Licensing . . .
is an arrangement whereby an inventor grants another
person or company the right to make, use or sell his invention. In
many cases, licensing is a viable alternative to starting a company
and raising capital. Licensing of an invention can be very profitable
to the inventor if the invention succeeds in the marketplace and the
license agreement is properly structured.
In general, an inventor who licenses his technology to
another stands to earn less from his invention than one who builds a
new company to exploit it. This is because the inventor transfers the
risk and cost of developing and marketing his invention to the
licensee. On the other hand, because the inventor does not undertake
the time-consuming job of starting and financing a new company, his
time is available to explore other interests and develop other
products, which may provide additional commercial successes.
Sometimes an inventor does better to license his
product rather than trying to build a new company around it. If the
product requires a large capital investment or if the marketplace for
it is dominated by a strong competitor, the inventor may be more
successful licensing his invention than trying to raise venture
capital to start a new company. If the channels of distribution are
particularly hard to penetrate or name recognition is especially
important to his type of product, it may make more sense to license.
In short, when the entrepreneur conducts his market research, he
should consider carefully whether his product is one that can be
successfully developed and marketed by a new company or whether there
are factors that indicate that licensing would be more fruitful. See:
Business Plan Format,
Protection, Trade Secrets.