Author: Andrew Clay
So you have had an idea for a new product or process and want to commercialise it. Perhaps you have a prototype. You might even have gone into small scale production to test the market. The big issue for most SME’s in all these situations is how to scale up from where they are to where they want to get to. In other words how do you exploit your IP rights and best monetise what you have got?
The answer to that question for most SME’s is almost always going to involve seeking some form of help from third parties, be they your bank manager, a business angel, private equity, a sub-contract manufacturer or established player in the market. In this article, I explain five of the key effective IP exploitation routes and how to get started.
There is in reality a sixth exploitation route, which is to sue or threaten to sue infringers of your IP and extract money from them by way of damages or an account of profits. For the sake brevity, that route is not considered further in this article.
What is IP exploitation?
IP exploitation means making money, in consensual market transactions, either out of your IP rights themselves or alternatively out of the things that are protected by your IP rights. You might, for example sell a patented chair or you might license the patents covering the chair to a third party manufacturer.
Good housekeeping – IP Protection
The first thing you should do before you exploit your IP rights is to make sure you have properly protected them. Some key ways to protect your IP rights are:
- File a patent application to protect a new product or process.
- File a registered design application to protect the appearance of a new product.
- File a registered trade mark to protect the brand you propose to use to market the new product.
Copyright and unregistered design rights will often exist automatically in the things you have created, without the need for registration.
Next you will need a properly drafted confidentiality agreement (also called a non-disclosure agreement or NDA) so you can share your new product idea, plans and commercially sensitive information relating to them with relevant third parties. Such agreements will not prevent third parties misusing what is disclosed to them but their existence can make it much easier to frame a legal complaint for breach of confidence if they do so. An NDA is not only essential but also signals to third parties that you know what you are doing and will protect and defend your IP rights. Disclosing a new product to a third party, which has not been protected by a patent application and without an NDA, can leave the product developer in a very weak position.
With your IP rights protected, you can turn to the weighty question of how to get your product to market. There are at least five key routes to effective IP exploitation, each with its own advantages and disadvantages.These are briefly outlined below.
Route 1: Cash injection to build your own manufacturing facility and fund marketing/sales
This route can take numerous forms, from a simple bank loan, through to equity investment via a private raise or IPO.
Advantages: in theory you should have more control over your manufacturing, product launch, marketing and distribution processes than for some of the other routes.
Disadvantages: building manufacturing capacity, a market position and demand for a new product can be expensive and time consuming. Taking a new product to market often takes a lot longer than people anticipate, which can put added strain on already stretched finances. IPO’s represent expensive money, not just during the float but afterwards, complying with listing regulations. Many who IPO come to regret it. Equity investment via a private raise is also often expensive money: a large chunk of a company’s shares are given away early on when the company doesn’t have much value for what can seem, with the benefit of hindsight, not very much money.
Route 2: appoint a sub-contract manufacturer to make the product for you, which you or your distributors will then sell
Advantages: this route will often involve a lower upfront cost than inhouse manufacture and enables you to tap in to experienced manufacturing expertise and a purchasing network for component parts.
Disadvantages: there will often still be up some up front costs such as tooling and other specialised production machinery. Also you will still need to fund the stock you buy, which can seriously impact cash flow. It can be tempting for the subcontract manufacturer to make some extra product on the side and then sell it (for example on Alibaba) into the market to compete with you. This can be very expensive to stop if the subcontract manufacturer is based overseas, for example in China. Finally you are still left with the cost of building a market for the product and a distribution system.
Route 3: license your IP to a third party
Advantages: the licensee may have all the advantages of an established player in the market – a reputation, distribution network, financial strength and the manpower and other resources, which it would take you years to build up. The licensee will also often assume a lot of the financial risk of taking a new product to market. Thus, when it works out well, appointing a licensee can be a low cost way of gaining rapid and significant market access. Not surprisingly this is a very popular route.
Disadvantages: a bad licensing arrangement can be like a marriage gone sour – difficult and expensive to get out of, with plenty of scope for argument about numerous issues. If it goes wrong the IP can be tied up for ages with little benefit or worse still a bad licensee can irreparably tarnish the IP. Finding a licensee for a new product can be very difficult and time-consuming. Often the licensee will be in a much stronger bargaining position than the SME licensor so the licensee has to consummate a licensing deal on less than ideal terms, with a party which has much greater financial clout if the parties do fall out.
Route 4: Outright sale of the IP to a third party
This route is often favoured by biotech/pharma start-ups as the only really viable way to get their promising new drug or test onto the market, which can with clinical trials costs tens or even hundreds of millions of pounds.
Advantages: Potential for a quick cash out exit. Low risk if the cash comes up front. Often the key players in the technology developer will join the buyer’s business so as to assist with the further commercialisation of the new technology.
Disadvantage: Often the seller gets a relatively modest return in comparison to the upside that may be generated down the line. Purchasers will often be reluctant to pay all the cash upside upfront and will want to defer paying at least some of it until certain milestones are hit. Sometimes former entrepreneurs don’t adapt well to being “mere” employees of the buyer.
Route 5: JV/partnering arrangements
These arrangements can take numerous bespoke forms. A common route is to set up a JV company with a shareholders agreement with a third party who can bring technical, financial or marketing expertise or resources into the JV.
Advantages: You will retain an ownership position and some degree of control in the exploitation vehicle, which is much better resourced and positioned to exploit the market opportunity. If set up properly the interests of the owners should be broadly aligned which discourages cheating.
Disadvantages: If the partners fall out they can be even more expensive and difficult to get out of than a licensing arrangement. Conflicts can arise if one of the business partners is a supplier or customer of the JV, whose commercial interests are not the same as the JV. Often conflicts arise when the parties’ exploitation plans meet reality, for example if much more money is required to fund the JV than had been expected.
Which IP Exploitation route is best for you?
There often isn’t a single right answer. There may be multiple options that will work well for you. It is often easier to say what routes won’t work or are too high risk to sensibly contemplate. For example, is granting a worldwide, ten year, exclusive licence to a competitor of yours, about whom you know in truth very little, with no minimum exploitation obligations really a good idea? Is disclosing all your non-patented, confidential process know-how to a giant Chinese manufacturing conglomerate worth the risk? Can your business’ likely growth trajectory really pay for all the costs of being listed on AIM?
At Sonder & Clay we have vast experience of advising entrepreneurs and businesses about the different options. Often what will help you the most is having someone independent who will really challenge your assumptions and help you think through the consequences of your plans. If you would like an informal discussion with us then please do get in touch with me, Andrew Clay.
Sonder & Clay’s Andrew Clay is giving a licensing master class in London on 10 October. If you would like to attend please follow this link: Licensing IP Rights – Common Problems & Solutions.