Cash from Patents – Part II

Yesterday I tried to give you some quick and dirty guidance on monetizing patents.  I got a lot of feedback from that — people asking detailed questions.

So today I’m reprinting a 2004 article I wrote for Entrepreneur magazine about turning an idea into a patent and then licensing your ideas.  I spoke with both lawyers and entrepreneurs about this topic, including Nabeel Hyatt, a serial entrepreneur who at the time was CEO of Ambient Devices:

Ambient Devices Inc. is not your typical high-tech company. The company’s first product, the eerily glowing Ambient Orb, broke new ground in the consumer electronics space and landed squarely on the cover the Hammacher Schlemer catalog in May 2002. Building on technology first conceived at PARC Xerox and the Media Lab at MIT, the company is not only turning out eye-popping products but also turning heads with a business model that substitutes royalties for venture capital and helps launch new competitors.

Like many growing companies, Ambient has some key intellectual property–patents, trademarks and other “secret formulas.” Most companies, however, would use such technology simply to tempt investors and then squirrel it away from the rest of the world. Ambient turns that model on its head by eschewing investors while spreading its technology far and wide through aggressive licensing. It’s a strategy that squeezes huge economic value out of the Ambient patent portfolio and gives the company an important (and largely passive) source of funds.

In general, Ambient wants to license its wireless technology, called bit trickling, to consumer electronics giants like Sony and also encourage new start-ups to use the patents for smaller niche plays. All that while Ambient builds and markets its own products, like the $150 Orb and the new cube-shaped Weather Forecast Beacon.

“This strategy came out of lessons I’ve learned from previous start-ups,” says Ambient co-founder and VP of strategy Nabeel Hyatt, 27. “This is a new way to say, ‘Let some other entrepreneurs take advantage of the opportunities.’”

Selling not just products but also licenses for core technology pays off handsomely for Hyatt and his team. Although he says they spend only about 5 percent of their time helping other companies launch products, nearly 15 percent of Ambient’s revenues already come from that activity. “And that could grow to 50 percent next year,” says Hyatt. “There are a hundred good opportunities outside the consumer market for Ambient technology–entire industries that are not being touched.”

Do It Yourself

To mine the value in intellectual property, you first have to know what you’ve got, says IP attorney Rose Auslander, a partner at the Wall Street law firm Carter Ledyard & Milburn. “A lot of people have intellectual property of great value and don’t even realize it.” Whether you design jewelry or jet engines, create skyscrapers or software, the fruits of your labor can be captured as intellectual property and put to work again and again through licensing.

Identify it, secure it and protect it are the three steps you must take before you start looking for licensing partners. “You want to be sure that your company would be considered the author—or be sure you get the rights,” advises Auslander. You can’t sell what you don’t own, and having the right patent or trademark registration will help you protect what you’ve created.

Intellectual property comes in many flavors, including trademarks, utility patents, design patents and copyrights. Conceivably, one item could be protected by a copyright, a trademark and a design patent. That’s the good news. The bad news is that each type of protection has different rights and limitations, and they are not always complementary. A patent, for example, can nullify the effect of a trademark, warns Auslander. That can be dangerous because each type of protection has a different duration: A patent is the shortest; a trademark exists only while you use it in the marketplace; a copyright is perpetual.

Seek Professional Help

By now you’re probably thinking that this sounds like a job for a lawyer. You’re right. Lawyers who specialize in intellectual property law can help you protect your intellectual property and may also be a good first stop for finding a licensee. Professionals like CPAs and lawyers can help you find companies that need your technology or design, says CPA Larry Weiner of Weiner, Dailey & Co in Elmsford, New York.

If you’re serious about a licensing strategy, you might be well-served by speaking with both a lawyer and a CPA says Weiner. “Where a lawyer would be looking at your IP from a legal point of view, a CPA can help you maximize the strategic and economic value,” he says. Issues like how much to charge for a license, whether to require minimum royalty payments and how to be sure your licensee is calculating royalties accurately are all issues for a CPA or financial advisor.

Slice the Pie

Every time you grant a license, you give up sales and profits you could have pursued yourself. Of course, you can’t be in every market with every possible product, but you’ll need to start with a clear strategy for segmenting the marketing. Decide in advance what you can do–in Ambient’s case, for example, selling Orbs through consumer catalogs–and what you can’t. For the opportunities you can’t or don’t want to pursue, look for a strong licensing partner.

Licenses, both exclusive and non-exclusive, allow you to slice the pie any way you want. Some common segmentation strategies include assigning rights within geographic limits, within particular industry segments, or simply for use in a single product line. “Where a piece of technology has multiple applications, I’d license it for a particular use,” suggests Weiner. Industry-specific designs or trademarks, on the other hand, might be better suited to geographic licenses.

Ambient divides its licensees into two broad categories: consumer electronics and “other.” Since the adoption of Ambient technology is still in its infancy–but has such broad application—it’s not difficult to manage the different licenses, says Hyatt. “We haven’t yet had a situation where an existing company is going into the same market as another start-up.”

Nonetheless, managing and monitoring licenses can become a complex and time-consuming task. There will always be issues of compliance, reporting and quality control. Quality is especially important suggests Auslander, since poor quality can lead to liability issues and could even cause you to lose protection under trademark laws. “You may want to see a sample from each manufacturing run or see their marketing and advertising for approval,” she says. Don’t forget that you retain ultimate ownership of the intellectual property, so any product or derivative should be marked with something that protects your rights, such as “TM”, © or the patent number.

Both Weiner and Auslander agree that license agreements can go bad, so be prepared. “Good fences make good neighbors,” laughs Weiner. “We trust everybody–subject to verification. Be prepared to audit the results annually.” As a rule of thumb, expect to pay about 1 percent of your revenues for a thorough audit by a CPA.

Is licensing a distraction? It absolutely can be. On the other hand, few other aspects of your business hold such potential wealth.

As Hyatt and the Ambient team mined the value of their IP, they found that licensing partners not only provided financial capital but also human and market capital. Says Hyatt, “What I see is a lot of outside companies worrying about this while we’re not. Its only 5 percent of my time, but the licensee is spending 100 percent of their time trying to make the product successful.”

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Dedicated to your profits,

David