landlord, and let you use other facilities. Buy equipment and fittings cheaply at auction, and keep expenditure on image to a minimum.
You must know how your business is running all the time: whether you’re profitable or not and especially whether your cash flow (money coming in minus money going out) is positive or negative. Cash flow determines the health of your bank account and is always more important than profit. Don’t be squeamish about harrying slow payers, and be ready to sacrifice some profit to maximise your cash flow. For example, give customers discounts for prompt payment. Be constantly alert for any threat to your cash flow: for example from rising sales. This means bigger bills from suppliers, which may deplete your cash reserves faster than they can be replenished from income, especially if you have too many slow- paying customers.
Until you establish a pattern of sales, keep stock to a sensible minimum even if that means paying a relatively high unit cost. Stock obviously costs something to make but less obviously costs something to keep: interest charges, space, deterioration, pilferage, insurance etc. Don’t be tempted by a low unit cost for large quantities unless you know you can sell them. Buying 10,000 mousetraps at 50 pence each sounds a better deal than 1000 at £1.50, but if you only sell 1000 at, say, £2 you make a loss of £3000 instead of a £500 profit and you’re stuck with 9000 unwanted mousetraps.
An overdraft facility should only be used to cover temporary cash flow fluctuations. It should never be regarded as permanent borrowing. Overdrafts are repayable on demand and banks have been known to wait until a business pays in a large enough cheque to clear the overdraft, then cancel the facility without warning. That can destroy a perfectly healthy firm overnight. Bank managers now rarely look further than their computer screens, and inexperience of business makes them almost eager to interpret a temporary dip in your trading as a signal to cut you adrift. As a general principle keep your bank’s hold over your business - through overdrafts, loans, even direct debits - to an absolute minimum. (Several entrepreneurs have told us they’d sooner raise finance from other businesses than borrow more cheaply from a bank.)
It may be worth registering for VAT even if you’re trading below the compulsory registration level, as inability to pass on VAT may raise your selling price or reduce your profit margin. VAT registration gives you the status of a ‘proper’ business, and paying VAT means your books are never a mess for longer than three months. You must however be genuinely trading: H M Customs & Revenue won’t enjoy sending you regular cheques.
Even a tiny business can generate a lot of paperwork, so it may pay to hire a freelance bookkeeper for a few hours a month to take care of your books, VAT and tax returns. They’re usually much cheaper than accountants, whom you should use only when their professional expertise is required. (Tell-tale sign: when your bookkeeper says ‘You need an accountant for this’.)
There’s always a big difference between how long something - in your case, launching a business - should take and how long it actually does. The same goes for costs. To get somewhere close, multiply all time and cost calculations by three. There’s no scientific basis for this formula except that it works more often than not. Time stretches and things slip, so it can pay not to plan too far ahead. For example: don’t book advertising that may have to be cancelled, and don’t print brochures too early in case so many details change that you can’t use them.
Lots of small customers is good because it spreads your risk even if it increases your admin burden. Or concentrate on ‘blue chip’ customers - large, reputable companies or public sector organisations. Always treat large orders from small businesses with caution. Many are only a prayer away from insolvency and an unscrupulous customer won’t limit the size of his order if he knows he isn’t going to pay. Always insist on a written order, and if in doubt insist also on a large enough deposit to cover at least your material or supplier costs. If the order will take a long time to fulfil, ask for staged payments and stop the job if an instalment doesn’t materialise. Never overstock on verbal assurances that a large order is imminent.
A common sting is the order placed by small company A to supply large company B. You think you’re safe because company B is a respected name but your contract isn’t with them. Company B pays company A; if company A then doesn’t pay you, you lose. If the order is big enough to threaten your business, insist on payment with order or at least a large deposit. Or put the boot on the other foot: offer to supply company B direct and give company A a cut. If company A won’t play either kind of ball, refuse the order. It’s safer to do that than risk going bust.
If you sell direct to the public, insist on full payment in advance or on receipt. Anything else gives a green light to non-payers. If you sell to businesses, a big problem is slow payment: 30-45 days for good payers, 60-120 days for the majority. Add the time taken to fulfil the order and you could be looking at many months from start to finish. If you can’t get payment in advance or on delivery, you must take this into account in your business plan, as it may mean no income at all for a large chunk of your first year.
If your venture is clearly failing, it’s vital to act quickly to limit the damage. Having a shoe- string business designed to be shut down rapidly obviously helps, but failure leaves most businesses saddled with at least some debt. Talk immediately to all stakeholders and trade creditors. Early warning gives everyone a chance to sort something out and stop your business failure - an unremarkable event in itself - from turning into a personal disaster, perhaps especially for friends who may have backed you with their cash.
What if you’ve done the rounds of companies and no one has shown any interest in licensing, but you’re convinced that your best long-term plan is still to place your idea or product with a company? An alternative to starting your own business is another form of entrepreneurship: a joint venture with someone whose expertise and resources you need. That ‘someone’ is most likely to be a company but it could be another individual if - and only if - they have strengths you lack: money, technical or marketing expertise, a business track-record etc.
It could also be a university, as most now have business units looking for opportunities to exploit their own research or specialised resources. If your product has sufficient profit and innovation potential and their expertise can help get it to market, they may be interested in a joint venture. Different universities have different technology interests and areas of special (often world-class) expertise, so you may have to shop around.
Let’s assume though that your joint venture will be with a company. It could be with a large company willing to fund or in other ways help you to develop your idea further so that they have a better idea of its potential. This might look like an opportunity to grab with both hands, but the danger is that the larger the company, the less commitment there may be to your idea. At the end of the project they may not see enough profit potential in their terms to want to keep a stake in your idea, leaving you with the problem of what to do next.
Smaller companies may offer better prospects. It’s possible that a small company has shown interest in your idea but is reluctant to take the plunge into full commitment. The problem for the average small company is the cost of developing and marketing a new product. Major marketing may in fact be outside their experience if their main business is supplying other companies. But assuming that they like your idea enough to commit some resources to it, your willingness to lighten their load may make the exercise viable. For example, to market your idea they might have to employ someone. If you’re capable of doing the marketing at your own cost, they immediately save a salary.
From the company’s point of view a joint venture can be a cost-effective way to get something done quickly, or to get a share of worthwhile business at low risk to themselves. If such an opportunity presents itself, take it very seriously. The typical inventor’s objection is that the company will get too big a slice of the cake, but that misses the reality that company involvement can dramatically increase the size of the cake and at the same time reduce the inventor’s exposure to risk.
If the company, the inventor and the idea are all compatible, this strategy makes business sense as it isn’t far removed from the conventional practice of farming development and marketing work out to specialists rather than doing it more expensively or less well in-house.
Unfortunately, in several joint ventures we know about the inventor has let the company down, by missing deadlines, overspending or ignoring the agreed plan of action. If offered this kind of opportunity you must meet agreed time and cost targets even if your best guesses turn out to be wrong and you make no money from the exercise. At stake are your credibility and your product. Flag problems as you see them looming and ask the company for advice. A good company will read that as a positive sign and won’t knowingly let you flounder. At a push you might get extra time, but don’t expect any extra money unless something happens that neither of you could have foreseen.
What you don’t want in a joint venture is a one-sided situation where the company can’t lose but you can. If your business venture is in effect arm’s length R&D for the company, they should be prepared to support you in some significant way - for example by letting you use their equipment and premises (a big saving to you that may cost them little or nothing) or by giving you a budget to buy materials or a ‘consultancy fee’ to stop you starving.
Do not however expect to walk in off the street and in five minutes persuade a company to become a partner in business. They must know and trust you, which probably means you’ve been building up a relationship with them for some time. It probably also means you have skills and abilities they recognise, and a commitment to your idea that they can respect.
You might in fact already work for them. A joint venture could be a dynamic way to benefit from an idea that is intellectually yours but belongs legally to your employer, especially if your employer is otherwise unable to do anything with it.
Before embarking on any joint venture you must establish exactly how much control you have. Are you really your own boss or just a risk-bearing dogsbody? For example, the company might reasonably want to assign someone to assist you. This can be an asset if they have expertise you need, but a liability if it means they know everything about your part of the business and a danger if they also have the authority to push you around. Even if the company’s heart is in the right place, control can drift away if you can't draw a clear line and keep them on the far side of it. Control is vital to any business, so share it only if the risk is fairly shared. And make sure that if your joint venture partner should fail to keep his side of the agreement, you have the right to pull your idea out - improvements and all, even if these eventually have to be paid for - so you can continue trying to market it.
You must as an absolute essential get professional legal advice and representation, before embarking on a joint venture and especially when it comes to drafting an agreement on who does what and for what reward. Any formal agreement between you and the company should include:
The following checklist is partly an action planner and partly a reminder of what matters. If you’re tempted to think ‘I don’t need to do all this stuff’, it may help to point out that we’ve modeled the checklist on questions professionals are very likely to ask if you want their advice, support or money. We therefore have to be stern and say that if you aim to be a respected and successful inventor, you can’t afford to duck any of it.
This Project is about improving the resources available to help you exploit your idea.