Starting a Small Home Business

There are two ways to bring an invention to market:

Licensinggranting rights to make, use and/or sell your invention to a company; or

Venturingstarting your own company to make, use and/or sell your invention.

Licensing requires little time and money and is extremely risk-free, while venturing requires a huge amount of time and money and is extremely risky. (There is only one exception to this rule that will be the subject of my next book Venturing on a Budget.).

When you venture your own product, you are competing with larger, more established and experienced companies for market share. When you license, you are partnering with these same companies to bring your product to market. Simply put, licensing allows you to leverage the time, money and experience of successful companies in order to reduce your risk, increase your chances of success, and create passive residual income.

My last successful invention cost my licensee (the company I licensed my invention to) over $100,000 to launch. The company is a large pet product manufacturer with years of industry experience and with well-established manufacturing, marketing, distribution and sales networks already in place. They already had successful products selling in stores, online, in catalogues and on television shopping networks. Best of all, they had personnel dedicated to do all of the work required to make my product a successand they still fail more often than they succeed. However, these companies understand that it only takes a few successful products to make up for all of the losers and they have the resources necessary to absorb those inevitable failures.

Each year approximately 20,000 new products are introduced in the U.S. alone. Of these new product introductions, only about 20% are successful. Given these facts, it is extremely unlikely that youhaving no experience and little time and resourceswould be able to successfully introduce a new product on your own. Of course there are exceptions to this rule, but even if you did manage to introduce a successful product yourself, the risk-reward relationship still favors licensing. Heres why:

Licensing produces passive income. Licensing will provide you with both time and money because you continue to get paid for as long as your product sells, regardless of whether you continue to work or not. Not only does venturing require huge amounts of your time and money upfront, it will continue to demand your time and money on an ongoing basis. Even if you do manage to make money venturing, your time will not be your own. Furthermore, if you stop working, the whole venture will most likely come crashing down around you.

Licensing produces additive income. Another attractive feature of licensing is that royalty payments from successful inventions begin to have an additive effect. Lets say you negotiate one successful licensing agreement per year for five years. Lets also say that the royalty payments you receive each year from each license total $20,000. Year one you make $20,000, year two you make $40,000, year three you make $60,000, and so on. Without working any harder, your income increases significantly because you continue to get paid for your past successes.

Licensing reduces your risk. When you license your invention, your licensee assumes the entire risk and cost of bringing your product to market. You are betting on the company and they are betting on your invention. However, if they lose they are out tens, sometimes hundreds of thousands of dollars. If you lose, you are only out maybe a few hundred dollars and a handful of hours.
Licensing increases your chances of success. By licensing your invention you are partnering with an industry leader who has the experience and resources necessary to compete successfully in their industry. You do not.

Licensing diversifies your investments. Any financial advisor will tell you the importance of having a diversified investment portfolio. Inventing is like investing in that you will own a piece of each company you license your inventions to. However, unlike investing, you dont need a lot of money lying around to get started. By licensing to various companies across different industries you are diversifying your invention portfolio. You would not put your entire life savings into a single stock, so why would you bet the farm on a single invention idea?

Licensing gives you free expert advice. Lets say you invented a new widget for the sporting goods industry. However, after you shop it around to all of the companies in the industry they all pass. You ask each of them why? in order to determine whether you can fix the problem(s) or whether your invention is inherently a loser. Either way, you get free input and advice from industry experts telling you how to improve upon your invention idea, or when you should move on to your next one.