A company funds its research and development projects with money earned from royalties on its products.
Lots of technologies (and markets, too) go undeveloped because small companies have neither the money nor the management required to develop them -- not right away, anyhow. Too bad more entrepreneurs don't think like David Rae, president of $5-million-plus Spectrafax, in Naples, Fla. He used licensing to fund product development and generate revenues from markets that Spectrafax wasn't going to enter.
Spectrafax had no products and little capital in 1983, but it had a technology that Rae thought would work in the PC-based-fax field. He took the technology to Matsushita, which owns the Panasonic brand. Matsushita agreed to pay Spectrafax to develop circuitry that it eventually incorporated in a consumer product, the Panasonic Fax Partner, whose sales Spectrafax receives royalties on. Spectrafax used the same technology to enter the more specialized, fast-growing corporate market for large-scale fax retrieval systems. "Matsushita paid for the development," Rae says, "and we kept the portion of the market we wanted."
Spectrafax struck similar licensing deals with Intel and others to pay for product development and generate royalty revenues.
Royalties constitute just 10% of Spectrafax's revenues, but the large-company partnerships lifted the company from struggling start-up with about $200,000 in sales in 1983 to established company with expected revenues of $10 million in 1992. -- Susan Greco and Tom Richman