Sophisticated investors look for a sustainable competitive advantage when evaluating a business as a potential investment. Most of the time, sustaining a competitive advantage involves acquiring and maintaining the exclusive right to some form of intellectual property (IP), thereby keeping your competitors from being able to use it. However, permitting others to use your IP also can fuel the growth of your business. Strategic licensing of your IP can be the ultimate use of Other People's Resources (OPR).
Intellectual property assets not only can be leveraged to sustain your competitive advantage, but also to create credibility in the industry (and with potential investors). And through strategic alliances and/or licensing, IP assets can add virtual mass and resources to your business. Your approach to making the most of your IP can be a significant factor when potential investors and/or co-venturers consider investing in your company.
Licensing Your IP
Licensing is a powerful tool for leveraging IP assets, and you can generate significant ongoing revenue to help grow your business using it. When you "out-license" one of your IP assets, you, the "licensor," enter into an agreement with the "licensee." Under the agreement you grant the licensee certain rights with respect to the IP in return for some agreed-upon consideration. For example, the licensee may be permitted to use the IP in return for payment of royalties. In fact, you can often obtain huge returns on investment: The ratio of licensing income to the cost of developing the IP can sometimes be essentially infinite.
However, there is another perspective from which to view licensing. You can view a license as a mechanism to get the benefit of your licensee's manufacturing and distribution facilities, and/or sales and marketing efforts without having to spend the time and money to develop them on your own. This is the ultimate use of OPR. Your product can be manufactured and distributed entirely through OPR -- your licensee's.
The license also may permit distribution into a geographical region or channel that you would otherwise not be able to reach; the licensing income from this becomes essentially found money. And, depending upon the circumstances, you can sometimes use the licensee's resources and efforts to increase the value of your business -- your credibility and goodwill -- far beyond the royalty income generated.
IP and Competitive Advantage
Though the advantages are clear, licensing your IP can jeopardize your competitive advantage. Since exclusivity typically is the key to a competitive advantage, something every investor is interested in, how can you license the use of your IP to others while using it to sustain a competitive advantage?
One way is to license IP that is not being used in your core business, or that relates to a product or service that has more than one basis for a competitive advantage (e.g., you have two patents covering a product, but grant a license under only one). You can also limit the scope of the license with respect to one or more of the following: technical fields of use, products or product lines, marketing channels, and duration of license. As a practical matter, you do not lose any competitive advantage if you grant a license that limits the use of the IP to technical fields, distribution channels that are outside of your core business, or to geographical areas outside of your present marketing area. This is particularly true if the term of the license agreement is correlated with your plans for expansion.
In a nutshell, licensing can serve a real purpose in your efforts to fund your business. You maintain a competitive advantage while at the same time making money by permitting others to use your IP. You keep your cake and eat it too.
Sidebar: How to Identify IP Assets
How do you identify your IP assets? Here are a few things to look at:
- Identify everything about your business that gives you an advantage over your competitors. Ask yourself: "Why do my customers come to me instead of my competitors?" Dissect your business systems, products, services, and communications (e.g. customer and/or supplier relations) and analyze each component and feature to determine whether it contributes to the competitive advantage, and whether there is anything about it that is perceived as "unique," "better" or "distinctive."
By "unique," we mean your competitors don't have it or provide it. Something is "distinctive" if it differentiates your business from the competition and brings your business to mind. Of course "better" can mean many things. Determine precisely what it is about that component or feature that makes it unique, better or distinctive.
- Remember that IP includes more than just "technology stuff." Of course it includes technology-related invention, know-how, expertise, data, and information. But it also includes invention, know-how, expertise, etc., relating to business subjects such as management and operations, marketing and sales--the things that give (or can give) your business its identity to the outside world, and those things that can differentiate your business from your competitors.
- The trademarks and trade dress that symbolize that reputation and goodwill are all part of your IP. And don't forget the written materials and artwork relating to or created for the business -- works of authorship and artistic expression. These, too, are part of your IP.
- Anytime you solve a problem, you have created a potential IP asset. If you encounter a problem in connection with your business, is it likely that your competitors will encounter that same problem? If you have found a better solution than your competitors, perhaps the optimum solution to the problem, that solution is also part of your IP.
Many legal tools (including trade secrets, utility patents, design patents, copyrights, mask works, and trademark registration) are available to protect IP assets. Once you have identified the specific source of your competitive advantage, develop a strategy to secure exclusive rights by applying those legal tools.