Several years ago, I developed an invention that I wanted to take to market. Upon receiving the patent, a decision had to be made on what to do next. My options? Either license the invention or manufacture, market and sell it myself.

Like any important decision, I approached it with careful consideration of the pros and cons. Not only were there procedural implications, but personal as well. I was forced to consider things like my age and a need to support my family by providing a steady stream of income. These factors were ultimately the simple ones, as I knew my responsibility.

The real challenges were the business factors, knowing that both licensing and manufacturing offered different but equally viable outcomes. To start, I decided to flesh them out in a pros and cons format.

The chart ended up looking like this:

Pros

Cons

License

  • Reduced risk
  • Less time and effort
  • More lucrative if the manufacturer has distribution and sales capabilities that can penetrate a large market.
  • Success in one invention incentivizes the licensing of other inventions by the licensor.
  • Less control on how the product is marketed and the level of effort in achieving its potential.
  • Lower returns if the product is not a priority for the manufacturer
Manufacture
  • Greater control
  • Establish a Brand name
  • Expand product offerings
  • Potentially more lucrative than licensing in the long run
  • Higher risk
  • Greater capital requirements
  • Must find a manufacturer with capabilities and willingness to manufacture
  • Product liability
  • Significant costs (fixed and variable)
  • Must create distribution, sales and service infrastructure

Beyond this pros and cons list, there were three other major considerations. The first was the guaranteed minimum royalty component which prevents the manufacturer from ‘dragging their heels’ while the inventor is guaranteed cashflow for having ‘tied up’ the product. The second was the income potential and, in dealing with one of the top companies in the world, I was assured by highly capable marketing, sales and service that could turn my product into a ‘home run’. The third was risk, a consideration that many of you will know quite well.

In the end, licensing my invention created a win-win situation for me. I was able to achieve my financial goals with minimal effort, time, and risk. The licensor was able to generate profits that justified the royalty costs, expanded their client base and created a new product category that established them as a leader in their industry.

So, what did I learn?

  • Start by building a detailed Business Plan. The plan must include a thorough understanding of various components like feasibility studies, market and product research, legal and liability, manufacturing, distribution and selling. Also, a thorough understanding of capital requirements, costs and projected revenues should be used to build projected cash-flow statements.
  • Don’t underestimate the value an inventor (with a patent) can bring to large companies. Large companies can be bogged down by bureaucracy, running their business, rolling out existing products in their pipelines etc. They can miss opportunities that relate to new trends. An independent inventor has the flexibility to act quickly and develop products and patent them that fulfil these opportunities.
  • Value the inventive process over your own idea. Do not become emotionally attached to your idea such that you discard the findings that stem from your research and analysis. For example, upon considering the total manufacturing costs per unit, the required selling price of the product may not be feasible. The idea may be a good one, but it is of little value if only a few are willing to pay for it…
  • Learn and be proficient with how patents work i.e. Importance of claims language­ that can influence how wide or narrow a patent can be. A patent lawyer is not ‘skilled in the art’ as the inventor is and therefore the onus is on the inventor to ensure the patent is drafted in a way that provides the most valuable protection.

Whether you’ve got an invention in development or are curious about the process, this summary should give you a better idea of some of the challenges involved.

As a new (returning) Principal at The Osborne Group, I look forward to new clients and new connections. If you’re interested in a conversation, you can reach me at nnizam@osborne-group.com.