Licensing Your Creation vs. Building a Company Around It
The biggest question for would-be entrepreneurs who developed their own products is if they should license their products or start a company around them. The answer is: it depends.
If the first product can be developed into a product line and, even better - the technology can be applied to multiple product lines, then the answer is "Yes". Having your own company designing, manufacturing, and selling the products can potentially provide higher margins and higher revenues. It also gives you more control of the creative process and brand building.
The downside is that building a new company requires a significant capital investment. There are product design costs (to turn the prototype into manufacturable product), legal cost (for patent protection worldwide), manufacturing costs (including packaging and transportation), marketing and advertising (both traditional and online), insurance (product liability), fulfillment center with customer service, and daily operations costs (office, people, benefits, equipment). Additionally, you will have to identify distributors and/or retailers to sell your products. There will be significant travel cost, especially in the first couple of years: trips overseas to identify manufacturers, to build the relationship and check on progress. Domestic trips to and with distributors and to retailers. Depending on the complexity and number of products you want to start with, a typical start-up investment is between $500,000 and $1,000,000. (Of course, each situation is unique, and these numbers give only a rough estimate).
If you developed only one product that cannot evolve into a product line, licensing might be a better option.
Licensing gives the advantage of minimum up-front costs for market research, prototyping, and patent application. (You should always start with a market research for the product you are creating. There are unfortunate situations where some products have limit or no market potential. By performing the market research first, it saves you time, energy, money, and hurt feelings). A typical license agreement includes an up-front fee to the inventor and a royalty fee per unit. (All is negotiable, and therefore, each deal is unique). In most cases, rough prototypes are sufficient for deal negotiation. Depending on the type of product and the targeted consumer profile, the licensors can be direct marketing companies of manufacturers of similar products. Direct marketing companies will not only sell it via infomercials and catalogs, but also online and in traditional retail stores. And manufacturers are always looking for the next really cool product, especially since they don't develop all their products in-house.
The downside is that licensing generates lower margins and therefore, lower revenues. Considering that there are no costs, it is not such a bad idea.
My recommendation to inventors of stand alone products is to license the first 2 or 3 products, generate some revenue, establish a reputation of inventors of high grossing products, and then decide if they should continue the licensing route or build their own companies. You can build a profitable (and fun) business by developing unique products and licensing them to interested parties.
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