America Invents

America Invents announces license of Griller's Edge Spatula

2011-11-03T09:46:00.000-07:00

America Invents licensed the Griller's Edge Spatula to a leading direct marketing company. The patented lip on the Griller's Edge Spatula makes it more versatile than traditional spatulas.

The Evolving IP Marketplace

2011-03-15T13:14:00.000-07:00

Read the findings by the FTC on patents and the IP marketplace. This is good news for independent inventors and small R&D firms.

America Invents Licenses Kwikpoint® travel product to a leading travel company

2011-03-11T16:40:00.000-08:00

America Invents licensed the wallet card travel translator to a leading travel products company. The product was recently launched at the International Housewares Show and Travel Goods Show.

FTC Takes Aim at Patent Trolls

2011-03-09T19:05:00.000-08:00

Senate Votes to Let U.S. Patent Office Set Fees, Keep Cash

2011-03-09T13:51:00.001-08:00

America Invents licenses Squeeze Clip™

2011-02-28T21:12:00.000-08:00

America Invents is proud to announce the license of the Squeeze Clip to a leading catalog and retail company. The product will pre-launch at the International Home & Housewares show in Chicago March 6-8. The Squeeze Clip helps you get the most out of your toothpaste, lotion, lip balm, or anything else in a tube.

America Invents Licenses the Touch Up Topper (TM)

2011-02-15T11:37:00.000-08:00

America Invents licensed the Touch Up Topper to a leading vendor to major catalogs and retail in the US and Canada. The Touch Up Topper is a patented magnetic ironing blanket that secures to the top of a washer or dryer. Say good bye to clumsy ironing boards.

The Animation Station Launches at 2011 NY Toy Fair

2011-02-08T09:05:00.000-08:00

The Animation Station will launch at the NY Toy Fair this week. The product was licensed to one of the top toy and novelty product manufacturers in the world. Keep an eye out for it in stores soon.

Marketing isn't about cost---it's about value

2010-11-03T10:23:00.000-07:00

People ask me all the time, "What do you do?" What we do is more than marketing. It is more than just showing companies your product. It is more like business development. You have to be able to wear many hats: marketing, sales, manufacturing. You have to know what objections you are going to get and how to overcome them in advance. Otherwise you spend all your time back pedaling. We know how to overcome objections because we know how companies think. We know how they think because we have been in their shoes marketing our own products. It’s not enough to show someone a product. You have to build a business case for why they should invest in your product and not one of their own.

Marketing is about eyeballs. You can’t license a product unless you can get the product noticed by the appropriate decision makers at qualified companies. We get 100% of our products noticed. We do this because we have the right contacts and we personally introduce the products. Once you have the product in front of the decision maker, you have to turn interest into a desire to actually consider the product for licensing. This is a big step because it requires the company to spend time and resources (money) on your product. We get our products under consideration 93% of the time. Once the company considers your product and comes to the table to negotiate, you have to close. We close 85% of our deals.

If you were to hire a business development person, it would probably cost you $80,000 a year including taxes and benefits. We have over 50 years of experience and our products have done over $1.5 billion at retail. For someone with our credentials, you would be looking at more like $250,000 per year.

You might have heard this analogy: A man has a squeaky floor. He tries and tries to fix it but the squeak won’t go away and it’s driving him crazy. So he calls a master carpenter. The carpenter shows up and walks over the squeak in the floor. Then he takes out one nail and hammers it in the floor and the squeak is gone. The man says, “That was amazing!” The carpenter hands him an invoice for $100. The man complains that he hammered only one nail. So the carpenter takes the invoice and adjusts it to read:

One nail: $1

Knowing where to hammer the nail: $99

Lesson: The carpenter succeeded where the man failed over and over because the carpenter had expertise and knew exactly where to put the nail.

Here’s another. A woman spots Picasso drawing outside at a café. She walks over to him and asks if he would mind drawing her. Picasso obliges and in five minutes hands her an original Picasso. She asks what she owes him and he says $500. She is taken aback. “But it only took you five minutes!,” she exclaims. Picasso replies, “No, it took me my whole life.”

Lesson: I took Picasso his whole life to learn his craft. For expertise and experience, you don’t pay by the hour, you pay by the year.

If you want to hire a marketing geek fresh out of college, I’m sure you can find one on the cheap. But do you want someone to cut their teeth and learn the ropes on your product? Or would you rather have someone like us representing your invention or product?

Remember what John Ruskin (1819-1900) said:
"It is unwise to pay too much, but it is worse to pay too little. When you pay too much, you lose a little money - that is all. When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot - it cannot be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better."

What is an inventor’s agent and why do you need one?

2010-10-22T10:33:00.000-07:00

I talk to a lot of inventors and most of them do not understand what an agent is. They often confuse an agent with a middleman. I’ll try to explain the differences here.

First, let’s start with a middleman. A middleman is an intermediary between two parties. The middleman brings two parties together or bridges a gap in the market.

For example, a manufacturer makes widgets. The manufacturer wants to sell as many widgets as possible. But the manufacturer can’t call on every account out there, so they focus on only the largest accounts. A distributor approaches the manufacturer. The distributor happens to call on many of the smaller accounts the manufacturer can’t reach. So the manufacturer uses the distributor to sell its products to the smaller accounts. The distributor in this case is a middleman in that it does nothing except buy from the manufacturer to sell to the smaller accounts. The manufacturer has to sell to the distributor at a lower price so the distributor can make its margin. The key point here is the distributor is acting in its own self interest. The distributor wants the lowest price from the manufacturer and the highest price from the smaller accounts, thus maximizing its profits. But in the end, the distributor is ultimately beholden to the smaller accounts, in that they are the source of the distributor’s revenues. The manufacture represents a cost to the distributor, so the distributor could never be considered the agent of the manufacturer.

An agent is also an intermediary between two parties. In the case of an inventor, the agent represents the inventor and her product or patent. Think of an agent for a baseball player. Scott Boras is one of the best. The agent’s job is to represent their players and get them the best contact possible. In the case of an inventor’s agent, the same is true. The big difference between a major league baseball agent and an inventors’ agent is the baseball agent is usually representing a known or proven entity, like Alex Rodriguez, whereas an inventor’s agent is usually representing a new, unproven product.

The key difference between an inventor’s agent and a middleman is that the inventor’s agent is paid a percentage of the inventor’s royalty, so it is in the best interest of the agent to get the best deal possible for the inventor. A middleman, or distributor in the example above, is not paid by the manufacturer and thus acts in its own self interest.

Why should an inventor have an agent? Negotiating parties rarely represent themselves. Why? Because each party has too much emotion and bias involved. One party is often unable to see the other party’s side of things because it is too focused on what it wants. Even large corporations use investment bankers to conduct mergers and acquisitions. A good agent is able to look at a deal in an objective way. A good agent does not let emotions get involved. Agents have usually been around the block a thousand times, so they know what is fair and what is not. They can watch for pitfalls and overcome misunderstandings. They also help preserve the relationship between the two parties. When Scott Boras plays hardball with the Yankees, he can do so without making Alex Rodriguez out to be the bad guy (as difficult as that may be). After all, Alex ultimately has to play for the Yankees and its owners (and fans).

If you want to determine if someone is acting as a middleman or an agent, follow the money. If the person is ultimately getting paid by the end user, in the case of an inventor, the manufacturer, then he is a middleman. If the person is ultimately paid by you, he is your agent.

Kris Hudgens, EVP Licensing

Mattel Toy Fair and Fisher-Price at the ABC Show

2010-10-20T08:00:00.000-07:00

Last week was quite a week. I was able to tour the Fisher-Price booth on Tuesday and attend Mattel’s annual Toy Fair on Friday. It’s always amazing to see how many brands and products they have and how much thought goes into their creation.

All-in-all the outlook for 2011 is optimistic. They have added new and exciting game play features to tried and true brands. It is also clear that digital is here to stay and is becoming an increasing feature in toy design and execution. But good old fashion play is always king.

One thing is clear from both my visits—inventors play a key role in driving sales and new products in the toy business. We are lucky to work with the biggest and best in the business. If you have new toy, game or juvenile products, please call us soon. Or if you have a new twist on an existing toy, game or juvenile product we would like to learn about it too. Work is already underway for 2012 believe it or not.

Happy inventing!

Kris Hudgens, EVP Licensing

How to make the most of a trade show for under $1,000

2010-10-06T20:56:00.000-07:00

There is a trade show happening right now as you read this. Trade shows are the main venue for unveiling new products and a way for manufacturers to sell their products. There are many types of trade shows. I will focus on international, industry trade shows because if you are looking to license or sell your patented product, that is where you want to be. Why? Because these are the shows where the industry leaders show up to exhibit their products and retail buyers from major chains show up to scout and buy products.

Industry Trade Shows

International industry trade shows are by far the most important. There are two ways to attend a trade show. One way is to exhibit. This requires getting a booth and setting up a display of your product(s). Companies that are looking to sell their products exhibit at trade shows. Exhibiting at a major industry trade show can cost anywhere from $15,000 to hundreds of thousands of dollars. Inventors with one product are more in the range of $15,000 to $25,000 for a decent presence.

Should you exhibit?

You should only consider exhibiting your product at a trade show if you have the following in place:

· A finished product that is ready to be produced at volume (not in your garage)

· Volume pricing

· Packaging is helpful but not a must

· The funding and ability to handle any purchase orders you receive

If you are looking to license your patented product to an established manufacturer, do not exhibit at a trade show. Specifically do not exhibit if you intend to set your prototype on a table and wait for someone to walk by and offer you a wad of money. The last thing you want to do is expose your product or invention to the whole industry if you ultimately want to license it. You are risking someone taking your concept and running with it, patented or not. To license your patented product, you can simply attend the trade show and discuss the product with the companies that are exhibiting. Maybe your product will be in their booth next year.

Attending an Industry Trade Show

By attending an industry trade show, you can get a lot done if you plan accordingly and if you know what you are doing. You can typically attend a trade show for less than $1,000. There are typically two reasons to attend a trade show:

1. to collect information and see what is new in the industry, or

2. to discuss your product with manufacturers that might have an interest in licensing your product and patent

Since most inventors choose to license their products and patents to established manufacturers in their industry, I will discuss how to attend a trade show to license or sell your patented product. You will want to focus on the following five items to prepare for the show, attend the show and most importantly to follow up after the show.

1. Selecting the trade show

The first thing you need to do is select the best trade show for your product. For most people this is obvious. For example, if you have a hardware product or a tool that you want to see sold in Home Depot or Lowe’s, then the National Hardware Show is for you.

Some trade shows actually cross multiple market categories. For example, the International Home and Housewares Show in Chicago is by far the biggest show for items you would buy for the home. However, the National Hardware Show now hosts the Lawn and Garden Expo and also includes a small houseware section.

2. Researching the trade show

Every trade show has a website. These websites are gold mines of information. The first thing you will want to do is check the requirements for attending the show. Most industry trade shows are not open to the public. However, you can usually get in any trade show with a little creativity. Most shows allow Trade Guests, Licensors or Licensing Agents to attend. You can also attend as a non-exhibiting manufacturer. If you are an inventor looking to license or sell your patented product, I suggest attending as a Licensor or Licensing Agent. Each show will provide a list of credentials needed to obtain a badge. Licensors, you usually only need a business card showing you are affiliated with a company. So just take your business card, you’ll need them anyway.

The next thing you will want to do is search the exhibitor listing. The website will list all the companies that have signed up to exhibit. You can use the list in two ways. If you already have a list of companies you want to talk to about your product, you can see if they will be exhibiting or not. If they are, you will want to make a note of their booth number. Note that large companies sometimes have meeting rooms reserved. These meeting rooms are off the trade show floor and provide more privacy. Even large companies are reluctant to show their new products off to everyone in the industry, so they have private meeting rooms where only buyers they know can enter.

Now that you have your list of target companies, it is a good idea to call on the company to find out who you need to talk to about new products. It is good to get the name of the person and determine if they will be attending the trade show and if so on what days. If you can, it is a good idea to get them some preliminary information on your product and try to arrange a time to meet with them at the show, usually at their booth. Schedules fill up fast, so you will want to plan ahead. One thing to remember; the weeks leading up to a trade show are beyond hectic, so the chances of getting someone on the phone during this time are about zero. But if you can get a name you will be doing yourself a big favor. I will explain why later.

3. Marketing and Presentation Materials

You will need something at the show to visually explain your product. Most shows do not allow you to take samples or prototypes onto the show floor. But if your sample or prototype is small enough to fit in your bag, then bring it.

You should always have a pitch piece on you. Your pitch piece can be a brochure or picture of your product that quickly (in less than 3 seconds) explains visually what your product is and what it does. Notice I said visually. You don’t want to rely on someone reading about your product. You should have your elevator pitch down to take care of that. You should know your pitch in your sleep. You should be able to explain your product quickly and succinctly. It also helps if you can tie your product into the company’s product line. For example, “My product is a new hand tool for tightening bolts in hard to reach places. I think if would fit nicely with your Handy Man product line.” This pitch accomplishes two things, 1) it tells the person exactly what your product does, and 2) it shows them you know a little about their products. Plus you are already talking like the product is in their line.

Some products require demonstration. This can be challenging at a trade show because you are typically standing in a booth during your conversations with potential manufacturers. There are several ways to get around this situation. You can ask if they would like to view a short video of the product. Notice I said short. By short I mean less than 30 seconds. If you are going to use a lap top, make sure it is booted up and ready to go. No one wants to sit there and wait five minutes for your computer to boot up to see your video. With technology now, it is probably best to use a tablet or handheld device.

4. It’s show time

Now that you are prepared for the show, it’s time to get down to business. The trade show directory lists all the exhibitors and often useful information about them, including contact information. The directory will be helpful when you are following up with companies after the show. The directory will also list any last minute changes, like booth number changes. This is obviously important and you will want to double check your target companies to see if there booth number has changed. There are usually many free publications available which you may want to pick up. Some of these publications have valuable market statistics and information.

Each aisle has two sides, just like a street in a neighborhood. If this is your first trade show, I suggest focusing on one side at a time. As you get used to walking shows, you can scan both sides in one single pass. As you walk by each booth, scan the products to see if anything interests you. You may spot a company that you want to talk to that didn’t show up on your research. Or you may just see something interesting. Don’t be afraid to stop and ask questions or take any information you can about a company or their products. You never know where your next new product idea will come from and although a company may not be a good fit for your current product, they may be perfect for your next product.

As you approach a target company, go over your pitch and customize it to that company’s products. Then walk up to the booth and ask for the contact person. Hopefully they are there and you can talk to them about your product. If they aren’t there, ask when they will be back or when the best time to catch them will be. Leave your card and ask the person you speak with to let them know you came by and that you will return later. Your card should have your cell phone on it in case they want to call you later at the show.

If you were not able to determine who the appropriate person was at a particular company, or if the company wasn’t on your list, then simply introduce yourself and ask who the appropriate person is to speak with about a new product you are looking to license. If the appropriate person is in the booth, they will introduce you to them and you can discuss your product. If they are not in the booth, ask if you can get the person’s card. If they don’t have any cards in the booth for the appropriate person, ask for the card of the person helping you and write the appropriate person’s name down on the back of the card. Whatever you do, make sure you get a card from somebody. Repeat: Do not leave the booth without a card.

If the person you are looking for happens to be busy, you should wait until they are finished with what they are doing. If it is going to be a long time, you can always come back later. But I usually wait if I can because you never know if they will be back in the booth the next time, especially if it is an important target company. Of course, on the same token, the person you are supposed to be looking for at a booth three aisles over may leave their booth while you are waiting. So you will have to make a judgment call when waiting.

When you have the appropriate person, hand them your pitch piece and give them your elevator pitch, then shut up! Give them a few seconds to absorb your pitch and review the pitch piece. Let them reply first and listen closely. Their initial response should indicate if they are getting it or not. They will probably ask some questions. You should answer succinctly, letting them absorb and process the new information before you speak again. If your product really needs demonstration, let them know you have a sample, prototype or video if they want to see more. If your sample is small enough to easily handle, you may just start by showing them the sample first. If a picture is worth a thousand words, a sample is worth a million.

If someone tells you they are not interested in your product, don’t take it personally. Ask them why. They may have misunderstood something. If they have, explain the misunderstanding. You will also want to alter your pitch so the next person doesn’t have the same misunderstanding. If they do point out a flaw that you can’t counter, write it down. Maybe you can fix it later.

More than likely if they person is interested in your product, they will ask you to follow up with them after the show. Remember, even if you leave them with your pitch piece and card, don’t assume it will make it back to the office. It probably won’t. And always get a card and thank them for their time.

Notes about the meeting are critical. After you leave the booth, make notes on the back of the person’s business card. You will want to note what they seemed to like about the product or what they might have misunderstood. You should also not what they want you to do when you follow up after the show. You will also want to note anything new you noticed about their product line. For example, if they seem to be focusing on making their products ergonomic, you will want to work that into your presentation that you follow up with.

Then you are off to the next booth, one by one, until you finish the hall. If you missed a company or need to circle back to a booth because the person you were looking for wasn’t there, now is the time to do it. Then you are off to the next hall to start all over again.

When you are done with the show, you should have a good idea of how you did. I usually judge a show by how many business cards I come back with. Hopefully you were able to meet with all the companies on your list and you have some good feedback from them. You will also be pretty darn tired, but the hard work is yet to come. Now it is time to follow up.

5. The follow up

Now that the physical show is behind you, you will want to go through each card and review the notes. Often more thoughts will come to you as you are doing this and you can add them to your notes.

Timing after a trade show is critical. Your impulse will be to start calling and emailing right away. I usually wait a couple of weeks, unless a person tells me otherwise. Why? Remember, the reason a manufacturer exhibits at a trade show is to get business. So the weeks after a show are just as hectic as the weeks spent before preparing. However, once the show is over, they will usually start working on new products to launch and next year’s show. So you don’t want to miss that window. Two weeks is usually a good time and you can use the two weeks to modify your pitch piece and customize it for each company if needed.

When following up, be sure to mention you met at the show. If you didn’t meet at the show, you will want to let them know how you got their name. For example, if you missed a person entirely at the show, but a salesman or someone else from the company gave you their name as the best person to contact, make sure you let them know who referred you. This will increase the likelihood of them getting back to you quickly. And it lets them know you care enough about the industry and category to attend the show.

I like to put a phone call into each of my contacts and follow up with an email. If you need to physically send them something, send it via courier so you can track and confirm that it was received. Also, people tend to open items from FedEx or UPS immediately. You will get to know each contact and which method of contact they prefer. Some prefer phone calls and some emails. Putting the phone call in reminds them of your meeting and alerts them that they are going to be getting an email from you or information via courier or in the mail. Another thing I like about email is that it is harder to forget. For example, if you leave a voice mail, you never know if the person makes a note of it. They may start to call you back and get distracted by another call or someone in their office and forget to call you back. If the voice mail is deleted, they may not remember. An email sits in their Inbox reminding them they need to get back to you.

As I mentioned before, each company is different in how they review new products. In most cases the company will have some sort of committee that will review the concept. So this can take some time. Patience if a very important aspect of trying to license or sell you patented product.

Conclusion

A trade show is an effective way to jumpstart the process of licensing your patent and product. You can get a lot done in a short amount of time and you will learn a lot about the industry your product is in. If you have the right plan, a trade show will lead to results. Even if you don’t find a company to license or buy your patented product, you can rest assured that you did everything you could. You may even get a new product idea from it all.

Kris Hudgens, EVP Licensing

All I need is money!

2010-09-29T18:16:00.000-07:00

All I need is money! If I could get enough money to make the product I know it will work! If I had a nickel for every time I heard an inventor say that, I'd be a rich man.

What you are looking for is SEED OR START-UP CAPITAL. Start-up capital is used to start the business and to begin the process of getting orders. Start-up capital is not used to start the product. The purpose of the start-up capital is to get the complete product together (or what looks like a complete product) to show to customers, buyers, distributors and manufacturers so you can actually start the business and have a cash flow. This includes full costing, price sheets, product samples, packaging and everything you need to show the product as it would be on the store shelves.

So you go to your friendly neighborhood banker and say, "Look at this great idea." And your banker is courteous and listens to you. After you finish your friendly neighborhood banker says, "But that's not what we do here, we loan money on secured methods of return. Unfortunately you have an idea and not a secured method of return."

You go off to get orders and build the business. You have to borrow money from family and friends, mortgage your house, and cash in your IRA's. You're now ready to speak with some big companies and you have success and return with half a million dollars in purchase orders. This is 1st ROUND FINANCING - The money is used to fill the orders.

So you go to your friendly neighborhood banker and say, "Look at this, a half million dollars in purchase orders." Your banker is courteous and listens to you. After you finish your banker says, "But that's not what we do, we loan money on secured methods of return and this is not secured. The bank will give you a second mortgage on your house or if you have a compensating cash deposit, the bank will loan you that same amount in return, with interest. But we do not factor orders."

Now you're in a real pickle. You used up all of your favors from family, friends, and all of the equity in your house just to get the start-up money you needed to get the orders. And now you have the orders and the retailers actually like your idea enough to buy it. But you don't have the money to carry the costs so you can't deliver the product. You find a financial partner to fund the orders and in return you guarantee the return of his money, with interest, and your new partner now owns a small piece of your business.

Everything is off and running. One day you answer the phone and it's your biggest customer who says, "Your product is selling great, we need to reorder and we need it fast." Now you have entered 2nd ROUND FINANCING - Fulfillment of Reorders. You have proven there is a need, now you must prove there is a continuing need.

So you go to your friendly neighborhood banker and say, "Look at this, a million dollars in reorders." And your banker listens and says, "This new business of yours is looking pretty good but we only loan money on secured methods of return. Don't you have a financial partner? We'll loan him the money."

So you go to your financial partner who says, "Gee, you didn't tell me this. You want me to give you the money for these reorders? I haven't been paid for the first orders yet. And if I sign for a loan from your bank I'm responsible for all of it. I now want 51% of this project to sign for a loan."

So now you're in a bigger pickle. You used up all of your favors from family, friends, your house and your financial partner and you have lost 51% of the business you were working so hard to build. Fortunately, everything is going well with your product. You keep getting more orders and that requires more money. Now you are at 3rd ROUND FINANCING - Established business. In many instances this is bankable, depending on the amount of volume that your business is doing, the size of your profit margin and the rapport that you have with your bank. Your friendly neighborhood banker that turned down your loan applications for your start-up, 1st round and 2nd round financing, is now your good friend. Your banker will now support your business because the bank can be fairly certain that you will pay back any loans with interest.

If you need money, you can't get it from a bank. If you don't need money and have a lot of equity, the bank is there to serve you. As an inventor you must be creatively ingenious and as an entrepreneur you must be financially resourceful.
By William Seidel
Published in Inventors' Digest Magazine.

License with leading novelty toy company

2010-08-26T10:51:00.001-07:00

We just completed a license with a leading novelty toy company. The product is still in development, so we can't say much now. The product is scheduled to launch in early 2011. We will update you then.

America Invents licenses Stack and Grow

2010-08-13T15:39:00.000-07:00

Stack and Grow is a unique planter that allows you to create tiers of plants and herbs. It is great for patios, decks and can even be used indoors.

We originally helped get this item sold into a retail account. Recently our client decided to license the product. After meeting with several companies, we decided on a Canadian company that specializes in lawn and garden items sold through big box retailers.

Invention v. Innovation

2010-07-16T10:26:00.001-07:00

I saw a commercial today by Dow Chemical Company. The commercial talked about the difference between invention and innovation. I think this is a point inventors often miss. Invention is the spark, the idea, the breakthrough. Innovation is the process of turning the invention into a useful and profitable product or service. Unfortunately, too many inventors get stuck after the invention phase.

Inventors often mistakenly think they have to control their invention from start to finish. Not only is this a mistake, there is no example of this approach being successful in the marketplace. Think of a company like Dow. They have R&D people that invent. They have manufacturing people that figure out how to make the invention reliably and economically into a product. They have marketing people that figure out how to price and sell the product. And they have sales people that actually go out and sell the product. It would be silly to ask the R&D people at Dow to do all of these jobs.

So why do so many inventors think they can handle all the jobs needed to turn an invention into an innovation? I actually don’t think most inventors do feel this way. Inventors often try to do all the jobs because they can’t afford to hire people with the skills to do the jobs they can’t. Or they don’t trust others with these jobs and can’t delegate.

The answer for most inventors is licensing. If the inventor can put their invention in the hands of a company like Dow, then they can leverage Dow’s people to make the invention a successful product. The inventor gets compensated with a royalty.

Kris Hudgens, EVP Licensing

2010-02-04T16:10:00.001-08:00

Mouthman® is an innovative line of clothing that brings your garments to life. America Invents worked with Mouthman to get the Simpsons 20^th Anniversary license and placed the product with the Discovery Channel’s Animal Planet Store.

Available at:

www.mouthman.com

http://store.discovery.com

CreaClip™

2010-02-04T15:33:00.000-08:00

CreaClip™ is another hit product we represent. The product sells out every time it airs on HSN and the product has been featured on TV. No more expensive trips to the salon just to trim your hair. And you can cut your children’s hair with ease saving even more money.

Available at:

www.creaclip.com

New Product Launch--Bindy Bed

2010-01-26T14:26:00.000-08:00

The Bindy Bed is a unique pet bed. Instead of using bunting and traditional filler, the softness is created using a patented cut-and-sew method. This makes the product less expensive to ship and merchandise. The product is also machine washable.

Available at:

www.petshopusa.com

New Product Launch--Crazer

2010-01-26T14:17:00.000-08:00

We just licensed another pet product called Crazer. The product improves upon the wildly successful laser toys already selling in the market and the licensee is one of the leaders in the category. Using a patented spring-mounted laser and dampener, the user can create a laser light show that pets love. The product is available at PetSmart and will soon be available at Petco and other retailers.

The Difference between Gross and Net Profit

2009-10-09T10:11:00.000-07:00

I wanted to write today about a common misconception we find with inventors. Not surprisingly, it has to do with royalty rates. Let’s assume that we have a company that offers a client a 5% royalty for a kitchen gadget and the company sells to Walmart, Target, Bed Bath & Beyond, etc. Naturally we are excited and take this offer to our client, to which they respond, “I’m not letting them have 95% of the money!”

So what is the misconception going on in the inventor’s mind? After all, the company is making 95% of the gross profit from the product. But companies don’t rely on gross profit to calculate their return. They focus on net cash flow or net profit.

Let’s assume the kitchen gadget is going to retail for $9.95. That means the wholesale price is on average around $4.50 if you are selling to the retailers above. So the inventor’s royalty would be 5% x $4.50 or $0.225 per unit. The inventor is furious because the company is making $4.50 - $0.225 or $4.275 per unit. But that is only their gross profit. Let’s look at what they actual net out.
From gross profit they have to deduct: cost of the product, packaging costs, sales commissions, freight, warehousing and insurance. Then they allocate the company’s total overhead to the product. So after they net out all of these costs, the company might make 20% net profit, or $.855 per unit. So in this example the inventor is making 26% of the net profit yet they are not doing any of the work to generate the profit. Not a bad deal. Which is why we were excited in the first place.

Let’s look at the net margins of some public companies you probably recognize for 2008: Coca Cola 26.4%; Proctor & Gamble 14.5%; Walmart 5.7%; Black & Decker 4.8%; Newell Rubbermaid 3.1%. So you can see these companies are in some cases making less than the inventor on a net basis.

The next time you evaluate a royalty rate, make sue you evaluate it against the correct numbers.

Kris Hudgens
America Invents
866.503.1717 x222

Types of Innovators, Which One are You?

2009-09-11T14:33:00.000-07:00

In 1984 I wrote and taught a seminar titled Entrepreneurship and Innovation. This seminar was available at colleges and universities throughout the west. It evolved into a business elective at the University of California at Berkeley where I taught for fifteen years. In this class I walked thousands of entrepreneurs and innovators through the process of fostering innovation and growing success. The students took this class because they had an idea and they were stuck (usually at marketing and finance). The students left this class with a lot of answers but many more important and bigger questions. Everyone needs a business education and every inventor, designer and entrepreneur needs a marketing education.

The inventors, designers, engineers and entrepreneurs that took this class generally fit one of seven types. These seven attitudes are in all of us. We have all experienced I Can’t Get Started, All I Need is Money and I have the Greatest Idea in the World. The attitude is often magnified and becomes a prevailing position for the development of the idea. This is both a benefit and a detriment. For example, if the inventor were an engineer he would engineer the product to death and avoid the marketing and finance needed. If the inventor were in advertising he would write ads and promotions focusing more on the marketing and avoiding the engineering and manufacturing. I can’t say why it occurred this way except that the inventor used his natural talents and acquired abilities to go as far as possible.

I know this appears to be a generalization but it is true as reported. Following types of inventors were identified as:

A JAR FULL OF IDEAS
The title of this group came from a creative director in the advertising business that took the seminar in l987. This ad exec would write down his ideas and place them in a jar, on a table, at the end of his couch. Eventually the jar became full and he was faced with the problem of what to do with all the ideas. When he saw the seminar offered, he attended, hoping he could learn what to do with his jar full of ideas.

This is a group that has too many ideas and no interest, ability or time to develop the details. This group wants to work with concept. They write down their ideas, organized them and hope. This is a very tough position because, contrary to what most inventors believe, nobody wants ideas. The belief of this group is ‘the idea is everything.’ The truth is that you can’t giveaway ideas even if they’re patented and protected. But if you have a successful product you can’t stop people from stealing it, even if it is patented and protected.

If you are a Jar Full of Ideas inventor then there is an easy solution and that’s to focus on the most lucrative first. Go through your “jar full of ideas” and find the ideas that will be the most successful the fastest and then focus on details needed to protect, develop and fund your project. (In that order.) Timing is a critical factor. Avoid the long-term, R & D intensive projects. You could have a medical product that requires clinical trials, FDA approval, five million dollars and ten years of studies. One factor I look for is a “quick flip.” A quick flip is a product that is inexpensive to manufacture, easy to understand and ready to launch. Attack the idea that has the potential to sell the biggest volume at the highest profit margin first.

THE GREATEST IDEA IN THE WORLD
This group generally refers to the designer, engineer and inventor that thoroughly develop their idea. These people usually possess the development abilities, have patents and finished prototypes and often have complete, tooled and manufactured products. The "Greatest Idea in the World" is always stumped at the marketing and finance phases of development. The hurdle with this group is to understand what marketing and finance need to see. Find professionals to help you like SCORE, which is a great SBA assistance program. Seek truth in business partners, marketing and finance relationships. The right partners can take it to the next step and further.

The "I won't let go, I don't trust anyone, I will do everything myself", attitude is a typical problem area for the "Greatest Idea in the World" group. This is because they are very ‘Married to the Invention’ and they can’t let go. The first law of marketing is don’t fall in love with your idea. This sounds good but it never happens. Everyone loves their idea, however objectivity is essential for success. Hundreds of great, well-developed products stall and fail because the inventor refuses to get marketing and finance help. If it’s a project that can start small and local then the inventor can do everything himself and this can be a viable strategy. Local marketing on a shoestring budget and space in your buddy’s garage is a good way to start. But if it is a project for mass distribution then significant money is needed to pay for the proper marketing and substantial financing is needed to carry the costs.

I CAN'T GET STARTED
The innovator is often faced with tasks in areas where he or she lacks knowledge of what must be accomplished. This group has problems identifying any task and can’t get started because they don’t know what to do or where to go. The I Can’t get Started group usually needs a road map to understand everything that must be done before they get started. Frankly, we all need a roadmap to get to where we want to be. There are 181 tasks to address when launching a new product, which is a book in itself. The educational goal for this group is to focus on the “big picture” of operations and timelines. If you can’t build a prototype, find someone who can. If you can’t write a patent hire a patent attorney. If you can’t find the interest inside yourself to make it happen, maybe it you don’t really believe it should happen.

Everything the I Can’t Get Started group does must be reduced to fact and absolute certainty. Therein lies the problem, little in marketing and product development is fact and nothing is absolute. The success is dependent on the fickleness of the consumer. Consider the toy business, how can you be sure kids will buy it. There is no logic, rational or science that can help. It is test, test, test and improve, improve, improve. It becomes a series of tests and qualifying rounds to improve the product, define the market and determine the best strategy to penetrate the market. If you need absolute answers before you start you are probably part of the I Can’t Get Started group. It’s OK to make mistakes you’ll be in good company with Edsel and New Coke.

ALL I NEED IS MONEY
The idea of a money partner dominates and controls the All I Need is Money group. Additional exposure to business plans, marketing plans, costs, spreadsheets and similar case studies are essential to further their project. The irony of the All I Need is Money group is that they generally don’t know what money is. They think it’s cash and they think some “angel” will give it to them. Money or an investment can be office space and overhead expenses (this is usually from a financier that needs to keep a close eye on you because he doesn’t trust you). Investment can be manufacturing capability, a controlled line of credit or more commonly a letter of credit where the risk is greatly reduced and the financier is assured of his funds being returned. So now the financier has his money back and 40% of your company, unless you screw up when the financier will have 51% of your company. The road to success is littered with carcasses of failed ideas and wounded inventors.

Invariably the inventor will enter into an agreement with no working capital, stringent limits and with some costs covered. This is a formula for doom; you have enough money to start but not enough to succeed. If you do succeed then you need a lot more money to carry costs and fill orders – so you lose either way. If you lose you lose and if you win you lose.

Above all any investment is not in a product and it is not in an idea. Smart investors do not put money into products they put money into people. Inventors' attitudes regarding risk are rarely aligned with financial attitudes regarding risk. For example, most companies pre-sell their products before they manufacture them. They sell two million units first and then they make them. This strategy eliminates much of the risk and makes it easy for an investor. Unfortunately this strategy usually offends inventors. The inventor is under the misapprehension that the investor gets a “big” piece of their brainchild for taking the risk and putting up the money. The truth is that people with money don’t take risks, that’s why they have the money. The truth is the investor makes certain it is sold in advance they then borrow other peoples’ money (using their good credit) and then incur the costs (carrying costs, marketing, manufacturing, distribution). Money is rarely the solution. Money is a vehicle, a tool, an ingredient. Planning, strategy and leverage can solve most anything.

ALL I NEED IS MARKETING
The All I Need is Marketing group is the largest group and needs a good marketing education. Marketing is the great stumbling block. Solve the marketing problems and the money will appear, the value will increase and the plan will exceed expectation. Money and investment follow brilliant marketing. Today there is more money available than viable projects to invest in. The perception is that your marketing takes your invention to Target and you make money. That’s not how it works. It’s sales that sells it into Target. It’s marketing that sells it through the store to the customer. The reason Target bought your product is because marketing guaranteed it would sell through to the customer. Marketing may use packaging, demonstration or TV but good marketing will make it sell through. The whole purpose is to sell more product, at a lower price with an increased profit margin.

It is a massive mistake to assume that the world needs your product. The first marketing question is, who needs it? And that answer is your market. Then your market research hones in on the preliminary market questions, like, Who is the customer? (Where do they live, what magazines do they read, where do they shop?) How big is the market universe? How big is the target market? What share can you capture? What is the profit margin? This will tell you what you need to know to start. Remember, marketing creates value. It is a fact that good marketing can sell anything. We have Chia Pets and Pet Rocks to prove it.

ACHIEVEMENT MOTIVATED
The Achievement Motivated are commanded by seeing the project succeed because it’s "the right thing to do." This group is righteous and driven by a higher vision. Because it is right is not a reason for success. A great example is the invention and attempted marketing of kidnapping devices. I see at least one of these every month, yet none make it to market. And the few that have made it to market fail miserably. Every company in juvenile products and safety products has attempted to launch abduction prevention products and every time these marketing attempts fail. Why, the cause is right? The answer is really a marketing absolute: the jury is in and the test results are available: the market didn’t buy it! That’s all there is. Safety products and prevention products are very hard to sell. Are your fire extinguishers current? Do you have fire extinguishers? Do you have enough fire extinguishers? And fire extinguishers are required by law and insurance.
~It doesn’t succeed because it’s right
~It doesn’t win because it’s good
~It doesn’t fly because you try

Not surprisingly, this group is expecting an achievement far above and beyond financial rewards. The invention of the defibrillator and the artificial kidney are driven by social good. These projects often take on a life of their own. They find the money needed, they find committed people and they find market acceptance. If there is one group with unyielding perseverance it’s the Achievement Motivated.

MAKE A FORTUNE
This group is usually looking for a way to make quick money, and there are many more secure ways to make money and most will be quicker. When all of the work, money and sacrifice are understood to manufacture, market and launch a product it becomes clear the amount of money earned for the work necessary seems defeating. Very few people took the seminar to make their fortune, less than 5%. However, a majority of students in each seminar wanted to be in business for themselves.

When teaching this class I would always ask the question, “How many people want to make a million dollars?” And all the hands would go up. Then I would ask the question, “How many want to spend a million dollars?” And confusion grew great because everyone knew how they would spend a million dollars but few knew how to make a million dollars.

It is the market that determines everything. You can’t guess or hope that a product will become a success, but you can go to the market and test a product to determine the likelihood of success. Clearly understanding the market is a problem half solved. How big is the market? Who is the customer? How to reach the customer? What motivates the customer? These are all basic questions and if you don’t have answers to these questions you are doomed. You will make expensive mistakes that will prevent the success of even a truly good product.

The innovator usually will not have the means or professional skills to market the product, yet the marketing is the most critical element. The finance aspects are vital to the success but without good marketing and responsible financial management the inventor will never secure the funding needed. Inventors’ attitudes regarding risk are rarely aligned with financial attitudes regarding risk. There is a major disconnect. The entrepreneur, on the other hand, has a broader perspective and a more accurate assessment of the marketing and finance necessities and actual risks involved. The entrepreneur has the proper planning and the needed marketing to obtain financing. It takes both of these disciplines to succeed, which is why the seminar and class was titled Entrepreneurship & Innovation.

Bill Seidel, President & CEO of America Invents
866-503-1717

Negotiations: What’s in a royalty rate?

2009-07-10T13:17:00.000-07:00

One of the most important aspects of a product license is the royalty rate. This is the percentage that the licensee agrees to pay the inventor for the rights to the patent and product. Inventors naturally want to negotiate the highest possible royalty. But a high royalty isn’t always to the inventor’s benefit. In this article, I will illustrate how in the real world, you can sometimes make more money with a lower royalty rate.

When negotiating a royalty rate there are several factors to consider. The first is the manufacturer’s suggested retail price. This is what the finished product will sell for to the end user. Ask the licensee what price points they want to hit at the retail level. They should be open with this information. I’m sure many of you have heard of the magic price points of $10 and $20. Most everyone has a $10 or $20 dollar bill in their wallet and most are willing to trade it for a product they think might be useful.

From the manufacturer’s suggested retail price, you can determine the approximate wholesale price by knowing what channels the product will be distributed in. For example, a product sold through mass retail channels will typically have a wholesale price of 50% to 65% of the retail price. That is the retailer’s discounted price. Your estimate here will be approximate, because often other discounts are negotiated for trade and quantity discounts. Again, ask the licensee what channels they plan to distribute through and what the typical discounts are in those channels.

Now that you know the approximate wholesale price, you need to determine what the cost of the product is likely to be at the volumes assumed in determining the wholesale prices above. Again, for a product distributed in the mass retail channels, you are probably looking at a minimum of 200,000 units per year for a moderately successful product. At these volumes, the manufacturer should be able to establish a competitive manufacturing cost. This is commonly called the cost of goods or cost of goods sold. (Other costs are associated with getting a product to market, but I will ignore them here for simplicity.)

Now that you know the wholesale price and the cost of goods, you can calculate the gross margin for the manufacturer. This is the gross profit the manufacturer will make, before other expenses, such as royalties, marketing, sales, general and administrative.

Let’s look at an example. A magic retail price points is $19.99. Most consumers will try anything for under $20.00. Let’s assume a manufacturer is going to “keystone” a product in the mass channels of distribution. This means the manufacturer is offering the retailer a 50% discount. In this case, the wholesale price would be $10.00 in round numbers. (A 50% discount may be needed to sell a retailer on a new product that is not yet proven.) Now let’s assume the manufacturer’s cost of goods is $5.00. That means the manufacturer’s gross profit is $5.00, before other expenses.

Royalties are typically calculated from the wholesale price. Royalties are accounted for as a cost of goods. It is what the manufacturer has to pay for the rights to manufacture, market and sell the product. So your royalty comes out of the gross margin. You need to make sure your royalty is fair, but that it isn’t so high that the gross margin becomes unattractive to the manufacturer. I don’t care how cool your product is, if the manufacturer can’t make their minimum required margin, they aren’t going to license the product.

Let’s look at two more examples which illustrate why royalty rates are important, but should be examined in terms of volume. Let’s say in the example above, you drive a hard bargain with the manufacturer and demand a 12% royalty. That means the royalty is 12% x $10.00 or $1.20. And let’s assume the manufacturer’s minimum required margin is 40%. This deal won’t work! The manufacturer’s margin is only $3.80 ($10.00-$1.20-$5.00) or 38% ($3.80/$10.00). So if the manufacturer decides to go forward with the product they will have to raise the price. This puts the product over the magic price of $19.99. What will happen? The manufacturer will sell fewer units per year, compared to the $19.99 price. Why? If you raise the price of any product, fewer consumers will by the product. This effect, often called price elasticity by economists, has been proven again and again. So perhaps the manufacturer only sells 100,000 units per year at the higher price. So your total payoff is 100,000 units x $1.20 per unit = $120,000 per year.

But what if you had been more flexible with the royalty rate? Let’s say you were willing to lower your royalty rate to 10% to allow the manufacturer to meet its minimum allowable margin while keeping the retail price at $19.99. Your royalty now is $1.00 per unit. And the manufacturer’s margin is 40%. Let’s now assume that the lower price results in an increase in unit sales to 150,000 units per year. Now your total payoff is 150,000 units x $1.00 per unit = $150,000 per year. Your royalty rate went down roughly 17%, but your total payoff went up 25%!

Remember, a higher royalty rate doesn’t always mean more money in your pocket. At the end of the day, the consumer will decide the fate of any new product. And if the product isn’t priced properly, it can fail to achieve its true sales potential. That is why it is important to gather the proper facts about the economics of the product so you can negotiate from an informed perspective. When in doubt, ask questions and do research into the various channels your product is likely to be distributed. Happy negotiating!

Kris F. Hudgens
Executive VP, Licensing
866-503-1717

The Truth About Licensing

2009-06-29T12:09:00.000-07:00

Licensing is the most popular method used to commercialize and profit from patents, yet few inventors are aware of the realities of licensing and in fact I find there are many misconceptions about licensing. Since I talk to inventors and companies about licensing patents and products every day, I thought I would clear up some questions and point out some misconceptions and try to give you a realistic perspective on licensing.

Most books about licensing are written by attorneys. While attorneys are knowledgeable concerning the legal matters of licenses, I have found most to be unfamiliar with the realities of the marketplace, especially as it relates to consumer products, which is the category most inventors patent in.
You can find generic license agreements in books and on the Internet these days. Again, while these agreements cover the basic legalities of a license agreement, they don’t cover, in my opinion, all the terms needed to memorialize the relationship between the licensor (you) and the licensee (the manufacturer licensing your product). I often use the term patent and product interchangeably, so you can take them to be the same thing.

The Terms That Drive Value

I will briefly discuss what I feel are the terms of a license that drive value. Although this isn’t a comprehensive list of the terms required in a license agreement, they are the terms that drive the value of a license. Disclaimer: I am not an attorney. I am however a successful licensing executive and I have negotiated hundreds of licenses.

1. Licensing—It’s all about exclusion

The license grant determines what rights you grant to the licensee. You should only grant a licensee the rights they can fulfill. There are several types of licenses, but I will focus on three here: exclusive licenses, non-exclusive licenses, and limited exclusive licenses.

Most inventors understand what an exclusive license is. You are licensing all the patent rights to one company. An exclusive license even prevents the inventor from using the rights. Most companies will want and try to get an exclusive license on your patent. They want to lock it up. While this may make sense in some cases, you want to be certain the licensee can execute on all of the rights you are granting.
A non-exclusive license gives a licensee the rights to your patent but allows you to license the patent to other companies on a non-exclusive basis. It also allows you to use the patent rights.

A limited exclusive license grants exclusive rights to a company with certain restrictions or limitations. An exclusive license can be limited in various ways. Some common limitations are: field of use, territory, time and patent components. A limited exclusive license is the type of license I most commonly recommend, so I will discuss some of the common limitations on an exclusive license.

The field of use describes in what field a patent can be used. For example, let’s say you have a patent on a laser technology. Lasers are used in many fields. They are used in consumer products, medical products, and commercial products just to name a few and even these fields can be subdivided. In this simple case for example, you can license your patent exclusively to one company in each field of use. That is three license agreements.

Territory describes the geographic territory in which a license is granted. Let’s say you have obtained a patent in the US, Europe, Japan and China on a laser technology. You can now license your product exclusively to a different company, in each field of use within each territory. Now you have 12 license agreements (assuming a licensee doesn’t obtain a license in multiple territories or fields).

You can also limit a license using time. This is often called the term of a license. You might grant a company an exclusive license for five years because the product requires a large upfront expense to get to market. After five years, the exclusive expires and you can license the patent to other companies while allowing the original licensee also to maintain a non-exclusive license.

A patent actually grants the patent holder the right to exclude others from making, using, offering for sale, selling and importing the invention. Some licenses (usually only exclusive licenses) may also include the right to sublicense the rights granted. You can limit a license using the components as well. For example, if a technology requires a significant amount of research and development and investment in production facilities to commercialize, no company is going to invest the time and money to commercialize the technology unless they feel they can make their money back, plus a profit. So you might grant the exclusive right to make the product to one company who agrees to commercialize the technology. Then you might grant several companies the right to import and sell the product in various territories. This scenario works well because the manufacture has the incentive to invest in bringing the technology to market and also has established companies ready to sell the product.

2. Royalty—Sometimes Lower is Higher

One of the most important aspects of a license is the royalty rate. This is the percentage that the licensee agrees to pay you for the rights to the patent and product. Inventors naturally want to negotiate the highest possible royalty. But a high royalty isn’t always to the inventor’s benefit.

When negotiating a royalty rate there are several factors to consider. The first is the manufacturer’s suggested retail price. This is what the finished product will sell for to the end user. Ask the licensee what price points they want to hit at the retail level. They should be open with this information.

From the manufacturer’s suggested retail price, you can determine the approximate wholesale price by knowing what channels the product will be distributed in. For example, a product sold through mass retail channels will typically have a wholesale price of 35% to 65% of the retail price. That is the retailer’s discounted price. Again, ask the licensee what channels they plan to distribute through and what the typical discounts are in those channels. Also, some manufacturers use distributors which require a piece of the pie.

Let’s look at an example I recently encountered. A product, let’s call it “Hitchy,” was going to be sold in the automotive aftermarket channel. In this case the manufacturer sold through a distributor to automotive retail chains, so the channel included a 35/35 mark up structure. The target retail price was $19.99. So the retailer would buy the product from the distributor at $13 and the manufacturer would sell to the distributor at $8.45.

Let’s look at two scenarios which illustrate why the royalty rate is important, but should be examined in terms of volume. Assume the manufacturer’s cost of goods is $5.00. That means the manufacturer’s gross profit is $3.45, before the royalty. Let’s say in the example above, you drive a hard bargain with the manufacturer and demand a 10% royalty. That means the royalty is 10% x $8.45 or $0.845 per unit. And let’s assume the manufacturer’s minimum required net margin is 35%. This deal won’t work! The manufacturer’s net margin is only $2.60 ($8.45-$0.845-$5.00) or 30% ($2.80/$8.45).

Even if the manufacturer decides to go forward with the product they will have to raise the price to meet their minimum net margin, which will put the product over the magic price of $19.99. What will happen? The manufacturer will sell fewer units per year. Why? If you raise the price of any product, fewer consumers will by the product. This effect, often called price elasticity by economists, has been proven again and again. So perhaps the manufacturer only sells 100,000 units per year at the higher price. So your total payoff is 100,000 units x $0.845 per unit = $84,500 per year.

But what if you had been more flexible with the royalty rate? Let’s say you were willing to lower your royalty rate to 6% to allow the manufacturer to meet its minimum allowable margin while keeping the retail price at $19.99. Your royalty now is $0.507 per unit. And the manufacturer’s net margin is 35%. Let’s now assume that the lower price results in an increase in unit sales to 175,000 units per year. Now your total payoff is 175,000 units x $0.507 per unit = $88,725 per year. Your royalty rate went down 40%, but your total payoff went up 5%!

3. Performance—Make Sure they Practice what they Preach

Performance requirements need to be in every license agreement. These include, but aren’t limited to, an introduction date, minimum royalty payments and an anti-shelving clause.

The introduction date is the date by which the licensee will have your product manufactured and ready for sale. The introduction date will vary depending on the complexity of the product. Remember, nothing ever goes as planned. Make sure you have a reasonable cure period for the introduction date. Usually 30-90 days depending on the complexity of the product.

Minimum royalties also need to be included in a license. The exception is a non-exclusive license. If a company can’t meet minimum annual sales targets, you might want to terminate the license, or convert it to a non-exclusive license. Also, you always want to make sure your licensee is continuously marketing and selling your product. Unless the product is seasonal, the licensee should be able to meet some portion of the minimum annual royalties in each quarter. For example, let’s say a licensee has an exclusive license with a minimum annual royalty target of $100,000 and they only sell enough units to pay $90,000. You would expect the licensee to pay an extra $10,000 to maintain the exclusive (the licensee might want to credit this against future royalties). If they refuse to pay the extra $10,000 you could terminate the license or make it non-exclusive. However, you want to be careful before terminating a license because it means you have to start all over again with another licensee (assuming the license is exclusive), if you can find one. Certainly if the licensee only sold enough units to pay $40,000 in royalties you would want to at least make the license non-exclusive and perhaps pull it entirely. Also be conscious of what is going on in the market in general. If macroeconomic conditions are hurting all products in the category, it probably isn’t the fault of the licensee that sales are slow. Minimum royalties are the toughest terms to negotiate. You want to be fair and reasonable. A tactic I often use is to ask the licensee how many units they would need to sell each year to keep the product in the product line. Companies drop products all the time because they don’t meet internal minimums. Your product should be no different.

Myths and Misconceptions

Now that we have covered the basic terms of a license, let’s look at some common myths and misconceptions of licensing.

Highway Robbery!

Many inventors are skeptical about licensing because they feel the licensee is somehow out to get them. I have never encountered this situation. Many inventors feel if they are getting a 5% royalty then someone else, usually the licensee, is making 95%. But if you look the Hitchy example above, the licensee has other mouths to feed, including their own. The licensee had a net margin of 35%. The royalty was $0.507 which is 17% of the licensee’s margin. That’s a great deal considering the licensee had to pay to tool, manufacture and package the product to get it up and running. Your licensee should be your partner, not your adversary. If a potential licensee isn’t offering you a fair royalty, and you can show them on paper, let them know your concern and if they don’t come around, walk away.

Giving Away the House

Some inventors feel if they license their product they are giving it away. First of all, when you license a patent, you still own the patent. If you own a house and rent the house you still own the house. If the tenants don’t pay rent on time or if they wreck the place, you can kick them out and rent it to someone else. This works the same for a license. If the licensee doesn’t pay royalties or doesn’t do what they agree to do in the license agreement, you can terminate the license and license to another company. And if you are careful about licensing the proper rights, you can usually seek multiple licenses.

The Grass is Always Greener

When dealing with a potential licensee, some inventors develop the attitude that they can get a better deal from someone else. They think, “If this company wants my product, others must.” While that might be the case, you had better be sure you have another deal on the table before you walk away from a fair deal. When you are attempting to license your product, you should be talking to all the qualified companies that could license your patent at the same time. Or you can divide your prospective companies into tier 1 and tier 2 companies and go after tier 1 first and then drop down to tier 2 if you are not getting a good response from the tier 1 companies. It can take four to six months for a company to evaluate a license offer. So you don’t want to go down that path with one company and if you don’t like their offer have to start all over with the next company. If the other company comes back and isn’t interested in licensing or gives you a lower offer it may be too late to do the deal with the first company. They may have already committed the budget for your product to another project.

I Can Make More Money on My Own

Another common reaction I get from inventors once a company comes to the table to license their patent is I can make more doing it myself. This is especially true when an inventor looks at the royalty versus the wholesale price and retail price. Sadly they don’t understand what “it” requires. In the Hitchy example above, without knowing the mark up in the channel the licensee was selling to, some inventors might wrongly think the licensee was selling the product for say $13 to the retailer. Then they would ask, Why should I get $.50 when the licensee is getting almost $8 per unit? That is why it is important to know how each channel of distribution works. In fact, the licensee was netting $2.60, and while this is more than what the inventor was making ($0.507), you have to consider the risk the licensee took to tool, manufacture and package the product. In risk-adjusted terms the royalty is fair. But some inventors think, “I’ll just make it myself.” This leads to my next misconception.

All I Need is A Manufacturer

Manufacturing a product in any reasonable volume is risky. It means investing money in set up, tooling and inventory—often before you have sold a single unit. Depending on the product, this figure could range from $5,000 for a short-run, single cavity mold, to $100,000 for a multi-cavity mold. Next, the manufacturer will quote you a unit cost for the product at various quantities. So before you have sold a single unit, you are looking at a significant investment. On top of the tooling and manufacturing cost, you must also look at packaging, marketing, sales, freight and storage costs. And don’t forget about product liability insurance.

My Product is a No-Brainer

Most inventors feel like their product is so good that all they need to do is send a letter to a company and the money will come pouring in. Take a second to think about your day. What if you had to do all the work expected of you this week AND consider 20 to 50 new business opportunities? Could you do it effectively? I doubt it. As Herbert Simon said, “A wealth of information creates a poverty of attention.” So, sometimes the easiest thing to do is to maintain the status quo. Companies are constantly looking for ways to improve and differentiate their product lines. Ironically, such a focus on their products can lead to myopia. As a result, good ideas often originate from outside a company or industry. You would think these ideas would be easy to introduce to companies. In reality, convincing companies who rightly feel they are experts in their product line and industry to pay for your idea is difficult. Most companies have people that do nothing but focus on new products and ideas and they often suffer from a syndrome called Not Invented Here.

All I Need is My Patent

To license a product or patent, you need to know how to qualify companies AND know how to give the decision-makers at these companies all the information they need to make a well-informed decision. At a minimum, this will include a proof-of-concept prototype, renderings of a finished product and a positioning of the product with the prospective company you are targeting. You have to show a company how your product fits their product lines, distribution channels or customer base. And you have to show them how your product will be profitable. The more innovative the product or concept, the more difficult it is to convince a company to go for it. When dealing with far reaching innovations, try to focus on the steps in between and show the company how they can ease their customers into the long-term objective.

Licensing for Long Term Success

Licensing is and always will be an effective method for profiting from patents. Understanding the realities and value drivers of a license will help you be successful in your licensing efforts. When exploring a license with a company, I recommend using a simple term sheet to nail down the basic terms of the license. Do this in English. Then let the attorneys put it in legal format. Agreements serve to memorialize what the parties agree to on a certain date in time. But we live in a constantly changing world, so agreements often need to be updated. Make sure you leave the door open to future evaluations.

Happy licensing!
Kris Hudgens
America Invents
866-503-1717
kris@americainvents.com

The Inventor’s Dilemma

2009-06-21T18:47:00.000-07:00

The Inventor’s Dilemma

One of the biggest dilemmas facing an inventor is: Should I play it safe and license my product? Or should I shoot the moon, manufacture my product and go straight to retail? Manufacturing a product in any reasonable volume is risky. It means investing money in set up, tooling and inventory—often well before you have sold a single unit. But sometimes the risk is worth the reward, and that is what I want to focus on here. Business decisions should be made after calculating the risk versus reward. If you don’t, you are simply gambling.

Large, well-financed companies own or operate their own manufacturing facilities. Think of Ford, GE, Hewlett-Packard, and Black & Decker. Manufacturing facilities and processes are huge investments to establish and maintain and should be a source of competitive advantage. So what does an inventor with limited resources do when they need a product manufactured?

Myth 1: You can make it yourself.

While it is important to prototype, refine and perhaps build some pre-production samples of your product, it is rarely possible for an inventor to make a significant profit manufacturing their product in their garage. The product will either be too expensive, because the manufacturing process is inefficient and produces a low volume, or, if the product does well, the manufacturing process will never be able to meet the demand.

Manufacturing

Since it is rarely possible for an inventor to build their own manufacturing facility, I will explain the steps to take if you choose to find a contract manufacturer to tool and make your product. You want to select a manufacturer that specializes in the manufacturing process best for your product. The manufacturer will give you a quote on tooling and set up costs. Depending on the product, this figure could range from $10,000 for a short-run, single cavity mold, to $100,000 for a multi-cavity mold. Next, the manufacturer will quote you a unit cost for the product at various quantities. So before you have sold a single unit, you are looking at a significant investment. On top of the tooling and manufacturing cost, you must also look at packaging, marketing, sales, freight and storage costs. And don’t forget about product liability insurance.

The decision to invest in manufacturing should be based on economic and market principals, not on how deep your pockets are, or could be. There are several questions to answer before justifying a large outlay of capital for manufacturing. These questions are:

How large is the market?
How consolidated is the industry?
How easy is it to reach the target customer?
What will a target customer pay for my product at retail?
Where will my product be sold?
Can I pre-sell my product?

Myth 2: If you make it they will come.

Many inventors feel because they have solved a problem specific to them, many others must have the same problem and desire the same solution. There are thousands of products introduced each year, most of which never make it past the first year. Don’t let your emotion or ego drive your product strategy. Understand your product and the need you are trying to fulfill. And understand the market economics of your product. And do your homework.

The two simple questions can provide valuable insight. Barriers to entry include high costs of setting up manufacturing, extensive R&D costs to learn and understand a product or process, establishing a brand, having access to distribution channels and economies of scales (producing a high enough volume to realize material decreases in unit cost). Industry fragmentation refers to how few companies control the majority of market share in an industry. For example, if four of fewer companies control 60% or more of the market share in an industry, the industry is considered consolidated. The US automobile industry is both consolidated and has high barriers to entry. If your product has low barriers to entry AND the product is in a fragmented industry, it may make sense to manufacture your product.

Licensing

If you have considered the questions above, and the answers point to licensing, or if you simply don’t have the time or the resources to manufacture your product, we will now look at the process of licensing your product to a qualified company that can manufacture and market your product for you.

First of all, don’t feel bad if you choose licensing. Most inventors choose licensing because it is less risky and can provide an attractive supplemental income. Secondly, notice I recommended seeking ‘qualified’ companies to license your product. I recommend qualified companies because if you license your product, you will be paid a percentage of the product’s wholesale price. So in order for you to make a sufficient return on your investment, you need to license your product to a company that can sell a large volume of your product.

Companies are constantly looking for ways to improve and differentiate their product lines. Ironically, such a focus on their products can lead to myopia. As a result, good ideas often originate from outside a company or industry. You would think these ideas would be easy to introduce to companies. In reality, convincing companies who rightly feel they are experts in their product line and industry to pay for your idea is difficult. Most companies have people that do nothing but focus on new products and ideas—they see the Big Picture. These are the people we know and regularly work with and they are the people you should seek out as well.

Most inventors feel like their product is so good that all they need to do is send a letter to a company and the money will come pouring in. Take a second to think about your day. What if you had to do all the work expected of you this week AND consider 20 to 50 new business opportunities? Could you do it effectively? I doubt it. As Herbert Simon said, “A wealth of information creates a poverty of attention.” So, sometimes the easiest thing to do is to maintain the status quo.

Myth 3: All you need is your patent.

Companies are inundated with new ideas and opportunities every day. Successful companies know how to make smart decisions and allocate resources efficiently. Therefore, if you want a company to license your product, you need to make a good first impression and give the company all the information they need to make a well-informed decision regarding your product. Think about all the red flags an outside submission from an inventor raises. Is the patent really good? Is the inventor reasonable in her expectations? Is the product concept proven? Is the patented improvement economical?

To license a product or patent, you need to know how to qualify companies AND know how to give the decision-makers at these companies all the information they need to make a well-informed decision. At a minimum, this will include a proof-of-concept prototype, renderings of a finished product and a positioning of the product with the prospective company you are targeting. You have to show a company how your product fits their product lines, distribution channels or customer base. You can’t expect them to instantly see the Big Picture. In fact, the more innovative the product or concept, the more difficult it is to convince a company to go for it. When dealing with far reaching innovations, try to also focus on the steps in between and show the company how they can ease their customers into the long-term objective.

When it comes to negotiations, you must be tough but fair and realistic. The art of a licensing deal is creating a win-win situation for all the parties. Most inventors feel skeptical towards potential licensees. Actually, you should consider the relationship with your licensee to be a partnership, whereby each of you is seeking to make money on your product and to share that money on a risk versus reward basis.

Myth 4: Your idea and patent is a “no-brainer.”

For a company to bring your product to market, they must spend hundreds of thousands of dollars on tooling, manufacturing, marketing and distribution. There is also an opportunity cost, since investing money and resources in your product means they cannot invest in other products. The real judge of any idea or product is the market. Companies know this and will only invest the money needed to bring your product to market if it is justified.

The Dilemma Continues

Despite the best thinking and research, manufacturing and launching a product is still a big risk. Experience is key in making difficult product decisions. Although product development is risky, following a proven strategy can help reduce the risk of both manufacturing and licensing. I hope I have provided some of the key considerations we consider when evaluating new products.

Kris Hudgens

Executive VP, Licensing

866-503-1717