There are two main paths for commercializing a new product idea. At some point, you're going to need to decide which one you want to take. Some product ideas are clearly a better fit for one path, but more often than not, the decision is a matter of personal preference. I speak from experience, having achieved success doing both. For most of my career, I utilized the licensing business model to transform ideas in my head into products on the shelf. When I had the idea to change the shape of guitar picks, I experienced the ecstasy and the agony of venturing by starting and growing a business to bring it to life.
These two paths are very different, and each has pros and cons.
In our society, venturing gets all the glory. To venture a new product onto the market is to go into business for yourself -- meaning start a company, likely raise money, and do all of the necessary research and development, prototyping, manufacturing, marketing, sales, distribution, fulfillment, and so on. Think startup and Shark Tank. Making a venture profitable requires a significant investment of time, experience, and an appetite for financial risk. For example, while a single guitar pick cost less than a penny, I still needed to float a quarter of a million dollars to fulfill orders from Walmart.
Simply put, licensing is akin to renting. In exchange for the right to make and sell your idea, your licensee -- a company already in business -- pays you a small percentage of each unit based on the wholesale price. This is what's known as a royalty. Royalties are a form of passive income that are typically paid out per quarter. Are companies really looking for ideas to license? Yes. In academia, this phenomenon is known as "open innovation," and it has become the most popular form of R&D worldwide.
Your licensee is a perfect partner, because they have the know-how, experience, and relationships with retailers. But you forfeit control, and what if they don't do a good job?
Recently, I had the pleasure of interviewing Benjamin Kwitek, inventor and Director of Innovation at the University of Colorado, Colorado Springs. Kwitek invented a new pen grip that has sold more than 100 million units. He pivoted to licensing out of necessity after discovering that it would cost him tens of thousands of dollars to have molds of his initial prototype made. His perspective is priceless.
"The advantage of starting a venture is that it's your own. It has your name on it. Ideally, you scale it so that it becomes a company that people know, trust, and utilize. The problem is that it comes with all the challenges that a venture creates in its wake, with HR probably being the biggest headache.
Now you've got full-time employees who are dependent on you, legal obligations, and significant capital costs. Venturing means managing a business with a lot of other responsibilities that maybe don't turn your crank and are not as fun -- like paying the rent or ensuring that the supply chain is working properly."
Fundamentally, this is the reason why I walked away from my guitar pick company. We were selling picks around the world in 7-Eleven and other popular retailers, but I wasn't enjoying it. I was too stressed, probably because my appetite for financial risk is very low. Ultimately, I wanted to focus on being creative, which is what satisfies me.
"On the licensing front, the beauty is that you've still got your baby -- the idea -- but you find a better home for it. That home, the licensing company, then provides the capital, the logistics and all the expertise that would be difficult for you to get without a lot of work and failures.... Big companies aren't as good at coming up with new ideas because they're established, slow, and want to protect what they already have. This means they are open to disruption. As the innovator, you can be that person who benefits financially from the idea and gets bragging rights, without all the agony that managing a new venture entails.
The one problem with licensing is that it, like venturing, takes some degree of sophistication. If you don't know how to do licensing, you might not get the best deal. The other thing I would say is that you've got to talk to the right people in the organization who understand licensing and have the proper incentives to work with you. The product manager at the company you're approaching might need to be properly enlightened."
Fundamentally, you need to ask yourself a few important questions. How many ideas do you have? How much experience do you have in the field you are inventing in? How do you want to spend your time?
Both paths require that you educate yourself and embrace being persistent, because there will be obstacles.