An honest look at what inventors can really expect when attempting to licensing a product idea.
I cannot tell you how many designers and inventors I have talked to over the years have an unrealistic view of the potential licensing process. They think, “I have a great idea. Why wouldn’t X Company want to buy my idea, make it and pay me royalty?” But, over the past decade, our marketplace has changed and the licensing process and market cycles have changed with it. For example, prior to the recession, the life cycle of a product was generally 3-5 years. After the recession companies began to feel pressure to switch products every 6-12 months. Now, with the growth of the internet and other tools, the development cycle is also shorter and drastically different. These things matter when it comes to the level of difficulty attached to obtaining a licensing agreement and the Holy Grail for designers and inventors – royalties.
Here’s What the Experts Have to Say
Besides my own experience, I wanted to draw on an expert about these changes and what it means for inventors moving forward and David Lieberstein happily obliged. He started his first company at the age of 17 with a $5,000 investment from his father. He grew that business to $500,000 in annual sales. His first ever licensing agreement netted $65 million in sales over the past 25 years, something that doesn’t happen often in this current marketplace, because getting a product licensed is more difficult than ever before.
According to David, potential license partners today have incredibly high expectations in order to manage cost and to stay ahead of the game. If you go to a company without a fully operable, fully engineered, full-scale working model… your chances of getting even just a follow-up email are slim.” Another common objection to licensing deals is whether or not the company you are in talks with can find a place for your product to exist within their current business model. If your design is one that needs demonstrated, be prepared to search even more, because this limits your potential partnerships. The fit has to be right, and buyers know this.
It All Boils Down to the Costs
And of course, this aspect is also make or break for how far you can go. A lot of inventors or designers get to a potential partner before they have a complete cost analysis in hand. This can work against you because buyers are looking for the numbers of right now. What are the minimums? What is the total manufacturing cost? They need to know about ordering, royalties, etc. If you don’t have your numbers together, it’s a shot in your own foot. It doesn’t have to be perfect, but you have to be prepared with numbers because this is the foundation of everything that will happen and be discussed in the licensing process.
A Real-Life Inventor’s Example
Not too long ago I had a chat with Abraham Contreras, inventor of the Spin-Cup. He is now 2 years into the process of perfecting his design, securing a licensing deal, and absorbing every single lesson along the way. “It’s all fun and games until you start splitting pennies… because every single penny matters. I’ve learned so much about shaving costs, having to invest in proof of concept beyond a prototype, and really understanding how furthering the idea affects the speed and success of the overall outcome. I’ve messed up, I’ve learned a lot, and I am working on applying those lessons to new product ideas.”
One of Abraham’s mentors, author and entrepreneur Greg Reid, agreed completely about the changing landscape of licensing. “With so many ideas being generated there seems to be more (options) for manufactures and suppliers, so where once someone was the lone new product line, today there is a waiting list all bidding for the same opportunity.”
Remember, licensing your idea to business for manufacturing and distribution is not the only option. There are other ways to get your product to market. Exploring and understanding what those options are before you choose a path is your best chance at ending up in a place that works for your ideal endpoint whether that ends up royalties or revenues.
Read the original INC article published on January 24, 2017.