You now have your product, your Provisional Patent Application (PPA) is in force in the United States and you manage to make 50 sales per month. Let me first congratulate you! You’re off to a second source of income to complement your main job.
But then, why sign a licensing agreement and share your business success and profits with another company? Why not rent an space, buy machinery, find staff, buy a truck and build relationships with reputable distributors?
To avoid having to do all these tasks at the same time!
I present to you the 10 reasons why you hit the market under a licensing agreement.
These reasons come from the great book One Simple Idea by Stephen Key. I recommend it!
The opinions expressed herein should not be considered in any way as legal advice. For more information, please consult your patent agent or patent attorney.
1- Get to market fast
The sooner you reach the market, the sooner you can dominate it. Rather than establishing the distribution channels yourself, the licensing agreement gives you access to existing networks of a reputable manufacturer. In addition, you rely on the their already established reputation and credibility, which could take you several years to build alone.
2- Little financial risk
As we saw in the previous blog post, starting a business is a daunting adventure. It will take several years of bootstrapping, knowing that the commercial success may not be there. For your first innovation, the licensing agreement puts the risk on the side of that manufacturer. If commercial success is not there, you will not have lost your home or years of work.
With the royalties that this first license agreement will pay you, you can then absorb the losses should your second innovation be a financial pitfall. Finally, and since job security no longer exists for anyone, these royalties could be the difference between tightening your belt and having to sell your house and move back with your parents. In any business, never forget that there is always someone who has a budget to balance.
3- Don’t need to raise capital
To be able to launch your innovation, you need capital. To find capital, you need a business plan and partners. While you can prepare yourself a business plan, finding partners will take time. You will need to find one or two people with background and experience complementary to yours, but with the same desire to succeed. And then there is the personality, the availability, the priorities and many other reasons why it will or will not work.
In love, I would hope that you will not throw yourself at the feet of the first partner. Same thing goes for business!
The licensing agreement allows you to avoid all that. Better yet, it will allow you to put some money aside that you can use as seed money for your 2nd or 3rd innovation.
4- Great for creative individuals who don’t want to run a company
Even if I want each of you to succeed in business, some personalities lend themselves to it more than others. In general, the more inventive, the more introverted. Or they have trouble selling their innovations to customers.
The typical image of the mad inventor in his workshop is not so far fetched. Think Doc Brown from Back to the future franchise!
With the licensing agreement, you put your innovation in the hands of a company with an experienced sales team. It will transform your innovation into an irresistible product for consumers.
Pro Tip: Get into sales or telemarketing for one or two years.
I can already hear all the parents and other well-intended people around you screaming that you’re going to ruin your career! That the sales are for the hot egocentric and aggressive Chad and Stacy of this world and that telemarketing is for losers who could not find anything better! It is true that sales attract more flamboyant personalities and that telemarketing is reputed to recruit people with less professional qualifications. However, you will develop two skills rarely taught at school:
A) you will practice and practice again how to present, convince and negotiate, skills that are rarely developed among professionals and college grads.
B) you will overcome your fear of rejection and that you will keep at it again and again until you succeed.
This is what separates the employee and the entrepreneur.
The employee accepts everything that the company gives him as work and settles for it. The entrepreneur looks for and persists in creating opportunities until he or she succeeds.
5- No experience required
As a new innovator, you have everything to learn and this learning will take time. The licensing agreement allows you to minimize the learning curve to successfully launch a product on the market. You could even do without online sales and go directly to the manufacturer with your PPA. But expect to sign a much less generous licensing agreement or hit a lot more closed doors because your product has not gained traction. Basically, here’s what a reputable manufacturer could tell you:
We have thoroughly analyzed your product and believe that it has a future with us. According to our market research, we will have to present it differently to the customer. It will be necessary to allocate more funds to marketing and sales teams. For these reasons, we can only offer you 3% on sales.
If you had invested the time to learn how to make online sales with Shopify, analyze your customer base with Google Analytics and Google AdWords, did contract manufacturing and drop shipping, you could answer as follows:
I’m already making sales via Shopify and the trends are on the rise for the summer. Google Analytics and AdWords already allow me to do my marketing. With contract manufacturing and drop shipping, I know the costs of production and delivery. And I know that the royalties that are paid in your industry for an innovation like mine are around 7%.
In other words, don’t bullshit me! I know what my innovation is worth and what it can bring you. If you are not happy, I will gladly go see your competitor and you will lose those sales! All that said with more tact, of course.
6- Little time invested
The licensing agreement puts the time and marketing efforts into the hands of the manufacturer. This frees you to work on other innovations.
7- ROI is high based on what little money you invest
If you minimize your expenses related to your innovation from the outset, your Return On Investment or ROI could be very high. For example, do the market research yourself, model your innovation with free software like SketchUp, build yourself a homemade prototype and start field testing for $ 100! Same thing for patentability and research on intellectual property databases. Same thing for the preparation of a first draft of a Canadian pending patent application or a United States PPA.
Pro tip: For your first innovation, I recommend presenting to a patent agent or patent attorney.
He or she will start from your research and your draft, validate that everything is in correct and will file the Provisional Patent Application on your behalf. This is an investment between $ 3000 and $ 5000.
If commercial success is there, expect $ 10,000 royalties, or even $ 40,000 per year for 20 years! Not bad for an initial investment of $ 5,100!
And for your next innovations, now that you have the experience, why not write and submit your own application for a pending Canadian patent or US PPA? If you are meticulous and take the time to learn how to prepare it correctly, nothing prevents you from submitting it yourself for $ 200. Your return of $ 40,000 per year for 20 years would come from an investment of a few hundred dollars. Now that’s some serious return on investment!
8- Let them pay for the patent
Remember that a Canadian Pending Patent Application or United States PPA IS NOT a patent. So, a company that decides to steal your innovation can do so. However, as the PPA lasts for only one year and savvy inventors turn to reputable manufacturer through a licensing agreement, the investment in machinery and the time to train staff will be lost.
The strength of the PPA is in the appearance of property.
Here again, for your first innovation, offer them to pay for the patent in for exclusivity to manufacture, sell and distribute. If commercial success does not happen, you will only lose the cost of the PPA, rather than the cost of the PPA and the patent.
9- Let their lawyers duke it out in your name
Let’s jump ahead a few years in time: you have your PPA, you manage to sign a licensing agreement with a reputable manufacturer and he agrees to pay for the patent. Your patent application is accepted, sales have exploded and you are starting to attract the attention of unscrupulous manufacturers. Despite your patent, they drown the market with counterfeit products sold for a fifth of your price. Sales drop as a result of unfair competition. What do you do?
By inserting a special clause into the licensing agreement, the manufacturer will send his lawyers to fight on your behalf!
A company doing counterfeiting knows very well that an inventor can not afford to hire a reputable lawyer. It also relies on the slowness of legal proceedings and in some extreme cases, it can close, then reopen under a new name, reintroduce a variant of your product and start again. Not only do you lose money, but you have to pay the lawyer out of your pocket every time? No thanks!
Pro Tip: Use Influencers Instagram Influencers and YouTube Stars to Promote Your Product
See it as an investment to multiply sales. In addition, by associating value and lifestyle by these influencers and stars to your product, your customers will be much less inclined to buy a product considered low-end.
Sell on value and lifestyle, never on cost! Think of Starbucks coffee. People do not just buy coffee, they buy an artistic lifestyle made of poorly written books!
Bonus Pro Tip: Declare that you pay one dollar for each sale to a social cause dear to your customers.
Once again, people are not just buying, they are contributing to a cause and you are giving them the opportunity to change things. Think of Ronald McDonald’s Breakfasts Club for example!
The idea here is to create such market dominance that counterfeiter will lose money right from the start and look for easier targets elsewhere.
10- You don’t have to leave your dayjob
Thanks to the PPA and the licensing agreement, you can build property without leaving your job, whatever you do. This is similar to people who are part-time renovating rental real estate or investing in the stock market on the weekend. Everyone has a job, but everyone agrees that this job could end at any moment.
Prior to the 1973 oil shock, money was set aside for rainy days. Today, you have to build a business, buy rental real estate or stock market investments to continue to generate money for rainy days!
You have just discovered my 10 reasons to hit the market with a licensing agreement. It is about minimizing financial risks, generating maximum return on investment while minimizing efforts. For your first innovation, it’s better a small slice of a big pie than 100% no pie at all!
In the next post, I will discuss the main elements of a licensing agreement.