Hmmm….That’s a good question!
By: Kenny Durham, President at Innovators Warehouse
Early in my career I had a sales call with a potential licensee. The call was going great. The licensee recognized the value in my client’s intellectual property. He was talking to me about how he saw the patents developing into a full line of products. We spoke of how his current distribution was perfect for the yet to be developed product. I was encouraged about the opportunity and I was feeling pretty good about the hours and hours of work it took to get ready for this one call. .
A 16 page product prospectus – dripping with great graphics, photos of the prototypes, graphs and charts, awesome financials, formal market research, competitive product analysis, and superbly written text. My ducks were in a row and quacking – I nailed it. I made a case for my client’s project that Perry Mason couldn’t poke a hole in.
Then the rubber met the road. The prospective licensee asked the Magic question, “What did I want for the patent?”
I went into my normal pitch about how my client understood that licensees typically take most of the risk and therefore they deserve to make the lion share of the profits. I pointed out how my client knew the rewards he would receive in the form of royalties would be based on how often the ultimate product judge and jury, consumers, felt inclined to purchase this soon to be product. I hate to brag but boy was I on a roll. I hit it all. I had convinced the licensee I had a great product. I made sure he knew my client would be easy to work with but that he was also aware of what standard industry financial terms should look like. Then I get the curveball question.
“But if I didn’t want to license the patent, how much would you sell the patents for outright?”
I wasn’t ready for that one. It hadn’t occurred to me that buying these unproven patents outright was even being considered. First of all I was so busy selling my plan I forgot to consider that someone else may take another path to commercialization. To me licensing almost always makes the most sense however what makes sense to me doesn’t always matter.
Unfortunately I didn’t have an answer. All I could come up with was that we hadn’t considered that option yet because we knew that typically the best way to maximize the value of a patent was through sharing in the long term success of it rather than just a onetime payment. Especially for a consumer product patent who hadn’t proven itself in any way.
The conversation did get interesting from there though. The licensee was probing trying to figure out about how much my client had invested in the product. Once the buyer felt like he had a good grasp of the number he then pitched out that he might be interested in buying the patent for roughly five times what my client had spent to date.
In most worlds this would be a slam dunk. If you bought a car two years ago and could turn it around for five times what you purchased it for you would do back flips. Take a house for example, or a dog, a skateboard, or a company, anything really.
But for some reason it doesn’t seem nearly as attractive when we are speaking about patents. Why is that? Why don’t we treat technology transfer like other industries? Why do we treat creations of the mind so differently? Everyone wants a million dollars for their IP. It makes me question what would happen if we all treated real estate the same way. “I know the market value of my house today is 100k however I want you to pay me 500k because it will surely increase in value over the next twenty years.” If you made five times your money by putting it in the bank you would jump for joy.
I guess what I’m saying is – First, treat your Intellectual property like a business. Don’t be so emotionally attached to it. There is a very good chance that you could miss out on a great business opportunity if you can’t figure out how to separate yourself. Second, listen to your potential licensee or buyer. Don’t get so caught up in being proud of your work that you overlook key points that will help you put a deal together.
The customer usually tells you how to sell to them, if you just take the time to listen.
In addition to being a huge supporter of the UIA and the inventor community – Kenny Durham is the CEO of Innovators Warehouse and one of the most successful product deal makers in the industry.
Posted by Mark Reyland at 8:46 AM http://inventoropinion.blogspot.com/2011/02/hmmmthats-good-question.html
If you would like to learn more on how Innovators Warehouse can assist you with your commercialization efforts, please visit www.innovatorswarehouse.com/free-inventors-kit/ and let the IW Crew open the Warehouse doors for you!