License to Thrive
Entrepreneurs have long sought to license their innovations to larger companies, and for good reason. Why go head to head with a big competitor when it's easier to sit back, collect your royalty check, and move on to your next project?
But the traditional licensing arrangement is undergoing a major rethink. Rather than handing the whole thing over as they might have in the past, entrepreneurs are increasingly pursuing strategic partnerships with corporate America, which has been happy to oblige. Small companies get access to new markets, industry experience, and manufacturing capabilities—while maintaining their independence. Budget-conscious corporate partners, for their part, get to cut costs by essentially outsoucing their R&D and innovation.
In years past, large companies tended to acquire, rather than partner with, small, promising outfits. But even small acquisitions are hard to integrate, and the expected financial returns often fail to materialize, notes Joel Shulman, a professor of entrepreneurship at Babson College. So many big corporations have shifted to cooperative relationships.
Take consumer products giant Procter & Gamble. Even with a $1.8 billion R&D budget, it still manages 500 active partnerships each year, many of them with small companies. "This is about accelerating innovation, says Jeff Weedman, P&G's vice president of external business development. It's a similar story in the pharmaceutical industry. By 2010, the smallest companies in the sector will capture some 25% of industry revenue, thanks largely to joint ventures, partnerships, and licensing, says Kaihan Krippendorff, a professor of entrepreneurship at Florida International University.
Strategic partnerships can be an important way to neutralize competitive threats—and hand off business challenges, says Richard Stromback, owner of Akron-based Ecology Coatings, which makes high-tech, quick-drying protective and decorative coatings for industrial products. Stromback bought the company in 2003 because he loved the technology. But he wasn't thrilled at the thought of going head to head with larger, better-funded companies. With no sales or marketing groups in place, Ecology Coatings, he felt, was a sitting duck.
So a week after purchasing Ecology Coatings, Stromback contacted DuPont, the world's largest provider of automobile-industry coatings. About a year later, DuPont licensed the rights to use Ecology Coatings' technology for its North American automotive business. (Stromback declined to discuss the details of the arrangement.)
Another partnership got Stromback out of serious hot water with a major client, a large propane-tank rental company. Ecology Coatings was having trouble serving such a large and demanding account. So Stromback outsourced the customer, along with all potential propane tank work, exclusively to Red Spot Paint & Varnish, a major name in UV coatings. Under the deal, Ecology Coatings should get about $500,000 in the first year. But just as important, it will avoid angering an important customer—and buy time to build infrastructure to serve large clients in the future.
The right partnership can also open whole new lines of business. Mary Boone Wellington, CEO of M.B. Wellington Studio in Nashua, N.H., patented a process to color-laminate plastic sheets, which could then be molded into translucent blocks for use in architectural projects. But though she had interest from a number of architects, the materials were expensive and time-consuming to produce.
Enter Arkema, a Philadelphia-based company best known as the manufacturer of Plexiglas. The larger company was so taken with Wellington's process that it agreed to manufacture the raw materials she needs, which significantly cut her production costs. Arkema will use her innovative color palettes. Wellington is so optimistic, she is creating a new division to wholesale the plastic to other firms. "This opens a whole new realm for us, she says.
The Art of the Alliance
Don't license to just anyone; pick only partners that make true strategic sense.
Find an ally
You need someone inside the partner firm who can stick up for your interests.
Be wary of granting exclusive licenses, which could limit future opportunities.
For more on striking smart partnerships, check out the books Strategic Partnerships: An Entrepreneur's Guide to Joint Ventures and Alliances, by Robert L. Wallace and Building, Leading, and Managing Strategic Alliances, by Fred A. Kuglin and Jeff Hook.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.