making licensing decision

8/8/2019 Making Licensing Decision

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LICENSING EXECUTIVES SOCIETY(U.S.A. & CANADA)

U.S. DEPARTMENT OF ENERGYINVENTIONSAND INNOVATION PROGRAM

PREPARED FOR:

OFFICE OF ENERGY EFFICIENCYAND RENEWABLEENERGY

U.S. DEPARTMENT OF ENERGYIN PARTNERSHIP WITH

THE LICENSING EXECUTIVES SOCIETY

MAKING THE

LICENSING DECISION


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M A K I N G T H E L I C E N S I N G D E C I S I O N

C O N T E N T S

ACKNOW LEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . .1

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

CHART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

CHAPTER ONE:

W HAT LICENSING IS . . . . . . . . . . . . . . . . . . . . . . . . .3

Licensing as a Business Strategy . . . . . . . . . . . . . . . . .4

Licensing is an Evolutionary Process . . . . . . . . . . . . . .4

Licensing Means Doing Your Homework . . . . . . . . . .4

Common Motivations For Licensing . . . . . . . . . . . . . .5

Licensing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

CHAPTER TW O:

DECIDING TO LICENSE . . . . . . . . . . . . . . . . . . . . . . . .8Decision Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Capital Needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Building Core Competencies and Core Technologies . . .9

The Pros and Cons of Licensing . . . . . . . . . . . . . . . . .9

Your Business Strategy . . . . . . . . . . . . . . . . . . . . . . .10

Planning to Execute Your Licensing Strategy . . . . . . .11

Doing Your Homework . . . . . . . . . . . . . . . . . . . . . .11

Sources of Information . . . . . . . . . . . . . . . . . . . . . . .12

Public Information . . . . . . . . . . . . . . . . . . . . . . . . . .13Trade Associations . . . . . . . . . . . . . . . . . . . . . . . . . .13

Personal Contacts . . . . . . . . . . . . . . . . . . . . . . . . . .13

Common Mistakes in Deciding to License . . . . . . . .14

CHAPTER THREE:

FINDING A PARTNER . . . . . . . . . . . . . . . . . . . . . . .

Defining What and When to License . . . . . . . . . .

Strength of Intellectual Property Position . . . . . . .

Formalizing Industry and Market Analyses . . . . . . Industry Analysis . . . . . . . . . . . . . . . . . . . . . . . . . .

Market Analysis . . . . . . . . . . . . . . . . . . . . . . . . . .

Sources of Assistance . . . . . . . . . . . . . . . . . . . . . .

Partner Qualification . . . . . . . . . . . . . . . . . . . . . .

Setting the Deal . . . . . . . . . . . . . . . . . . . . . . . . . .

CHAPTER FOU R:

NEGOTIATING A LICENSING AGREEMENT . . . . . . . .

Picking a Partner . . . . . . . . . . . . . . . . . . . . . . . . .

Negotiations and the Agreement . . . . . . . . . . . . .The AgendaOutline Agreement . . . . . . . . . . . . . .

Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Termination Clause . . . . . . . . . . . . . . . . . . . . . . .

Maintaining the Agreement . . . . . . . . . . . . . . . . . .

Schedule Periodic Review Meetings . . . . . . . . . . .

Maintaining Contacts . . . . . . . . . . . . . . . . . . . . . .

Document Exchanges . . . . . . . . . . . . . . . . . . . . . .

Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reflections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Common Mistakes in Negotiating Agreements . . .

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

APPENDIX ONE: CASE STUDIES . . . . . . . . . . . . . . .

Licensing In: White Industries . . . . . . . . . . . . . . .

Licensing Out: Alpha-Beta Medical Instruments . .


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Licensing often appears to be a quick and easy alternative to the hard anditful process of technology development and commercialization especially forndependent inventors and small business owners.Yet licensing is in its own right ademanding and highly-specialized process often involving participants from vastly

different backgrounds and organizational cultures.Quick and easy it is not.

On one side of the licensing equation, independent inventors and smallbusinessmen search for partners. In the search,they will interact with people andorganizations with which they are unfamiliar; they will encounter new and differentanguages and expectations; they will experience frequent barriers to communicationn expressing what theyre after and what they have to offer.Although attractingnvestors requires a sound business strategy, their strategy is often unclear orunarticulated.They often dont understand the industry in which they are trying tocense their technology.They find themselves dealing with people who are driven

by unfamiliar imperatives and who live in different cultures.These potential partnersequire them to provide information (e.g.,market information in sufficient quantity,echnology management information, production information) which they do not

have and dont know how to access.

On the other side of the licensing equation, the firms to which an independentnventor or small business wishes to license tend to deal effectively only with thosewho understand their imperatives and needs.Larger firms most often are driven bymarket imperatives instead of technology and are most interested in how technologycan contribute to the bottom line. Further, they are familiar with the licensingprocess and its requirements and may employ licensing professionals.Unlike thendependent operator or inventor, the firms prospects are not riding on this onedeal.They will not necessarily approach partnering as the most important thinghey will do this year.

Independent inventors and small businesses find the innovation process

1

challengingat best.For the purpose of this document, the innovation process isconceived of as a series of technical, market, and organizational development taskshat can be clearly defined,and which must be completed by someone to achieve

commercial success (see Table).Only rarely can one person or small firm completehe process. Individuals and small firms must decide which segment of the innovation

process they wish to participate in and then determine what kind of partner couldbest shepherd their product (or process or service) through the remainder of theprocess and into the marketplace so that all parties benefit financially.

Left unexplained,the differences between smaller and larger firms can constitutea nearly insurmountable barrier to licensing.This document contains informationneeded to understand the process. It attempts a straightforward, clear, and plain

English description of the major issues facing independent inventors and smallirms: making the decision to license for business reasons, finding a licensee,andnegotiating a license.We emphasize identifying what an independent inventor orsmall business can do best,and obtaining expert assistance to complete those tasksbest completed by other professionals.We wish each and every reader success inhis or her licensing efforts.

A C K N O W L E D G M E N T S

The Licensing Executives Society

(U.S.A. & Canada) and the U. S.

Department of Energy, Office of

Industrial Technologies, Inventions

& Innovation Program joined

forces to produce this document

for independent inventors and

small businessmen.

The authors wish to thank the

Department of Energy for funding

development of this monograph

and the Licensing Executives

Society for providing the

information on which the document

is based. We are indebted toDavid Lux (Bryant College) and

Marvin Guthrie (Massachusetts

General Hospital) for helping us

shape this document.

Special thanks to:

Russell Barron (Foley & Lardner)

for his help in enriching the

section dealing with intellectual

property strength and to Andy

Ney (Ratner & Prestia) whocontributed the case studies

contained in the Appendix. We are

also grateful to those who reviewed

and commented on our work:

Bill Damson (Damson & Associates),

Fred Hart (U.S. Department of

Energy), Varda Main (Los Alamos

National Laboratory), Willy

Manfroy (Eastman Chemical

Company), and Tom Ryder (Air

Products and Chemicals, Inc.).

As always, we remain responsible

for the material contained herein.

We hope it eases your journey

through the licensing process.

Marcia L. Rorke and Kevin Dwyer

Mohawk Research Corporation 1996

INTRODUCTION

M A K I N G T H E L I C E N S I N G D E C I

INTRODUCTION

INTRODUCTIO

How technology proceeds from product definition (whether a product, process,or service) to fullproduction in one or more markets.


4/36INTRODUCTION


2

TABLE 1: THE INNOVATION PROCESSRESEARCH STAGE: IDEA TO ENGINEERING APPLICATION

TECHNICAL DEVELOPMENT MARKET DEVELOPMENT BUSINESS DEVELOPMENT SKILLS REQUIRED PEOPLE INVOLVED

Idea Research literature Basic research funding Scient ific/technical Pr incipal Invest igator(Basic Research)Concept Definition Needs analysis Intellectual property survey Proposal writing PI + research team(Applied Research)Proof of Concept I.D. internal factors Commercialization planning Team building PI, research team,

I.D. competing R&D Define intellectual proper ty Core competencies Intellectual Proper ty staffstrategy Tech Transfer staffI.D. potential partners

Engineer ing Applicat ions Commercial needs analysis Research funding;Explore Applicat ions engineer ing Applied research teamAnalysis intellectual property options; Industry knowledge

Refine list of potentialpartners;Prioritizedeployment applications

INNOVATION STAGE: PRODUCT D EFINITION TO ENGINEERING PROTOTYPE

Product Definition Preliminary definition Decide to develop; Find Intuition to technical Principal Investigator(Exploratory Development) funding; I.D. product Technical to engineering Project Team

championWorking Model Market analysis Find developmental funding Engineering Project Team (?)(Advanced Development) Entrepreneur or corporat

product championEngineers: Production

Safety

Engineering Prototype Complete industry analysis Funding for advanced Engineering Project Champion

Test First formal market analysis development Legal EngineersRefine and market plan Establish intellectual Market Analysis Patent Attorney

(Engineering Development) property protection Partnership Development Industry partnersFormal commercialization Market analyst

planning Planners

ENTREPRENEURIAL STAGE: PROTOTYPETO PRODUCTION

Production Prototype Full Market Analysis Find Big Money Engineering Inventor (?)Scale Up and Plan Complete Business Plan Production EntrepreneurTest Niches Form Business Product Safety InvestorsRefine Barriers Meet State and Federal Entrepreneurial Engineers: ProductionProduction Pricing Regulations Financing Safety

Engineering Competition Arrange Insurance Marketing Attorneys: PatentProduct Safety Cost Data Price Production Cost Analysis Corporate

Engineering Distribution Facility Legal AccountantsMethod Management Consultants: Marketing,

Alternative Product Business Management,

Applications FinancialRisk Analysis Insurance BrokersSales Projections Trade Union Officers

Limited Production Contact Customers Find Big, Big Money All of the Above All of the AboveQualification Testing Commence Distribution Start-up Business -PLUS- -PLUS-Running Changes Seek Product Endorsements Build Plant Systems Engineering Foreman

Follow-up Sales Buy Equipment Specialty Engineering LaborAdvertise Hire Foreman and Labor Sales Analysis Sales PeoplePublish in Technical Arrange: Product Services Supervisory Specialty Engineers

Journals Purchasing Systems EngineersTransportationRecord Keeping

Full Production All of the Above All of the Above All of the Above All of the AboveStart-up -PLUS- -PLUS- -PLUS- -PLUS-

Expand Distribution Monitor Costs Delegation ExpandingAnalyze Competitor Finance Cash-Flow Deficit Marketing Forecasting Management

Response Refine Production System Strategic Planning SalesLong-Term Financial Labor Force

Initial Growth Increasingly Complex Increasingly Complex Increasingly Complex Increasingly Complex

MANAGERIAL STAGE: PRODUCTION FOR MAJOR MARKET PENETRATION

Product Improvement Complex Management Entrepreneur (?)New Products Complexities Intensify Fully BureaucratizedSustained Growth Management

R&D StaffNational Investment Firm

Mohawk Research Corp.,1995 All Rights Reserved


5/36WHAT

LICENSING

IS

Given the tremendous growth in licensing bybusinesses large and small over the past two decades,the question arises: What can licensing do for you?

To answer that question, let us first consider somebusiness fundamentals.

The conduct of business is, in large measure,asearch for new opportunities. In the technologybusiness,one searches for such opportunities in newtechnical capabilities and applications.Varieties ofmarkets exist to provide these capabilities to usersin the nearly limitless chain of producers and con-sumers that define the modern economy.Succeedingin business means succeeding in markets.In thetechnology business,one succeeds in markets bymeeting user needs; that is,by providing users withcapabilities they can use to profitable or productiveends.Gett ing to users requires gett ing to markets.

Licensing offers a way of getting to existingor new markets more quickly and at less expense.Those with new technologies or products, wholack the resources to make,market, and distr ibutethem may find a way of introducing new technolo-gies and products into markets through licensing.Businesses operating in established markets seek-ing to expand their product base may likewiseacquire these new technologies and products

through licensing.

So what is licensing? Simply put, licensing isgranting the rights to make,use,or sell a propri-etary product, process, or service in return forpayment. A license is the grant of permission orrights, the granting being done by a party that hasthe right to do so. A licensing agreement isthe formal embodiment of this arrangement, spec-ifying the parameters of the permission grantedincluding the terr itory in which it can be used, thelength of time for which permission is granted,

and other terms and conditions of useas well asthe amount and schedule of payments to bemade.To put it most simply,a licensing agreementis a contract.The devil, of course, lies in thedetails which we will discuss at greater length inchapter four.For now, let us walk around with theconcept and see how licensing can be made towork for you.


WHAT LICENSING IS

CH A PT ER O N

Licensing requires at least three things:product (defined as a product, process, servicea seller (licensor), and a buyer (licensee).The

product, process, technology, or service beingoffered or sought constitutes what the lawyersthe licensable subject matter. Licensing is ameans of exchange whereby one party enterscontracts for permission to use a licensable sumatter owned by another.The party granting tpermission is called the licensor .The buyer inrelationshipthe one obtaining permission to (or make or sell) the productis the licensee

Licensing presumes ownership of intellecproperty.As such, licensing requires recognizaforms of intellectual property protection.Patetrademarks, copyrights,trade secrets, etc.,demstrate ownership rights to inventions,productsservices, or technologies. Ownership needs to demonstrated if someone is going to pay for thright to use intellectual property.Prudent compwill not even talk to potential partners aboutlicensing items not readily identified by such tanproofs of ownership.

Because licensing requires legally bindingagreements about legally protected properties, tprocess also involves experts.Get good ones.Tw

types of professionals are generally needed to dlicensing:a patent attorney (for intellectual propissues), and a licensing professional (for finding anegotiating with partners). While some patentlawyers can do both jobs well,assume for plannpurposes that you will need to hire two professals.Presume a prospective licensing partner,deping on the size of the business,employs at least specialists:a patent lawyer and a licensing pro. Idpreparing to deploy or acquire technology throulicensing will work best when you can assembleteam to manage the process;a licensing team (y

resources permitting) will bring technical, markebusiness,and legal expert ise to the table. In casewhere such experts cannot be assembled,the ppal champion of the technology (this very likelymeans you) will have to pick up the slack andacquire working knowledge of the technical, maand business considerations that drive licensingactivity in the industries where you seek to lice


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CH A PT ER O N E

4

LICENSING AS ABUSINESS STATEGY

Licensing is a strategic tool for growinga business. It is used by large and small fir msalike. In common usage, when a firm acquires atechnology through licensing, it is said to belicensing in; when a firm grants permission touse its technology to someone else, it is calledlicensing out . Many firms engage in both formsof licensing. Some firms, although increasinglyfewer in number, practice neither.

The words business strategy andstrategic appear frequently in this primer.Let us take a moment to consider what theymean. By business strategy, we mean theapproach you will takemost usefullyembodied in a business planto meet yourbusiness goals. If you are not accustomed to

thinking of your business in terms of strategiesand goals,we encourage you to do so. Even ifyou have a technology and would like to leavethe manufactur ing, marketing, sales, anddistribution to others, you will need to developa strategy to find a par tner.Remember that not

just any par tner will do; as we will emphasizetime and time again, successful businessrelationshipsyour ultimate goal in licensingdepend most often on finding appropriatepar tners.To face the facts, par tners (let alonethe right partners) will not simply find you.

You must find them or at least put yourselfin a place where they can find you.Thus, theneed to develop a strategy.

Business goals and objectivesfor smallbusinesses especiallyare likely to be tightlybound to personal goals and objectives.Theseonly further necessitate the need for a wellthought-out strategy for your business (whetheryou decide to license or not ). Chapter twowill focus closely on the factors comprising thedecision to license. But if you are not in the

habit of thinking strategically about yourbusinessof thinking how you will relate themeans at your disposal to the ends you wouldlike to reachthere is no time like the presentto begin. Before we embark on that discussion,though, let us consider a few more generalfeatures about licensing that you shouldbear in mind.

LICENSING IS ANEVOLUTIONARY PROCESS

If you decide to license,understand whatare gett ing into.The search for a licensing partrequires an escalating need to gather,organizeanalyze information. In the early stages, informwill come in small quantit ies, the sort of stuff ycan collect in a shoebox.As you become morepracticed in the art of looking for a partner, thinformation will require sorting and organizingfile folders.As the level of detail of your informaand the sophistication of your analysis increasewill eventually need a filing cabinetor at leasdrawer in which to hang your folders.Welcomthis process.

Looking for a licensing partner is like loofor a job.The search can be thought of as a proin which you will need to gather a finite amou

information and make a finite number of contabefore you find the one that works for you.Evnotecard collected with information about a buness,every meeting held or phone call made aduly recorded and filed is one more step towathe finite number.Remember this at the earlystages especially, when your spir its can rise higand fall lowest depending on the outcomes of particular day.Again, as with a job search,the mthing is to keep going.

The amount of expert help you will need

evolves.At the beginning of the process,you shoconsult with a patent attorney to secure appropintellectual property protection (if you are aprospective licensor) or to verify intellectual prty ownership (if you are a prospective licensee)your resources permit , you may want to consultwith a licensing professional. It can save you an emous amount of t ime.Over time,your networkcontacts will expand,and,as you approach the dmaking stage,you should have built a team consof a patent attorney,a licensing professional, andother consultants hired to help navigate the sho

of part icular industries or companies.Resign yoto this fact early: You will need expert help.

LICENSING MEANSDOING YOUR HOMEWORK

As all of the above very clearly implies,licensing requires that you do your homework

WHAT

LICENSING

IS


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CH APT ER O N E

6

requires that one tr y again.W hile it is analternative approach to development or ven-turing, licensing will nonetheless involve con-tact with business people and conditionsoften the same sor ts of people and condi-tions that caused discouragement the lasttime around.

A fifth and related defensive motivation forlicensing stems from a small businessmansinferiority complex: the belief that onlythe big boys can play the game of new prod-uct acquisition and deployment.This ispatently false.Sure big businesses can br ingmore resources to bear and have teams ofexpert staff ready to facilitate the process ofa commercial acquisition or product launchthrough licensing.But the business wor ld isreplete with examples of small players who

found the right partners,made smart deals,and profitably enjoyed successful licensingagreements.

LICENSING STRATEGY

While the motivations for licensing differfrom business to business and person to person,the need to go about it strategically does not.Licensing strategically is more than simply licensingopportunistically; it is licensing opportunisticallywith forethought, licensing that helps your business

reach a desired end.

Companies that succeed in licensing employlicensing in a strategic way,as the following exam-ples show.Quabbin Corporation, a small NewEngland steam turbine packing ring manufacturingfirm,was looking for ways to expand its productline and grew its business significantly by licensingin new technology.Through an industry contact (inSweden,as it happened), the president of the firmlearned of an industry veteran,also in NewEngland,with an improved packing ring who had

unsuccessfully approached the leading packing ringmanufacturers about licensing the technology.Uponhearing of the new component, Quabbin pursued alicense with the inventor.While unable at first tomeet the inventors price, a licensing agreementwas finally signed owing to creative negotiating anda willingness to compromise.The firm brought theinventor on board as a consultant to oversee new

product development,meeting the inventor s segy to keep inventing as well as their own.Whnot a technology developer,Quabbin used thelicensing option to secure what it needed to lanew products into marketsand to meet theobjectives of its business.

DuPont Chemical Corporation, on the ohand,which invests heavily in research and devment activit ies,uses licensing primarily as a mefor increasing revenue.This practice derives frotheir corporate strategywhich is to focus onspecific competencies and maintain industry leship in those areas.When the laboratory folk cup with novel chemical compounds that do nowith the core competencies of the companys bnesses,DuPont will license out such inventionsinterested parties.The companys strategic diretion is focused.The intellectual property gover

new materials with commercially useful propegets licensed out, DuPont saves itself the distration of developing something tangential to its bness strategy, andnot leastthe company colects royalties on the success of the licensedprocess, technology, or product.

In other cases, technology developers deto simply sell the patent.Take the case of an inpendent inventor who decided that it was timelet go of his technology.The invention was novenough that the prospective buyer (a real entr

neur with an engineering background) had to sexpert technical assistance to determine its viaty.With viability affirmed, the entrepreneur didmarket research,contacted potential buyers, anactually obtained orders for the technology.Thinventor (who asserted that the technology waabsolutely ready to be manufactured) wanted tsimply sell the patent and drawings for a priceequal to the cost of a boat he wanted.They madeal, signed the papers,exchanged the intellectproperty and the entrepreneur left to begin seup a manufacturing facility.The entrepreneur

(a professional production engineer) nearly pasout when he saw the drawings that were deliv-eredthey were only sketches! What can belearned from this case?For one, it shows that ing can sometimes be determined for very perreasons having nothing to do with quantitativeresults of predetermined formula.The case alsoillustrates that stage of development is often

WHAT

LICENSING

IS


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he eye of the beholder.What an inventorbelieved to be production-ready was, in a produc-ion engineers wor ld, nine months away from

being manufacturable.The case offers a vividexample of the need to ensure that all parties arespeaking the same language. In the final analysis,he price was set and met, and the technology

was licensed.


CH APT ER O NEach of these examples shows that licensing

can be pursued for a variety of reasons to fit avariety of scenarios.Their common point is thatsuccess in exercising the licensing option is morelikely when licensing is used to meet a specificallydetermined end.So before you enter into a searchfor a partner,know what you intend to use licens-ing to achieve.

WHAT

LICENSING

IS


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DECIDING TO LICENSE

CH APT ER T W O

8

Contemporary business is replete withexamples of the multiple uses of licensing.Somefirms will use licensing as a defensive mechanism,togain control of a technology or product that mayprovide an uncomfortably strong measure of com-petition in a market where they are comfortablysituated. Such a firm may pay you handsomely foran exclusive license to control your invention, andthen bury it to prevent its ever coming to market.Be creative,and expect your potential partners to be.

Making the decision to license demandsanswering a fundamental question:Is it worth it?Answering that question fully and well requires thatyou consider several scenarios,and that you staymindful of the goals and objectivesboth personal

and professionalyou hope to achieve.This chap-ter discusses the factors you should consider inmaking a decision to license.

DECISION FACTORS

Several factors are likely to affect your deci-sion to license or not to license as a businessoption:strategy, capital needs, and core competen-cies and technologies.These are discussed below.

STRATEGYWhat are your business goals and how can

licensing help you achieve them?These are thestrategic questions which will determine whethera licensing deal will work for you. In the examplesgiven of licensing strategically, Quabbin set a goalof expanding its product lineto secure newmarkets,spur company growth,and secure abetter position in the steam turbine packing ringindustr y.The company had choices about how toachieve this goal. One, it could have established aresearch and development capability in-house.But

the company was in the service and manufacturingend of the business,not the research end.Bylicensing strategically,Quabbin acquired the newproduct it needed but lacked the capability todevelop.The deal helped the company meet its goalof product-line expansion more quickly and withmuch less expense than by developing an in-houseR&D capability. DuPont, on the other hand, licensed

out technology that did not fit its strategy of mtaining industry leadership in its principle comptencies, thereby generating a revenue stream fothe company while maintaining strategic focus.independent inventors strategy was to makeenough money from his innovation to get a neboat.With the sale of his patent, he did just thall of these cases,the companys business stratdrove its licensing strategy.

CAPITAL NEEDS

Capital needs are frequently a primary fain the decision to license.While licensing can oaccess to cash, it is infrequently a means for gerich quick.Superior technologies may generate

more revenue,but it is far from prudentalthaltogether too common, especially among thonew to the licensing businessto think that odeal is going to provide revenues sufficient to kthe company awash in cash (when licensing outhe one killer application that will establish a fias an industr y leader (when licensing in).As inother matters of finance, prudence should remthe watchword in calculating the impact of liceon the capital position of a business.

Expectations of the value of licensing nee

be realistic. Licensors in most cases will not gethat they are seeking in terms of royalt ies,andlicensees will probably wind up paying more inroyalt ies than they intended. The general rule thumb about licensing is that 25-33%of the licesubject matters value goes to the licensor, alththere is some variance from industry to industThe price of a license generally takes several oparticular factors into consideration.These inc

Value to the customer Dynamics of the marketplace

Competit ive situation Financial forecasts Impact in the marketplace

While you will seldom get rich quick bylicensing, licensing agreements can be used vereffectively to add a measure of stability and predictability to the cash flow of a business.A rese

DECIDING TO

LICENSE


11/36DECIDING TO

LICENSE

and/or development business, for example,maycense out several technologies it has neither the

desire nor expert ise to manufacture, thus generat-ng a reasonably predictable revenue stream thathelps to stabilize cash flow.A manufacturing com-pany in a seasonal industr y, on the other hand,maypenetrate new markets with licensed technology,generating revenues that help ease the crunch ofhe slower season in its principal business. These

are very straightforward scenarios which illustratehe basic point.Business life, of course,can be

more complex.Take the case of the research anddevelopment company that derives the bulk of itsevenues through licensing products combining

several component technologies, some of which itowns,and some of which it does not. In such acase, the firm pays royalt ies to licensors whoseechnologies it needs to develop products.Theirm, in turn, licenses these to a manufacturer.

Such a firm is engaged as both licensee and licensorn its business as a technology developera fairlycommon scenario in higher technology industries.n such cases,R&D funding is exchanged for licens-ng revenues. Expertise in a particular field is paidor through a licensing agreement, and the expenseof having to conduct such research and develop-ment in-house is saved.

While licensing can ease cash flow problems,asa business decision one must keep in mind thatcensing too much of your technology can,in time,

put you out of business.Every licensor risks turning acensee into a future competitor. Using your technol-

ogy as a starting point,a licensee may develop thecapability to develop the next generation technology.Thus,licensors need to be especially mindful of whatconstitutes their core technologies. If a firm is notmindful of this prospect, for the sake of a stable cashlow today it may license away the key technologyhat keeps it in business tomorrow,as the machineool industry did in recent memory. As part of yourbusiness strategy you must set limits for what youare willing to transfer out of your company.Above all,

protect your interests by securing and maintainingstrong intellectual property protection.

BUILDING CORE COMPETENCIESAN D CORE TECHNOLOGIES

Another decision factor is the extent towhich licensing may assist in building your business


CH APT ER T Wcore competencies and core technologies. Corecompetencies (the fundamental areas of your com-panys expertise) and core technologies (the tech-nical areas or technologies which form the basis ofyour business) derive from a business capabilities,andto the extent to which a firm intends todevelop them furtherfrom corporate strategy.The degree to which the acquisition or deploymentof a given technology or product will assist indeveloping these competencies and technologiesshould be a primary concern for assessing thedesirability of a potential licensing deal. In theexamples above,Quabbin enhanced its core com-petency in steam turbine packing ring manufactur-ing and developed its core technology by acquiringan improved component through licensing. DuPont,on the other hand,took something of the oppositeapproach when technologies developed there didnot fit with the firms core competencies.

Again a word of caution: In seeking to devel-op your core competencies and core technologies,you must be careful to protect your intellectualcapital. When you license technology in eitherdirection,other businesses get a look inside yourbusiness. You may take pains to reduce your expo-sure through established methods such as confi-dentiality agreements,and,as a general rule, thesemethods work. In all cases, it is vital to your owninterests that you do not give away processes,approaches,management techniques,and other

forms of intellectual property to potential or actuallicensing partners.Some of the people you will meetin this process will adopt the attitude that If youregoing to give it to me,why should I pay for it?

THE PROS AND CONSOF LICENSING

Like most everything else in business, licens-ing agreements involve as much taking as they dogiving.As you consider the licensing option, keep inmind the pros and cons.To take the bad news first,

consider that when licensing:

You lose control of your propertyusuallytotal control, for a long time,and often forever.

The involvement of the licensor with theproperty is reduced. In most cases, to thepoint of no further direct involvement at all,


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after perhaps a limited stint as a consultantto the licensee.

Finding the right partner is tough.The rightone may make for great success.The wrongone may cost you terr ibly.Finding eithertakes looking.Despite our happy mythologyabout better mousetraps and beaten paths,do not expect your partner to find you.

Protecting your interests is crucial. It is alsodifficult.Expect potential partners to utilizeskilled negotiators, shrewd bargainers,and/orseasoned professionals.Negotiation of alegally-binding agreement is no place for anamateur.Go alone at your peril.

But there is also good newsoften,very good:

Licensing is a resource multiplier.A dynamiclicensee can immediately put whole teams ofprofessionals to work on developing,produc-ing,and marketing an invention,product, ser-vice,or technology.The licensee can quicklyobtain access to such property it currentlyneeds but does not have: to produce ordistribute a product, to perform a profitableservice, to advance the goals of the businessthrough the use of property acquired.

Licensees see things you will not see.

Licensees often perceive usesand,there-fore,marketsfor a technology that thelicensor does not. One licensee turned a saltwater taffy machine into a new and highlyefficient type of concrete mixer.The moremarkets, the more potential income.

You may make some money and you maymake it soon.The licensee may pay youmoney up front, although probably not asmuch as you would hope.In addition, theymay agree to a minimum amount of royalties

for some period.

Licensing frees you to do something else.Ifwhat you want to do is retire,or go back toinventing,or to avoid having to continue withtechnical development by using a piece oftechnology that someone else developed,thenlicensing may serve your interests quite nicely.

YOUR BUSINESS STRATEGY

Clarity of purpose, though difficult toachieve, is one key to business successespecin the business of licensing.Translating clarity opurpose into clarity in action is what implemena business strategy is all about. Using licensingstrategically assumes that your business has astrategy.To define and to develop your businesstrategy, you need to consider the most basicquestion: What business are you in?ResearchDevelopment?Manufacturing?You may,perhapinvolved in all three areas.When you confront decision of whether licensing will work for youconsider the business goals that option will heyou to meet. What do you want for yourself?What do you and your business do best?Andconversely, what do you do least well?Or not to do at all?

The most fundamental tenet to bear in as you think about licensing is that licensing isbusiness decision.Therefore,any proposition tlicense must be judged on the extent to whicmeets the goals of your strategy. For some it profit (never a bad measure), for others it is textent of change you are able to renderthahow many users you get to use your technoloor product; the extent to which it changes thworldeven in the small world that your tecogy or product improvement will inhabit.Regardless of what drives you, remember to a

the decision criteria you bring to a proposedlicensing agreement with the business goals yoseek to achieve.And remember as well that ypotential partnersif at all intelligent about tway they conduct their businesswill be dointhe same.

A strategy, in essence, is a plan of actiondesigned to meet specific goals.When considethe licensing option, consider your businessstrategy and how you might develop a licensinstrategy that fits with it. Making this decision

assumes that you are clear on several issues:know what you want; you know what businesyou are in. It is,ultimately, about businesswwill allow you to continue doing what you wato do, going where you want to go (providingyou are doing it already)? What will allow youmove into areas where you have yet to go buwould like to?

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PLANNING TO EXECUTEYOUR LICENSING STRATEGY

Lets suppose that several decision factorsndicate that licensing will work for your business.Now you must begin planning to execute.You willneed to formalize a variety of information aboutyour technology (the filing cabinet stage) andcollect considerable amounts of information abouta variety of related matters:competing technolo-gies,users of these technologies, the industry orndustries where your technology will most likelybe put to use, the firms in those industries,and themarkets where users in those industries do theirbuying and selling.This is your homework.As was true of it in your school days,homeworkhoroughly done bears more promising results atgrading time.

You must be able to persuade potential

partners of the benefits of your technology,product, process,or service in the language mostpersuasive to themthe language of their business,heir industry. (Likewise for prospective licensees:n order to communicate effectively with technicaldevelopment and intellectual property specialistsrom whom you seek to acquire technology, youmust be able to articulate the capabilities and userbenefits you need, the specific technologies youhope to acquire, and the applications to which yountend to put them.) Thus you will need tounderstand the factors they use to make decisions

o acquire technologies, the concerns that dr iveheir industries, the competit ive pressures theyace in their markets,and the benefits that yourechnology may offer them.Furthermore, knowing

about the industries and markets of potentialpartners serves the vital function of risk reduction.The successful licensing prospector reduces theisk that potential partners perceive by knowing as

much as possible about the market, the industry,and the technology being discussed.The ability toeduce this information to clear, coherent summary

statements of technical, market, and business issues

will further enhance your credibility with potentialpartners, and reduce the risk partners will naturallysense in coming to a licensing agreement.

In very real terms,your job is to understandhe effect your technology will have on thecensees bottom line.How many new customers

will the licensee sell to?Where will they be?Why


CH APT ER T Wwill they buy?How will the licensee have to changethe production line?What will it cost?Will produc-tion personnel work habits need to change?

DOING YOUR HOMEWORK

Homework enables you to provide detailedanswers to the fundamental business questionabout licensing for your business: Is it worth it?Remember that the question must be answered inthe affirmative for both parties to the licensingagreement.Both will have to believe that thelicense offers a clear value.Answering the questionIs it worth it? for yourself and persuading poten-tial partners that its worth it for them,too,requires some detailed investigations into technical,market, and business factors.

Technical considerations are a first topic for

investigation and study as you plan to execute yourlicensing strategy. If you are seeking to license atechnology out, a prospectus or tech brief of thetechnologyone to two pages longis a goodthing to prepare.This prospectus will describe thetechnology and its primary and secondary applica-tions. It should also compare the subject technolo-gy with competitive technologies,providing perfor-mance data if such is available.To help prospectivelicensees assess the value of the technology fortheir business, the prospectus should also crediblyforecast business savings that can be expected as a

result of the technology. If you are seeking tolicense technology into your business,ask theprospective licensor for a prospectus on the tech-nology.And, if performance data and business sav-ings are not part of the presentation, ask thewould-be licensor to provide them. Such questions,while they may put the technologist on the spot,will give you some sense of the business considera-tion built into the subject technology.

Conducting an applications analysis for thepotential uses of a technology is another helpful

exercise for determining the value of technologyand for searching out potential new uses andmarkets for it.The applications analysis willconsider,among other factors:

A technologys robustness (the number ofuses to which it may be adapted) andpotential spin-offs from those applications

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CHAPTERTWO

12

Anticipated target industr ies for potentialapplications (i.e.,one industrys taffy makermay be anothers concrete mixer)

Contacts and assets (e.g.,vendors,users,manufacturers, technical credibility,R&Dcapability, regulatory drivers,availability ofdata) in these industries

Rationales for developing technology forapplications in target industrieswhich appli-cation, if developed,stands the greatestchance for acceptance in the marketplace,versus which would command the mostlucrative market, if successful?

Finally,the strength of the intellectual proper-ty protection of a technology will also impact con-siderably on its prospective value. (See chapter

three, Strength of Intellectual Property Position.)

Your assessment of the value of the technol-ogy must also consider industry factors.For eachapplication you envision,analyze the industry inwhich the technology would be licensed.The nextchapter reviews full-scale industry analysis in detail.The process of collecting and analyzing informationis an evolut ionary one.As you beginto assess the business value of the technology,collect what information you can about theindustry, building toward a broader analysis.Such

industr y analysis should consider :

Concentration of firms in an industr y Decision making structure Technology and product development patterns Capital formation characteristics Regulatory drivers Life cycles Market buying characteristics Att itude toward intellectual property Technology transfer patterns Industry/government relationships

Pricing policies and required returns oninvestment

In cases where you seek to license in anindustry with which you are familiar, the task ofdoing homework will be less burdensome than inother cases. On the other hand,do not limit your-self to familiar industries alone. Multiple applica-

tions for your technology may be found in a nuber of unrelated industries; the same may be trfor technical capabilities you may be seeking.Explore your options widely:the more you domore opportunities you are likely to find.

No assessment of the business value of atechnology would be complete,of course, withattention paid to the market.Technology develers must take market needs and competitiveadvantages of a technology into consideration ing development. Building market needs and uscapabilities into the technology will make it easto demonstrate to potential licensees exactly hthe technology can meet their goals. In additioyou will need to assess the size of the market be served by the licensed technology, to bettedetermine the boundaries of the opportunityunder consideration. Eventually,this determina

will require a full-scale, formal market analysis.with industry analysis,however,compiling datamarkets is an iterative process.The elements tconsider when analyzing potential markets incl

Market size Market expansion Market segmentation Value of market in dollars Market share percentage Buying keys Competition

Market trends and competition analysis Market idiosyncracies and drivers Pricing requirements Distr ibution channels Market entry requirements Key selling points (points of difference

from other technologies)

SOURCES OF INFORMATION

As you search for a licensing partner,youneed to gather data on industries and markets.

Generally speaking,you must find out who doeswhat.That is,which firms use technologies,proces,or capabilities like yours?Which firms licensetechnology in (or out)?How big is the market fyour technology?How much of that market can realistically expect to get, and why?What are thtrends in the market?Who do you need to knoorder to sell there?

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Finding answers to these questions will takea good deal of legwork and the help of someexperts who can point you in the right direction.For the moment, however, let us focus on theegwork partthat is,work that is most likelygoing to have to be carried out by you or someonen your firm.

PUBLIC INFORMATION

A good deal of the information you need toget is public.Your local public library will have anumber of helpful resources either on-line or onhe shelf.The popular literature (Inc.,For tune,

Barrons, etc.) may provide you with snippets of theatest developments in particular industries andmarkets,or about particular companies.While farrom definitive, this may not be a bad place to start .n addition,your local library should also receive

egular reports from the U.S. Small BusinessAdministration.

You may, in fact, want to start your search fornformation by contacting the Small BusinessAdministration.SBA publishes a variety of reportsand other literature,as well as videotapes on smallbusiness topicssuch as managing your business,esearching your market, and wr it ing a business

planthat may be helpful to you. For a list of SBApublications,write:

Small Business AdministrationP.O.Box 15434,For t Worth,Texas 76119

You may also call for the list of publicationsor other information or for answers to commonlyasked questions toll free at 1-800-U-ASK-SBA. Ifyou have Internet access, check out the SBA homepage at ht tp://www.sba.gov,where you will easilyind your way to state and local SBA offices inyour region.

TRADE ASSOCIATIONS

Trade associations also provide useful infor-mation and assistance.Chances are the industryyou are interested in has a trade association youcan contact for a list of member firms.

Licensing trade associations should be ofparticular value in the search for experts in yourarea. We recommend contact with the Licensing


CHAPTERTWExecutives Society (LES) and the Association ofUniversity Technology Managers (AUTM) as placesto begin.These associations regularly offer oppor-tunities to present and/or display technology offer-ingsgood places for prospective licensors toshow their wares and for licensees to prospect fornew technology. In addition, LES publishes theConsultants and Brokers List every two years.

PERSONAL CONTACTS

As useful as the trade association publica-tions are, the contacts they can provide are moreuseful.Keep good lists of the helpful people youhave spoken with,and always look to expand yourlist by asking people you get on the phone or meetat trade fairs for the names of other people youmight be able to speak with.

Remember that, in gathering information,talking is importantespecially when other peopleare talking, so listen carefully. A good conversationwith an experienced contact can put years ofindustry knowledge right in your ear. Such conver-sations can provide you with more useful informa-tion than weeks of library research or publicationsordering. Moreover, such people can tell you com-mon industry knowledge that you might not findwritten down anywhere. So even if you are not apeople person, try to get people to talk withyou,and listen carefully.

Through these various sources of informa-tion, you begin to get some idea of the shape of atarget industry and the dynamics of particular mar-kets.Leads about companies looking for technolo-gies like yours (or looking to license technologieslike the ones you are looking for) will begin todevelop as a result of this process.Follow them up.

When you get that opportunity, it behoovesyou to know what you are talking about. In additionto the technology prospectus you have put together

describing what you have to offer, you also need tobe able to speak with some knowledge aboutdevelopments in the industry and dynamics in themarket.The best preparation in this regard involvesconstructing industry and market analyses.Whetheryou present these documents to potential partnersright away is your decision to make.The primarybeneficiary of completing these documents,

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CHAPTERTWO

14

remember, is you.The degree to which you havedone so will be evident in your discussions withpotential partners.

COMMON MISTAKES INDECIDING TO LICENSE

A number of standard mistakes occurfrequently in licensing decisions.The sections abovehave touched on some of these.Let us highlightthree common mistakes made during the earlystages of the licensing game.

First is the propensityespecially amongsmall businessesto seek a licensing agreementtoo soon. Generally, upon the discovery of aninnovation,a smaller business may leave very lit tletime for reflection and information collection andinstead march directly into a licensing agreement.

The consequences of such a mistake may be cost-lycosting licensors a greater share of the profitsthat may have been realized from a more fullydeveloped technology or concept, and costinglicensees money to develop interesting conceptsinto products or technologies that actually work.As noted above,gett ing a technology to the engi-neering prototype stage ensures the licensor afuller share of the profits realized from the inven-

tion and the licensee a technology that has beeshown to work.

A second common mistake in making thdecision to license is the belief that the optiowill offer a silver bullet for your business. can just find that one technology, then we canturn this company around! think too manyenthusiasts of licensing in.Or, if we can just fthat one manufacturer to make this product fus, then well grow rich off royalt ies on the saonce it makes it to the market, the booster licensing out may hope. Gamblers ruin! For susuch things do happen. But not too frequentlyThe fact is, if your business is failing, the oddsagainst you that any licensed technology, no mter how good, will save you.

Finally, licensors, especially those who

look for acquirers of their technologies, oftehope to escape doing businessespecially thmarketing part.That is simply not possible.To find another business to license technologfrom you by definition implies that you will hto market technology.The belief that one caavoid that fate through licensing is misplacedyou fail to market, you will probably fail tofind a licensee.

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Having determined that licensing makes goodbusiness sensethat it fits your corporate strategyand can help you achieve the ends you seekthequestion arises: How do you find a partner?Theshor t answer is,you conduct a search and youinterview prospective matches.The longer answer,of course, involves a good deal more than that.

In your search, you will need to locate,gath-er,and analyze information about industries,mar-kets,and companies. Some of this you can doyourself,but with some you will need help.There ishelp availablesome of it is free.Once you locateprospective partners and impress them with yourpotential, you need to investigate theirs. If they passmuster, then you can begin to investigate how a

potential deal with them might be done.This chap-ter considers each of these steps in the search fora partner who is right for you.

DEFINING W HATAN D W HEN TO LICENSE

With the strategic intent for a licensingdecision clarified and the rationale considered,thequestion of definition arises.What, exactly, are youthinking about licensing?If you are licensing in,what kind of performance capability do you seek?

On the other side of the ledger,how well canyour product or technology perform?In terms oftechnical capability acquired or deployed,severalelements will determine how to define thetechnology or product.

The first of these is the technologys stageof development.The stage of development of atechnology or product will help to determine thevalue of a technologywhat the licensee is willingto pay or what a licensor can expect to make fromit. Someone must pay for the development of a

concepthowever original or novelinto afunctional and marketable technology or product.The further along in the development process thelicensor has taken the technology, the greater itsvalue.A technology on the drawing board, forexample, with some measure of developmentactually taken toward product definition,will bewor th more than a concept; and a working model


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CHAPTER THRE

of the drawing will be worth more than the dring itself. If the licensor has not proven that thconcept can be reduced to practice,the licenswill have to do so,and will, consequently,pay lefor the licensed property.

How much better does your technologyperform than similar technologies or productsalready on the market or under development?Answering that question means that your techgys performance needs to be measuredusinstandard indicesagainst competing technologor products.That implies testing.Again, the levedevelopment rules.Technical feasibility, taking tneeds of users into account, will be demonstrain early stage tests,while tests at later stages w

confirm feasibility and generate data upon whicthe design of a prototype can be based.Protottesting will lead to engineering and productionprototypes,which will confirm the adequacy odesign and its performance characteristics andparameters.Here again, the technical stage ofdevelopment will influence value by reducingperceived risk.The further along the developmprocess an innovation has been taken,the moraccurate the measurements of how it compareother technologies.

A solid definition of the product or technoshould be nailed down before licensing negotiabegin.This is particularly important to a potentlicensor. Put another way, for the purposes of ntiating with potential licensees, the technologyshould be frozen at a given stage of developmThe concept of freezing is especially importantnew technologies that are a work in progress.Ymust be very clear on what capability you are pared to license.Otherwise, the licensee may lclaim to advances or improvements you make your technology while the licensing agreement

being negotiated.

STRENGTH OF INTELLECTUALPROPERTY POSITION

A related issue involves the strength of tintellectual property position of the technologbe licensed.A license will by definition involve

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hey serve.Gett ing up to speed will take timeand information.

Constructing industry and market analyseswill help you sort and analyze the information youare collecting, and to sound credible when you talkwith people. In the evolutionary process of licens-ng,the search for a partner creates an escalatingneed to gather,organize,and analyze information.As early as possible, you should begin organizingyour information into a usable format.Writing yourown analysis is probably the best way to becomeactively engaged in the task of learning about theconditions your potential partners face. It willdemand that you organize,analyze,and synthesizehe information you have gathered on industries,markets,and competing technologies.

Keep in mind that its best to write industry

and market analyses for each potential applicationyou are investigating.For you, the search is aboutinding a licensing partner for your technology,buthat technology will find its way into the marketone application at a time.Thus,you need to beknowledgeable about each industr y and marketoffering a potential application for the technology.

NDUSTRY ANALYSIS

ndustries are like people: Although they allshare some common characteristics,each one is

different.A generic set of questions about thendustries salient characteristics will yield valuablenformation about them. Lets consider thesecommon characteristics and the significance ofeach in your analysis.

Concentration: Industry concentration is definedas the number of firms in an industry and theelative power of each. Industries with more firmsend to be more competitive (and less profitable)han those with fewer firms. In industries

dominated by a few firms, in-house technology

development tends to be the rule,although this ischanging in some industries.Generally speaking,arger firms tend to be more reluctant to entertaincensing proposals (from small businesses andndividuals) than smaller ones. Industry concentra-ion will indicate the leaders in the industry and

where the larger market niches tend to be.Smallerirms may profitably enter into licensing


CHAPTER THREagreements focused on exploiting such niches ifthey offer superior capabilities to users,at asufficiently better price.

Decision making structure: Firms in part icularindustries generally tend to acquire and deploytechnologies in similar ways. If you intend tomarket a technology to those firms, you need toknow who and where the decision makers are.Specifically, you will need a champion on theinside willing to go to bat for a partnership withyou. If that person is not the decision maker, orsomeone who cannot get close to the decisionmaker, you may be in for a long wait.

Technology and product developmentpatterns: Do you know how, in the last 10 or20 years, a given industry has developed newtechnologies and turned them into new products?

Knowing about such development patterns willenable you to talk to decision makers withreferences they understand and will also provideyou with something of a road map of the wayproduct development works in a given industry.As a general rule, do not expect that yourtechnology or product will deviate from theirestablished patterns of development.

Capital formation characteristics:Understanding innovation financing in a givenindustry will provide you with a sense of what

you and your potential partnersare upagainst, especially if your prospective licenserequires a significant capital investment. Theonus will be on you to prove to your championsthe financial impact of your technology orproduct. If they can not understand how tofinance its development based on the capitaliza-tion characteristics of their industry, it isdoubtful that they will seek to persuade otherswithin their organization that a deal withyou is doable.

Regulatory drivers:The regulatory environmentin which firms operate is an increasingly impor tantindustry characteristic.To market a technologyin a given industry, you need to be aware of theregulatory environment in which firms operate. Ifthere is some doubt that your technology complieswith various environmental, health,and safetyregulations, firms in an industry generally will

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CHAPTER THREE

18

show you the door. On the other hand, if whatyou have to offer stands to enhance compliancewith a given regulation, that can be a particularlyimportant selling point for the technology.

Life cycles: Life cycles exist for technologies,products, markets,and industries.These followpatterns from concept and growth to maturationand decline (and, in some form or another, renew-al). Know where your technology (or the tech-nology you seek to acquire) fits in the pattern oflife-cycle development.The latest iteration of atechnology or product that is in decline probablyis not something a licensor can expect to havegreat success marketing to industry. Likewise, it isnot anything a licensee will want to be tied to forfive years when the state-of-the-art is about tochange dramatically. Similarly, declining industrieswill offer fewer opportunities for profitable busi-

ness than growing ones. The future of a particularindustry is one of the more important points forconsideration when a technology has multipleapplications.A declining industry may be an easierplace to market your technology in the short-term, but if the industry does not have much of afuture, then neither does that application.

Market buying characteristics:What drives thebuy decision in a particular industry?In making thedecision to procure technology, what do firms inthe industry respond to?Price,quality, reliability,

service,and reputation of the supplier all make thelist for consideration. Different industries havedifferent prior ities.

Attitude toward intellectual property:Different industries view the importance of intel-lectual property differently. It is important to knowwhat kind of intellectual property protection firmsin the industry tend to seek for their technologiesso that you can acquire the same if neededforyours.Then present your technology in the kind ofpackaging firms expect to see.

Technology transfer patterns:The patterns bywhich firms in an industry acquire technology willgo a long way toward determining your chances forsuccess at licensing in that industry. Some indus-tries use licensing agreements less than others.Before getting your hopes sky high about doing alicensing deal with a firm in a given industry, it is

prudent to discern which, if any,of the firms inindustry license,and what they look for.

Pricing policies and required returns oninvestment:Most firms have benchmarks thamust be met to green-light acquisition or deploment of new technologies. If your licensing proal cannot make a reasonable claim to a certainreturn-on-investment, your chances of doing aare slim. In addition, firms have establishedthresholds for what they will pay to acquire netechnologies. If your asking price is out of the park (a common mistake of many a would-belicensor), you probably will not get a deal. Knothe industry norms for technology acquisit ionsexpect that is what they will be willing to pay fyours.Decision makers will seldom be empowto make exceptionseven for you.

Attempt to validate the data that you collect ftrade publications,contacts,magazines, etc.A pdent rule of thumb holds that you should haveauthoritative sources for each piece of informabefore it can be considered fact. Of course, thnot always possible. Do not let lack of absolutecertitude delay you from beginning to assembleinformation you have gathered about an indususeful ways. Make guesstimates when you needLike other aspects of this process, the confidenwith which you can analyze the behavior andcharacteristics of a given industry will evolve.

MARKET ANALYSIS

As you collect information about industrinformation about their markets will come to Markets drive business. If you cannot show howyour proposed license should work in a givenmarket, you cannot convince a partner that yodeal is worth their while. (And if you can,maybyou'd better take a second look at your partneFor each potential application, it is important tyou clearly define a particular market.

What is a market analysis?It is a detailedbreakdown of who the potential customers arhow many of them there are,how much they wpay,what the competition is,and how you can it.Your analysis should describe the market chanels through which products like yours reach tuser.Moreover, you should be able to define th

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significant points of difference between your prod-uct and its competit ion. (If you cannot, you have aproblem.) Above all, your analysis has to demon-strate clearly why people will buy your product,using statements from prospective customers,backed up with believable figures in dollars andcents.The surest way to turn off any prospectivepartner who asks about the market is to say:When they see it, theyll buy it. Their likely reac-ion (probably unstated):You obviously have neverried to bring something to market before.Regardless of technical elegance,a technology orproduct will succeed only if a large enough marketexists to support it. In light of that cold, hard fact,your market analysis had better show that the busi-ness risk stands a good chance of paying off.

The following are fairly standard considera-ions in any market analysis:

Size/Scale: Market size is a critical factor in target-ng potential licensees and licensors.A $20 millionmarket may be pocket change to a large corpora-ion.At the same time, the same market may over-

whelm the production capabilities of a smaller firm.Somewhere in the middle there is a firm for whichhis market is ideal.The critical nature of this mar-ket scale factor makes it imperative for smallbusiness innovation managers to carr y out whatamounts to a double-edged market analysis as theypursue licensing agreements.That is, they must

carry out a standard market analysis with precisionsufficient to approach potential licensees with reli-able data.They also need to carry out an industryanalysis to identify the market thresholds theirpotential partners will seek.

Market segmentation:Most markets break intosubdivisions,or segments.Segments can be based,forexample,on price (high-end,medium-range,low-end),or quality (from very reliable to reliable enough),orypes of product variations (i.e.,nylon-fiber,wax-coat-

ed,or uncoated dental floss).You need to know the

segments of a given market in order to reliably esti-mate the impact of a technology or a product in thatmarket:Will it work in all segments,some segments,and how much product can be sold in each?

Dollar value of market: Fairly reliable data existor the size of almost any market imaginable.Market size drives all other marketing calculations.


CHAPTER THREHow bigexactlyis the pie? You should be ableto discuss the future prospects of the market: Is itlikely to expand (by how much),or contract (byhow much), and why over the next several years,including the factors affecting market size.

Market share percentage:In keeping with thepie metaphor,market share is your slice. Estimatesof potential market share are best made in ranges,from best to worst case scenarios about thepotential sales,and why.

Buying keys:These are the reasons customers buy agiven technology or product.Following are seven,fairly generic such categories. In your market, theremay be more,and they may be different,and theweight given to each is particular to a market.

CompetitionThe degree of competition in

a market will determine the attractiveness ofwhatever capability you have to offer. In verycompetitive markets,new technologies tendto be more in demand. In less competit ivemarkets,there is less impetus for buyers toacquire or deploy new technologies. Lackinga sense of urgency to breed marketdynamism,such markets tend toward thestatus quo.

Market trends and competit ive analysisPresent and future trends in the marketplace,

as suggested, impact the decision to acquireor deploy new technology.To build a persua-sive case for your capability, buyers need tosee that you have anticipated or at leastcaught up with a trend in the market, andhow that capability will help them pull withinthe market leader or stay out in front of thepack.This is an especially important point incases where the market is changing quickly,and where all players are scurr ying to r idethe latest or next wave.To be thorough,youshould be able to discuss who the competi-

tors in a given market are, the strengths andweaknesses of each, and other factors thataccount for their position in the market.

Market idiosyncracies and drivers What isthe personality, so to speak, of a particularmarket?What stimuli does it respond to, oris it responding to at present?A couple of

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contact t rade associations, such as your local chap-er of the American Bar Association,Americanntellectual Property Law Association, LES,orAUTM, which can provide you with references toexperienced professionals.

For decades,licensing has been viewed as araditional preserve of the patent attorney.Thencreasing use of licensing as a strategic tool inbusiness has created a demand for a more special-zed form of expertisethe licensing profession-alwho may offer more assistance than a tradi-ional patent or general business attorney.Thesedays, the high tech section of a general businessirm has become a standard repository of suchexpert ise. Attorneys employed or retained byirms that routinely license are more plentiful thanever.You may not always be able to find one inyour area. But there is no reason, save for an

aversion to conducting business by phone, fax,andmail, not to retain an expert located elsewhere.

Apart from legal expert ise,a variety of otherexpert help with marketing,finance,licensing,man-agement, technical development, and other areas isavailable in the form of consultants.Check theireferences, and if references are not posit ive ororthcoming, look elsewhere.This bow to prudencenot withstanding and your resources permitting,qualified consultants can save you time and money.Use them.

PARTNER QUALIFICATION

So far,we have focused mainly on what youcan do to impress potential partners as a knowl-edgeable, capable professional in business.Such anmpression will, of course,encourage people to dobusiness with you. But in the excitement of themoment when someone contacts you about maybedoing business, remember that you, too, have ques-ions to ask. Principal among these: Is this someone

you want to do business with?Can they do what

hey promise to do?Not just any partner will do.Licensing your technology to the wrong firm canuin its chances for success,and may jeopardize

your entire business.

You must find a partner whose capabilitiescomplement your own, and one capable of holdingup their end of the bargain.You are responsible forchecking them out.


CHAPTER THREA number of elements need to be consid-

ered when examining the qualifications of a poten-tial partner.Develop a list of characteristics andcapabilities you want in a partner; evaluate howprospective partners measure up to that standard.Listed below are some of the more importantfacets about the partners business to check.Foreach,the overriding question is:Can this potentialpartner deliver what they promise,and do theyhave a track record to substantiate their claims?

Scale and ScopeHow big is your partner,and what is the range of their activities?Questions of scale and scope indicate howimportant your partnership might be in thebroader scheme of your partners view ofthings. If, for example,you enter into a part-nership with a $20 billion business,howmuch attention will be paid to the $2 million

in sales that your partnership generates?How much time will they give the agreementbefore they declare it a loser and cut youloose?On the other hand,partnering with asmall firm that is entirely dependent on therevenues your licensing agreement brings inmay be equally unnerving.If the firm needsyou that badly, are they competent to be inbusiness, and more impor tantlydo youwant to be the only one with anything tobring to the table?

Preliminary research into licensing agree-ments strongly suggests that licensing agree-ments tend to work best among firms ofsimilar size. Individual inventors and smallfirms fare much better in their licensingendeavors when they target potentiallicensees incrementally larger than themselves,according to one report.Technologies farebetter if they pass up the corporate foodchain one level at a time, as one licensingexecutive put it . Organizations of similarscale do tend to communicate better.They

grasp each others manufacturing,marketing,and business problems more easily, they cancoordinate solutions to them more quickly,and implement licensing agreements withsignificantly less friction than organizations ofvery different sizes.

Technical capabilityA would-be partneralso needs to demonstrate technical aptitude.

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CHAPTER THREE

22

Does their firm have a history of performingthe sorts of tasks expected of them under aproposed agreement using similar technology,and what is their performance like?Whattechnical strengths and weaknesses do theybring to the deal?The partners ability to workout kinks smartly,without major disruptions inthe flow of production or service delivery,willinvariably impact the success of your licensingagreement and the fate of your business.

Marketing capabilityWhen your partnerwill be marketing the product, technology,orother subject capability of the licensingagreement, its marketing capability deservescareful scrut iny.Has the firm shown good

judgment in past marketing decisions on pro-jects similar to the one you are contemplat-ing?Does the firm possess the requisite

knowledge of the market into which you willbe selling?Does it have access to the appro-priate distribution channels to sell to thatmarket?If not,what plan are they offering toget there?

Business management capabilityHow wellis your partners firm run?What do its finan-cials look like?What sort of reputation doesthe firm have in the industry and in the mar-ket?Steady, forward-looking management willnot necessarily attract a lot of attention, but

its performance will speak for itself.

Ability to take risks and overcome barriersAs a corollary to the management capability,you need to know whether a potential part-ner has the capacity to overcome technicaland market barriers,and whether they willbe willing or able to take the risks necessaryto make inroads in new markets.The trackrecord of your potential partner in newproduct launches or product improvementsshould provide some indication of whether

the firm has taken risks or merely riddenwaves to get where it is.

Project specific inquiries need to be madeabout any partner.Qualification criteria will tell youabout a partner generally: how well they run theirbusiness,about their capabilit ies and characteristics.But you also need to assess whether a partner can

and will provide the things needed to make yolicensing venture a success.

Specifically,you need to assess your partcapital acquisit ion capacity. If the success of yolicensing agreement is contingent upon significaup-front capital out lay,and you are looking to ypartner to provide it, it behooves you to knowyour partners capital acquisition capacity.Whalines of credit from banks do they have at theiposal?W hat kind of access do they have,have had, to venture capital?What are the limits of capacity?Will they be able to raise the money need?Do they understand the relationshipbetween an excellent plan and capital acquisitioSuccess in the market will be contingent uponability to provide resources genericallytechnfinancial, human,etc.As with capital acquisitionassess the ability of your partner to provide ot

resources where and when they will be neede

SETTING THE DEAL

Partners will be as excited to find you asare to find them.Gett ing enthusiastic about thprospect of doing a deal where both sides stanwin is only natural. But, especially when yourefeeling optimistic, it is imperative that you remfocused on what got you this far in the first playour strategy and the search for a partner thainto your strategy.While it is fine to talk about

potential deals, keep your head.Do not commanything and do not dare sign anything (with thexception of, say,a confidentiality agreement) wsuch conversations begin.

Know what you want from a deal when begin talking seriously to prospective partnersRefer back to your strategy and consider the sof modifications that might need to be made inorder to do a deal with a particular prospect.Wflexibility is a necessary part of doing business,you will need to set clear limits beyond which

cannot bend;elements were included in yourstrategy for a reason,after all.At what point dochanges demanded of you take you places thatdid not intend and do not want to go?

Likewise with potential terms of the deaYour market analysis, for example,will show thgiven application should produce a certain amo

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of sales,and,consequently,a certain amount ofevenueof which you should be entitled to a

certain percentage.A potential partner,however,may value the technology differently,or project asmaller market (perhaps because this is not theirprimary niche)and they estimate that you shouldeceive a certain, smaller percentage.Again, know

what you want. If you and a potential partner viewa particular opportunity altogether differently,perhaps you should not be partnering.

Knowing what you want from a deal is less amatter of complex calculation than it is about focusand clarity.Going into preliminary discussions,youneed to know and be able to articulate clearly theanges within which you expect the deal to fall.You will be willing to commit between this much

and that much capital, this much and that muchime, this much and that much technology and


CHAPTER THREtechnical assistance,etc., to the deal.) If yourpotential partners ranges fall completely outsideyour own,be willing to accept the possibility thatyour expectations just may be too different toreach a mutually workable agreement.

Such should not be taken as advice to stormout of talks and dramatically smash relationswith people you barely know.(As we will discussin the next chapter, such tactics, in the long run,seldom produce the kind of results you want.)Instead, we argue that you need to be able to layout your expectations clearly. Let the other sidedo the same. If the difference between the twosets of expectations is too great, there simply maybe nothing to negotiate.Do not waste too muchtime pursuing a deal with this firm.Find anotherwho sees the world more along the lines thatyou do.

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NEGOTIATING A LICENSING AGREEMENT

CHAPTER FOUR

24

When preliminary discussions demonstratethe seriousness of all partieswhen visions seemto match, interests in a project dovetail, the viewsof a potential licensing venture align,and personalrelationships work then it is time to take thenext step in making the project happen:negotiatingan agreement.The details of the agreement canmake or break a project from the point of view ofeither party. Negotiating the details should neverbe left to amateurs.More than ever,at this stageyou need the benefit of professional assistance. Ifyou have not had the time or the money to bring alicensing professional into the process yet, now isthe time when you absolutely must.

While you will need professional help tonavigate the negotiating process, you will, of course,be more than a detached observer.The followingchapter outlines the process of doing a deal with apartner,and covers some additional factors toconsider as you make your selection.An overviewof the negotiation process and the framework of alicensing agreement follow. But the deal does notstop therecontrary to popular belief.An agree-ment is an organic thing.As such, it requiresmaintenance.Maintaining your agreement is a keycomponent of building the long-term relationship

with your partners that will ensure amicable andmutually beneficial results for the term of theagreement and beyond.

PICKING A PARTNER

The last chapter detailed things you need tobe cognizant of when examining a potential part-ners qualifications.What it did not tell you is whichpartner to pick.That is a choice that no one canmake for you. In determining your fit with apotential partnerand their fit with youthe fun-

damental things are important.Your strategy willdetermine,to some degree,who you want or needto license with. If you seek national distr ibutioncapabilities, for instance,a local firm that sells intwo states may fit in every other respect but itsscope.You have a choice to maketrade off agood fit and the prospect of a good workingrelationship for access to a larger market. If your

analysis tells you that your capability has nationpromise, a larger partner (or at least one withaccess to a larger market) may be worthholding out for.

Other factors you need to consider involvthe harmony between the partners vision andyour own.Do you view the project (and businegenerally) in the same way?Are your views conerably different?As in other relationships,a comvision of the future of a licensing relationship isimportant.A shared vision gives the partners a of what to expect from the future.While visionslikely will notand need notmatch perfectly,visions in sharp conflict will ultimately manifest t

selves as strains on the relationship,when decisioneed making and the partners see things differen

Apart from but related to a common visthe partners need to have harmonious expectations.This means, first, that you are clear aboutwhat you expectabout what your business nto make the agreement worthwhile (e.g., rightsproduct improvements,access to markets in a ticular region, exclusive rights to manufacture two years).At bottom,you have to be absoluteclear with yourself on what you need from this

relationship. (Remember,needs come beforewants.) If the partner cannot provide what youneed to make a project work,no matter how monious your visions, no matter how well youseem able to get along, the agreement will fail.What you need is not necessarily the same thiwhat you will settle for.A smart business persoshould arrange to make a bucknot to breakeven.But knowing what you need will provide with a basis from which to extrapolate the reswhat you want, what you are willing to settle foclear on these things as you approach negotiatio

and during negotiations,be firm,but reasonable

NEGOTIATIONSAN D T HE AGREEMENT

Going into negotiations, you will need anagenda.That is,you need to know what youwant from the agreementwhat your ranges o

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acceptability are in each area covered by theagreement.An agenda is not a secret plan for fool-ng the other sidefor breaking their concentra-ion, dividing and conquering, or anything like that.

Some will advise you to employ tactics to that endn your negotiations. Such tactics are, in our view,counter-productive. Do not bother with them and,f you are subjected to them,you may want toeconsider your partner.

You must protect your interests.And youshould also respect the other parties need todo the same. Negotiation is not war, after all. It isabout reaching consensus, coming to agreement.The goal of a negotiation,moreover, is not simplyo hammer out an agreement that works for you.t is to come to an agreement that helps todevelop a long-term,mutually-beneficial businesselationshipa partnership, in the truest sense.

THE AGENDAOUTLINE AGREEMENT

Negotiations should be clear and open.Youhave nothing to hide.As such,a particularly helpfulstrategy is to begin by presenting a prototypeagreement detailing positions you find acceptableor the different agreement clauses. Let us take amoment to outline a typical licensing agreement.As a rule,a licensing agreement will contain theollowing clauses:

A. Identification of parties1.Date2. Addresses3. State of Incorporation

B. Whereas clauses (recitals)1. Purpose of the agreement2. Facts leading up to the agreement3. What each party brings to

the agreement

C. Definitions1. Field of agreement2. Licensed product/process/service3. Licensed intellectual property4.Confidential information5.Affiliates6.

making licensing decision

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