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Licensing is One of the Best Exit Strategies for Your Startup
Posted on Jun 26, 2017 by Administrator
Whether it’s going public, getting acquired, or selling to investors, your exit strategy is essential to your startups’ long term goals. Demonstrating that your startup has a viable exit for early investors is critical. Planning for your exit is key to realizing a return on your investors money. It requires a time-line for reaching certain milestones and keeping your startup on the growth trajectory required to attract future funding and acquisition interest.
But figuring out the right exit path and a specific plan to get there is challenging. As a startup, you face many unknown variables about how successful you’ll be in the market. It can’t be done effectively without careful analysis and a clear, realistic vision. Without exception, the aim is to sell for the highest possible price. But the problem is most startups often give overly optimistic or unrealistic assessments of their exit options, and wind up turning off investors.
That’s where your intellectual property assets come into play. Not only are they core to your current and future revenues, they enhance your startup value, and open different opportunities to make a profitable exit. Your IP signals investors that your startup has a greater chance of success. Research studies from MIT and WIPO confirm that startups with patents are more attractive to investors, tend to grow faster, have more revenue options, higher valuations and better exit opportunities. Another research study from IP Vision Inc. found a much higher percentage of VC backed winners (companies acquired or went public) had patents as opposed to losers (companies that went out of business). Winners are many times more likely to hold intellectual property than losers.
Many startups now use licensing to strategic partners not only as a revenue generating strategy, but also as a strategy to cut the time-line to an exit or liquidity event. Licensing gives you and your licensing partner an opportunity to engage with one another, work together, and see how the relationship evolves without the pressure of predicting what the outcome will be five or ten years down the road. Market conditions change. Business conditions change. And a licensing agreement offers flexibility to roll with the changes. If necessary, an agreement provides a way for both of you to disengage from one another without lengthy litigation.
A big trend driving IP as the exit strategy is the secondary marketplace for IP. It’s growing rapidly with new buyers and sellers entering the marketplace. Competition for top quality patents is increasing with the growing number of private IP funds, defensive pools, government-backed funds, and as litigation activity continues to grow.
Another trend diving this exit strategy is corporations reducing their in-house R&D capabilities. They are increasingly outsourcing their R&D through strategic investments and licensing partnerships with startups. One example is the drug industry, which at one time was heavy into R&D activities. Today, up to 60% of all new products marketed by pharmaceutical companies are licensed from startups and small businesses. Consumer products is another example. Licensing outside IP now accounts for over 40% of P&G’s new product launches.
Coupled with this R&D outsourcing trend, many of these large corporations now have startup corporate venture investment funds (CVF). Investing in the startup community is the only way they can get access to the top IP for their core business and, more importantly, stay ahead of the curve with emerging technologies and new business models. Some of the most active CVF’s in the technology industry are Google Ventures, Intel Capital and Qualcomm Ventures. But it’s not just technology companies. Active CVF’s in other industries include Johnson & Johnson, Unilever, Bloomberg, Comcast, CITI, Wells Fargo, and many more.
These CVF’s focus on startups with technologies and products in their core business areas, and are investing in just about every industry, driving up the demand for those startups with leading IP. But corporations are not stopping there. Some are even starting their own business incubators. Tech industry heavy weights Microsoft, PayPal, and Qualcomm all recently announced they’re opening incubators for multiple start-up companies, including providing guidance and development support to each startup.
The result is more exit opportunities for startups as these buyers/investors seek promising IP earlier in the development phase, explore non-traditional sources of IP (such as public and private research labs), buy patent portfolios, and invest in different IP business models (e.g. open innovation, pure licensing play, production outsourcing, etc.).
In today’s IP intensive marketplace, your IP is your startups’ exit strategy. It provides an asset for a larger player to license and integrate into their product or technologies as part of a broader IP strategy. At some point during the licensing term, if your IP is generating significant royalties, your licensing partner will most likely want to buy you out. At that point, you’ll have several years of sales and royalty payment history on which to decide the buyout price. Now you’ve got a realistic exit strategy for both you and your investors.