As discussed last week in my blog entitled Add Licensing to your Business Model Toolkit, licensing is an important tool for the advanced materials start-up CEO. However as I pointed out last week, concerns about value capture and loss of market influence cannot be ignored if the goal is to build a valuable and important business capable of generating venture capital returns. Furthermore, when licensing technologies in energy or industrial markets that often place less value on IP compared to IP-centric businesses such as IT and biotech., deal creativity can be the order of the day. The four tactics described below should be considered in formulating a start-up company licensing strategy:
Start-ups need to focus. A classic and obvious strategy for a materials business with “platform technology” is to license the technology in non-core markets. But even a licensing deal can create a significant draw on management and technical resources so care must be taken to ensure core activities are not disrupted. Considering how the license relationship strengthens core activities is a must. The impact on exit scenarios must also be considered. As we review new technologies with our strategic limited partners, many times they have applications in mind that were not even on the radar of the start-up and often licensing is their preferred commercialization route.
All start-ups should focus on creating a minimal viable product. But in many industrial and energy markets, for example thin film solar, that minimum may be difficult for a venture-funded start-up to achieve even with a superior underlying technology. Getting technology into the market as soon as possible is critically important, while the real game-changer continues to brew. Licensing is an obvious strategy. The key here is that the next generation technology must be substantially differentiated in terms of IP and product benefits such that a Gen One licensee does not effectively undermine the possibility of successfully commercializing Gen Two.
An ideal licensing situation is when there are levers in addition to IP that can be incorporated into the licensing negotiation. One lever is the control of a key ingredient(s) used in the production process. This could take the form of leveraging an established relationship with a third party supplier. It could also involve keeping production of a foundational material in-house while licensing applications and/or functionalization IP. If exclusive access to materials or control of an upstream process can be established, an IP license could be coupled with a supply contract. This combination creates a stronger negotiating platform capable of achieving a more lucrative and sustainable relationship. Taking this concept further, when dealing with companies based in countries with weak IP laws, replacing a license with a contract-based agreement may provide a stronger legal footing to work with.
You have to sympathize with a licensee who spends every day grinding it out in the global marketplace as checks go out the door. In their mind the licensor might be doing nothing more than spending their days lounging by the pool as the money rolls in. No company wants to send cash out the door and this can motivate behaviors such as developing work-around IP, tough negotiation on terms or even more unscrupulous behavior such as masking real production or financial volumes. Teserra is a successful public company with technologies widely applicable in the semiconductor and display industry. Their IP licensing business model has been largely successful because a core team continually updates and innovates the IP portfolio. When a licensee understands that a relationship will buy them a sustainable advantage based on continual innovation, the willingness to pay more lucrative royalties over the long term greatly increases.
As I explained last week, licensing can have some meaningful advantages for a materials start-up. But like most everything else in the world of materials start-ups, there is no free lunch and careful formulation of a strategy is foundational in achieving a licensing business model success.