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I Can’t Find Funding – Consider a Campaign to License!

by: Geoff Ficke

Most inexperienced entrepreneurs are unaware of the many options and alternative strategies available to push a new idea or invention to market. The most common approach they seek to implement is a classic funding round. When this avenue fails, and with overwhelming frequency it does, the idea often is dropped.

Driven inventors attend invention trade fairs, venture capital conferences, small business incubators, and network at every possible opportunity in search of funding and working capital for their invention. It is commendable and a tribute to the pursuit of the American dream that such efforts are expended in this daunting effort. However, virtually all will come to a disappointing end with no funding and disappointment.

In 2005 over 500,000 new business incorporations were organized in the United States. This does not include the hundreds of thousands of sole proprietorships, partnerships, joint ventures and strategic alliances formed. From this sea on creative, new opportunities only about 1000 were funded by traditional venture capital sources. The odds are so long against a successful funding round: the wonder is that so many entrepreneurs, with so much creativity to offer, are chasing so few sources of funds.

There are other opportunities and strategies available for successfully getting a great idea to market. The bar for acquiring venture capital funding is so high, so difficult and so competitive, that it is unfortunate how many inventors quit the pursuit of their goal after receiving no traditional funding commitment. One of several alternatives to venture funding is a license campaign.

Licensing is the assignment of intellectual property or product rights to a licensee for consideration. The consideration may consist of a rights fee, royalty, options, personal service fees, minimum annual sales turnover and more. The licensee agrees to make good faith efforts to commercialize the product or intellectual property and the agreement is memorialized in a License Agreement.
There are many more companies interested in licensing a product or technology than there are conventional funding sources for startups. Having said this, there is really no difference in the requirements for success in either venue. You will just get more swings at the ball when seeking a license for your project.

Entrepreneurs read about Blackrock Capital, Harvard Capital Management or Kohlberb Kravis Roberts funding a new opportunity for $200 million dollars or more. This is exciting, motivating and for most, unrealistic. A fully fundable opportunity is a rare amalgam of huge upside, mitigated risk, unique, potentially disruptive product and REALLY strong, experienced management. Very few entrepreneurs can present such a comprehensive package.

In the world of licensing the product, upside, risk mitigation and disruption features are crucial. Management is irrelevant as the licensee presumably has the management in hand to drive the project to success. The same elements that excite venture capitalists also excite the licensee. They are keen on a strong Unique Selling Proposition detailing the niche the product will claim.
A powerful, well-structured sales model will quantify and support the sales universe available to the product or technology.

There are many successful approach strategies available when seeking to license an exciting new product. The following are some broad elements we have utilized in our consulting firm with success. Remember there is no linear, set in steel index to follow. Innovate, adapt and keep pushing and try everything necessary to get that appointment with the decision-maker.

Create a Working, Production Quality Prototype

Whether you have a new product, a service or a technology, you MUST be able to demonstrate the unique features and benefits of your offering. Some inventors have a facility to create, design and construct the necessary demonstration unit. The great majority of people do not. This is a simple hurdle to overcome.

In every city in America there are job shops, product design and development firms, engineers and software writers capable of providing professional guidance resulting in production of the prototype required.

A key by-product of this process will be the creation of 3-D, Computer Assisted Design art. This art is essential in the assembly of the product for production, in obtaining crucial and totally accurate cost of goods and filing patents.

Patent Filing – Intellectual Property Protection

Very few licensees are interested in investing significant monies in marketing a new product without the guarantee of some patent, copyright and/or trademark protection. See a Patent Attorney. Patent law is exceedingly specific and for this reason it is a legal specialty. A competent patent attorney will conduct a search and, using the results, advise the possibility of successfully receiving a utility patent (highly preferred), design patent (patent on art, easily overcome) or not being artful enough to receive any cover.

If an item has dicey patent prospects we like an alternative strategy. I have been a proponent for several of my clients of a strategy we call “patent pending forever”. Our goal is to keep a product in patent pending status for as long as possible by timing addendum to the application and art and filing these in order to keep having the filing reviewed again.

During patent pending a filing is essentially in limbo. The advantage for the inventor is that there is no publication of the details of the art, features and unique benefits of their product. Secrecy is an asset. Once a patent number is received two undesirable things happen: details of the patented product become public knowledge, and the clock starts ticking against the 20-year life of the patent.

For most entrepreneurs seeking a license, we do not push for international patent filing. International filing is very expensive and we let the licensee assume this expense.

Source of Production, Manufacturing

Depending on the product, service or technology offered for license, you MUST source production. The reason is simple: this will set you apart from the dreamer. It reflects your commitment to the opportunity. It reassures that the product can be built (we see a number of projects that are unrealistic from an assembly and economic standpoint).
Now, let’s discuss a touchy subject in the current economic climate. I love my country. America is the land of opportunity. However, I am a capitalist and the rules of capitalism are much bigger than any one individual: including you, the entrepreneur. If at all possible I prefer to assemble components, source, and manufacture here in the United States. However, it is becoming more and more difficult to be competitive here in America.

I have clients that are adamant they do not want their project assembled offshore. Do not be a Luddite. You really have two options: you can go with the flow, or you can be drowned by the overflow. In the past decade, we have not found a single project that could be produced in the United States as inexpensively as we could produce offshore, including the cost of freight, customs and duty. Not even close!

We search out four or five factories, or offshore resources, for submission of the 3-D CAD art and a Release Packet. The Release Packet contains all of the hard samples of components that will be parts of the finished product. After this is forwarded, we typically receive quotes in four to six weeks.

This quote should include all line item costs contained in the Bill of Materials for the product, plus outer packaging, costs of display (if any), shipping carton, inserts (directions for assembly, etc.), plus freight to United States port of arrival, customs, duty and inland freight to your warehousing/fulfillment point. This is a dead net cost of goods.

Use of Cost of Goods (COG)

Knowing the cost of goods is crucial! This number proves the viability of the products pricing model, confirms margin assumptions and the ability to construct an exciting sales model. If COG is too high, and there is no capacity to squeeze costs, the future license prospects for the product are not exciting. This number sets the parameters for the potential of your project and indicates to the potential licensee that they are dealing with a thoughtful, serious and skilled licensor.

Research

The licensee with an exciting opportunity on offer will want to know (not guess) everything possible about the market they are about to enter. This will include; customer demographics, size of market, growth of the category, competition, and potential licensors. Cite sources of research and assemble as a portion of the Opportunity to License document you will offer. This is the knowledge that will set you apart from run of the mill tire kickers hoping to make a deal.

Professional Endorsements

Nothing resonates with buyers more than professional endorsements. I am not necessarily talking about celebrity endorsement. They are great for certain products. A pediatrician endorsing a juvenile product, or a professional association giving a positive quote on a service, or an educator endorsing a toy, are simple examples of taking a product and brandishing it with the glow of an expert. This is invaluable and a technique we utilize regularly for our projects. Include these quotes in all collateral materials.

Test Market / Focus Group

If you only have one prototype it can be difficult to assemble a focus group or test market. What we recommend is to show the product to strangers sequentially in the field where the product would typically be used. Recently, with a single prototype of a baby stroller accessory, we spent an afternoon in Central Park in Manhattan, demonstrating the unit to mothers pushing strollers. We walked away with positive quotes for attribution from 26 of 29 mothers that used the prototype. These we included as an exhibit in our product folio.

Opportunity to License Document

With all of the above in hand, you have the data and resources to assemble an approach document. We all have heard stories about the inventor sidling up to a banker in a bar, uninvited, and successfully pitching his idea over a scotch and soda. Good Luck!

You get only one chance to make a great first impression. Do not shortcut on any aspect of the initial approach. With your patent, prototype, possible endorsement, research and costs well in hand, you are ready to assemble the written document that will detail the features and benefits of your project and quantify the opportunity.

As you are not seeking funding, and are not interested in self-marketing, a classic business plan is not required. However, you will need a written synopsis of your project, written along the lines of the business plan. We call this the Opportunity to License.

This document needs to be crisp, exciting and short, eight to 10 pages, plus exhibits. The exhibits should include; patent information, list of contributors to the project, CAD art, bill of materials, cost of goods, research data.

Selling the Opportunity

Successful completion of the above now places the opportunity in position to seriously, and professionally, approach licensee targets. Your research will have identified the obvious candidates. Networking, walking trade shows and scouring appropriate industry trade publications will increase familiarity with added possible homes for placement of the item.

The target list needs to be approached with care and diligence. Large, publicly traded Companies have different, but fairly stringent standards for accepting unsolicited submissions. I find this barrier crazy, as many great opportunities are never viewed for fear of litigation. Mid-size and small companies, the really fast growers, are more open to reviewing unsolicited submissions.

Prepare mailings with care. Be sure to know the exact name and title of the decision-maker at each targeted potential licensee. Personalize each letter and assemble the mailing in a folio. The cover letter should be on top in the right pocket with the Opportunity to License document directly behind. In the left pocket place any public relations, positive user endorsements, etc.

Follow up the mailing with a phone call in 7 to 10 business days. Now the ebb and flow of making a deal begins.

Negotiations

No two deals are alike. This not a cookie cutter, fill in the blanks process. Securing that face to face meeting with Mr. Decision-Maker is crucial, and the opportunity cannot be blown. We seek to maximize every potential income stream for our clients. These include:

Rights Fee

You must receive consideration in the form of a Rights Fee in exchange for turning over all aspects of your project to the licensee. This should be paid on signing the license documents and is not returnable. The licensee should perform all due diligence prior to signing. There are no make goods here. The size of the Rights Fee will be in direct proportion to the size of the opportunity you offer.

Royalty

This is the vast bulk of income any licensor receives from a successful product placement in a licensing deal. The variables in structuring percentages are never ending. Some royalties are built to sales growth and minimum sales promotion investment. Others are tied to achievement of tiered sales goals. Many contain buyout options that automatically kick in at certain trip points.

The term (length) of the license is crucial. The licensee will want a shorter term. The licensor will want as long as possible to maximize income.

The details of each license are unique and specific to that particular deal.

Production

Another reason we are aggressive about controlling the production sources, and knowing our costs is because this often becomes another income stream for the inventor. For instance, assume a dead net cost of goods of $1.92 per unit. Assuming we can maintain production control in negotiations, and this happens often enough, we will quote the licensor $2.00 per unit COG. The difference of $.08 (4%) goes right to the licensor when peeled from the Letter of Credit that is organized to pay for the offshore inventory production. $.08 might not seem like a lot of income per unit. However, apply this number to potentially hundreds of thousands of units per year, for seven, 10 or 15 years. Do the math!

Several points to make here.

Do not be a hog. Hog’s get slaughtered. A good deal is a deal where every party feels fairly treated! This is an area where we see too many deals go south. Every party should profit handsomely, according to their level of participation.

Second, do not attempt to license a product without undertaking the steps detailed above (or some variant of the process). I have mentioned this before. This is just an outline. There are endless variables that apply to different industries, styles and categories of offerings. Do your homework and do not attempt to take shortcuts. You will be wasting your time and resources.

Finally, do not, EVER; utilize the services of an invention mill. These firms typically advertise on late night infomercials and they prey on the inexperienced, naïve and desperate. These firms are little more than boiler rooms with a goal of separating the weak from their cash. Check with your Better Business Bureau and State Attorney General for history on one of these houses. Even then proceed with caution.

Licensing is a real, viable option for inventors having opportunities that offer fresh, definable features and benefits. The Unique Selling Proposition contained in these inventions may have real value to licensees, while venture capital may not be able to overcome one or more shortcomings inherent in the project. Funding sources are often seeking a different deal parameter. Licensees are simply seeking the opportunity to bring in house a product, service or invention that compliments their array of assets. This makes licensing the best choice for entrepreneurs hobbled in one area or another: they simply have a great product to offer.