Licensing or Small Business Start-Up?
When you have a great new idea, there is a point where you need to consider the pros and cons of licensing versus starting a small business to manufacturer, market, and ship a new product. Both are viable options, but have different degrees of risk and profit.
Licensing is fast, requires little in resources, and relatively risk free. The manufacturer who is the licensee has assumed all the risk for the length of your license agreement, which in exchange they will keep the bulk of the profits, while giving the inventor a percentage of sales anywhere from 3% to 15%. There is often a good faith payment made upon signing a contract, a prepayment of expected royalties, that should further motivate the manufacturer to produce the product and make back its investment. The manufacturer knows their market, has existing relationships for distribution, and deep pockets for launching a new product. Six months is not an unreasonable time frame to seeing your product produced.
Small business start-up is slow, requires a large amount resources, and risky. The increase risk is directly in proportion to the possibility of increased profits. You assume all risk, from development of a functioning product, to finance, sourcing, manufacturing, fulfillment/shipment, marketing, advertising, and sales. It can take years to bring a new product to market and as a small business you are competing with established players who have the home field advantage. These larger companies can negotiate more favorable deals with suppliers, can afford commercials, fancy packaging and design. Even if you can produce your product, it may not be able to compete against the larger companies out there. It’s a very uneven playing field.
Someone with a new idea has to ask themselves what are their business goals, is it to make money, quickly, and sell their idea or is to be a business owner, investing the time and energy into building a company, not just inventing new products. Not every inventor is cut out to manage a company, to deal with and all the aspects of ownership that have nothing to do with the process of inventing. Ask yourself if your passion is research and development of a new idea or is it the commercialization of that new idea.