When you have a groundbreaking product or idea, one of the first big decisions you’ll face is whether to license it to an established company or build your own business around it. Both paths have their pros and cons, and the right choice depends on your personal goals, resources, and risk tolerance. In this blog, we’ll explore the key factors to consider when deciding whether to license your product or start your own company.
Licensing Your Product or Idea
Licensing involves granting another company the rights to manufacture, market, and sell your product in exchange for royalties or a licensing fee. This approach can be advantageous for several reasons:
Advantages of Licensing
Lower Financial Risk
Licensing significantly reduces your financial risk. You won’t need to invest large sums of money into manufacturing, marketing, and distribution. This makes it an attractive option if you have limited resources.
Speed to Market
Established companies already have the infrastructure, distribution channels, and marketing expertise to bring products to market quickly. By licensing your idea, you can see your product reach consumers faster than if you were building a company from scratch.
Expertise and Resources
Partnering with a company that has industry expertise can increase the chances of your product’s success. They can provide valuable insights into product development, market needs, and customer preferences.
Focus on Innovation
Licensing allows you to focus on what you do best: innovation. You can continue to develop new ideas and products without the distractions and demands of running a business.
Disadvantages of Licensing
Less Control
When you license your product, you relinquish a significant degree of control over its development, marketing, and sales. The licensee company makes most of the decisions, which may not always align with your vision.
Potential Lower Earnings
While licensing reduces financial risk, it also means you may earn less over the long term compared to owning a company. Royalties are typically a small percentage of sales, which can limit your profit potential.
Dependency on Licensee
Your success is tied to the licensee’s performance. If they fail to market your product effectively or encounter financial difficulties, it could negatively impact your earnings.
Building a Company Around Your Product
Starting your own business to bring your product to market is an alternative to licensing. This path offers its own set of benefits and challenges:
Advantages of Building a Company
Full Control
As the owner of your company, you have complete control over all aspects of your product, from development to marketing to sales. This allows you to ensure that your vision is fully realized.
Higher Profit Potential
Owning a business allows you to reap the full financial rewards. Instead of a small royalty, you keep all profits after expenses. This can be particularly lucrative if your product is highly successful.
Brand Building
Building a company enables you to establish a brand identity. This can lead to long-term value and recognition in the market, opening doors to future opportunities and product lines.
Direct Customer Relationships
Running your own business allows you to engage directly with your customers. This can provide invaluable feedback and foster brand loyalty.
Disadvantages of Building a Company
Higher Financial Risk
Starting a business requires significant upfront investment in product development, manufacturing, marketing, and distribution. There’s a higher financial risk, especially if the product doesn’t perform as expected.
Time and Effort
Building a business is time-consuming and demands a broad skill set. You’ll need to handle everything from operations to marketing to customer service, which can be overwhelming.
Slower Time to Market
Bringing a product to market on your own can take longer compared to licensing it to an established company. Setting up the necessary infrastructure and building market presence takes time.
Uncertainty and Stress
Entrepreneurship comes with uncertainty and stress. Managing cash flow, navigating market challenges, and ensuring business growth can be daunting.
Conclusion
Deciding whether to license your product or start your own company is a crucial decision that hinges on your personal circumstances and goals. If you prioritize lower risk, quicker market entry, and leveraging external expertise, licensing might be the better option. However, if you desire full control, higher profit potential, and are willing to take on the challenges of entrepreneurship, building your own company could be more rewarding.
Carefully weigh the advantages and disadvantages of each path. Consider your financial situation, skill set, and long-term vision for your product. Consulting with industry experts and advisors can also provide valuable insights to help you make an informed decision.
Ready to Decide?
Whether you choose to license your product or start your own business, we’re here to support you. Explore our business resources and connect with our network of advisors to help you navigate your entrepreneurial journey.
