Three Product Development & Licensing Strategies

So, you want to license your product?  In order to do so, you'll need to invest in its development in order to transform the "raw idea" into something that is sufficiently "baked".  (Click on image to enlarge.  Adapted from A Buyer's Guide to the Innovation Bazaar by Satish Nambisan and Mohan Sawhney.)  That is, your investment of time and capital will help resolve uncertainty, which will help a prospective licensee perceive value.  Therein lies the trick, because value is relative, personal, and contextual.  Consequently, sufficient development is relative, personal, and contextual.  Furthermore, as one moves from left to right in the development graph, different kinds of capital come into play.  In our experience at Evergreen IP, the interplay of value, sufficient development, and access to different kinds of capital result in three distinct product development and licensing strategies.  Real problems arise when you don't understand which game you are playing, because each follows its own special set of rules.

The first strategy is familiar to individual inventors: pitch the idea.  This strategy draws, primarily, upon human capital, which includes the inventor's ability to perceive and articulate an unmet need, sales skills, and perseverance.  Although some financial capital is required in order to execute basic concept and use tests - as well as to develop intellectual property - the key here is to avoid over-investing.  That's because this approach is likely to work best when the product is highly complementary to a prospective licensee's existing products, supply chain, brand, and marketing channels.  In other words, a raw idea is more likely to be perceived as having some value, if it represents an incremental improvement.  However, "some value" usually doesn't translate into very much, so it's wise to keep your investment as low as possible.

The advantages of this approach include the following:

• It doesn't cost much to play.
• Deep relationships with prospective licensees help, but aren't required, which opens up the range of prospective licensees you can approach.
• It doesn't take that much time, relatively speaking.  So, even if the hit rate is low, you'll have the ability to take more shots over time, which means you can benefit from a dynamic portfolio of opportunities.  Think of it as the savings approach versus the lottery approach to wealth.

That said, most individual inventors don't have the sales skills, discipline, or perseverance to win at this game.  People who tell you this is easy are scamming you.

Running the market experiment used to be the sole domain of companies.  That's no longer true.  Direct response marketing techniques, affordable e-commerce, and outsourced manufacturing and fulfillment options mean that individuals and tiny companies can find out whether they have a market-ready product by actually putting the product in the market.  The nuance here is to use the market experiment to resolve uncertainty in order to license or sell the product to a larger company as quickly as possible.  After all, large companies have one clear experiential advantage over the rest of us - they know about scale.  Scaling is a lot harder than first time entrepreneurs can understand.  On the other hand, big companies don't have a particular advantage when it comes to introducing new products - particularly differentiated products - to the market.  They may even be disadvantaged.  So, there is value to create and earn by running the market experiment yourself.

Of course, this strategy requires a relatively high amount of financial capital.  An on-line launch may take six figures and a DRTV launch may require six or seven figures.  Consequently, the risk is much greater, though the potential rewards are higher, too.

• Although easier today than ever, launching a product requires a much deeper and broader pool of human capital.  Partner with people who know what they are doing.  Don't sandpaper your collaborators by being greedy - you'll need them again.
• Even if you do an outstanding job with a terrific product, your chances of success are probably no better than 50%.  (See my other postings about the critical role of the consumer in the innovation process.)  Consequently, plan on raising enough money to launch three of four equally terrific products in order to have a good chance of overall success.
• An exit from this kind of investment falls squarely into the familiar realm of M&A, so deep relationships with prospective acquirors are not necessary.  Recognize, however, that it's tough to value a product in its infancy.  Acquirors are prone to gross under- or over-valuation.  Hope for the latter, but plan for the former.

The third path is the intermediate case, what Professors Nambisan and Sawhney call the innovation capitalist strategy.  It is the take 'n' bake approach to innovation: the innovation capitalists invests substantial capital and time in order to resolve a significant amount of uncertainty, but the product is not taken all the way to market.  As the editors of Harvard Business Review summarized, "Innovation capitalists reduce [the risk faced by licensees] by spending their money to develop a promising idea.  And they help you avoid the up-front costs of acquiring fully baked products."  In turn, the innovation capitalist counts on getting a commensurate return on investment - something higher than one might expect for a less well-baked idea, but less than one might expect for a product that has been demonstrated to be market-ready.

To be successful, aspiring innovation capitalists need access to human capital and financial capital.  But, the critical resource may well be social capital - long-term, trusting relationships with quite senior decision-makers at large organizations.  There aren't likely to be too many successful innovation capitalists for at least two reasons:

• Most people won't really understand the importance and nature of these critical relationships.
• It takes time and effort to cultivate a sufficient portfolio of such relationships, which makes social capital relatively rare and expensive.

I'll explain my rationale in a subsequent post.

Strategic clarity is liberating.  Be honest with yourself regarding your access to human, social, and financial capital.  If you don't have access to millions of dollars, and if you don't have established relationships with a portfolio of the heads of business units or corporate vice presidents at large companies, you'll need to rely on your personal sales skills and perseverance to successfully license your idea.  Don't over-invest; don't put yourself in the position of having to hit a home run, because the odds are exceedingly long that you'll strike out.  And, if you do get a hit, it's very likely to be a single.  Take it, and then swing at the next good pitch that comes your way.