In general, technology startups are presented with two business models to market their technologies. In both cases, the innovation or technology developer have to protect their intellectual property (IP). There are three different types of IP protection: patents, copyrights, and trademarks. Click here for differences and more details.
In this post we discuss the pros and cons of both models to help you make the best decision for your company.
The Traditional Model
In this model the developers (and investors) of the technology or innovation build a corporate structure around it. The objective of the company is to turn the new technology into a product, i.e., to manufacture, market and sell the product.
The Licensing Model
In this case, the developers license the technology through a licensing agreement so that it is the licensee who acquires the rights to commercialize the technology. The licensing agreement will establish compensation, duration of agreement, purpose, exclusivity, etc. In the case of software licenses, licensing agreements typically include software update clauses. Click here for licensing agreement terms and examples.
It is the licensee who builds the company around the technology and takes the profits as well as the risks that result from operating the business. In return, the developers of the innovation or technology receive a royalty (compensation) regardless of the licensee’s success.
When is best to choose the Traditional Model?
The traditional operating model offers important advantages:
- Higher earning potential than the licensing model
- Operational control including manufacturing, quality, marketing & branding, distribution and sales
- Higher payoff exit strategy potential
The traditional operating model has the following main challenges:
- Financing the operation
- Build and lead the right management team
- Making the right pricing & marketing choices
- Making the right assessment of market needs and competition
Because of the above, it is best to choose the traditional model when you and your team are experienced in business, have the means to finance the operation, have experience and contacts in your industry and throughout the product and distribution value chain, have great risk tolerance and unquestionable commitment.
When is best to choose the Licensing Model?
The licensing model offers the following advantages:
- No need to create or finance the operation
- No execution risk
- Freedom to focus on your next project
- Higher speed-to-market potential
The licensing model has the following main challenges:
- Less earnings potential than the traditional operating model
- Limited or no operational control with respect to manufacturing, quality, marketing & branding, distribution and sales
- Low brand-building potential
- Limited payoff exit strategy
- Licensees’ selection
- Licensing agreement structuring and negotiation
- Litigation and liability exposure in the case of IP infringement or challenge
- Licensees’ contractual default
- Licensees’ bankruptcy or acquisition
So, if you are not ready to operate a company, or if it is too hard to secure capital, the licensing model maybe right for you. Just make sure you have an experienced IP legal team on your side!
Feel free to comment/discuss/share. If I missed anything, Tweet to DrFranzC or leave a comment. Thanks for your feedback!