Venture capital investments in “hardware” companies such as advanced materials start-ups have typically focused on productization and scale-up as the key value creation activities. Partnering in the form of joint ventures, joint development or distribution agreements have traditionally been the business model of choice. Licensing models are often shunned with the argument being that you leave money on the table and your ability to influence is lost while fate is determined by corporate and market forces beyond your control. Valid points! But these issues can often be mitigated and should be weighed against the advantages of licensing, of course in the context of the market dynamics and industry structure that is faced.
Licensing becomes a more obvious choice when the market entry barriers are high. The obvious examples are large and mature markets with economies of scale, a depreciated capital asset base, regulatory hurdles, and oligopolistic market behavior at play. Would you say energy and industrial markets fit this bill? Overcoming these barriers and replicating the capabilities of established firms can be a monumental task even with some of the partnering business models that are often pursued. In these cases, a licensing strategy may reap the benefits described below:
The age-old problem faced by all start-ups is a crisis in credibility. With industrial and energy industry players often focused on risk mitigation techniques such as performance guarantees, bankability, supply contracts, warranties etc. it is a tremendous challenge to meet the risk tolerance needed by these customers. No market presents a greater challenge in this regard than the automotive battery market and therefore Pangaea portfolio company Envia Systems has established a licensing business model along with its ecosystem of partners in order to bring their technology to market. A license model allows a licensee to control risk, while going a long way in establishing credibility for the licensor. Ovonics established licensing as a viable strategy in the electric vehicle market with their licensing of Nickel Metal Hydride technology and they were eventually acquired by BASF. There are many considerations in picking the best licensee partner(s) but picking a brand name that will lend credibility should be at the top of the list.
Successful start-up companies are singularly focused on being the absolute best in the world at one thing. But creating a successful company and executing on a business plan requires developing a multitude of capabilities. The most obvious considerations in picking the best licensee partner are focusing on the organization with the best alignment. Market leadership, a synergistic technology and manufacturing platform and a culture of innovation are a must. But a more subtle consideration is finding a partner where the relationship is more than just receiving a check at the end of the month. In a two -way licensing partnership, some capabilities of the partner will naturally rub off, strengthening start-up capabilities in second generation technologies or different markets.
I often hear about licensing deals primarily as a way to generate early cash flow. In the early days cash is king and this is indeed a noble motivation. Entrepreneurial enthusiasm is a wonderful thing but in our experience, large up front license fees are often absent, except in the case where significant capital has already been spent to prove a technology and scale it up. More realistic expectations are that an early licensing model can reduce capital spending requirements in the early days when capital is most expensive or not available at all. A company we seed funded called Tivra Corporation which is working in the area of power electronics and LED markets has adopted a licensing strategy for the LED markets primarily to avoid replicating the to avoid the investments this industry has already sunk. When knocking on the investor door, a licensing relationship and quantifiable future revenue stream will make the fundraising discussion for a materials start-up such as this a little easier to have.
Licensing has been successful for decades in the venture-capital -supported industries such as IT, semiconductor and biotech. Licensing models in these industries are tried and true and have formed the basis for many a 10X plus venture capital return. While licensing may not be the hammer in the start-up materials CEO’s business model toolkit, a chisel might be an appropriate analogy. Synergistic with the hammer and sometimes you need to do a little carving up to create a masterpiece. Next week I will focus on tactics that support this underlying strategy.