Software companies can rapidly monetize their IP and broaden their market by licensing or selling their technology to larger tech companies. Here’s how.
In a sea of innovation and technology proliferation, monetizing a software vendor’s intellectual property can be a challenge for small and mid-size software companies. Investments in sales and marketing can be substantial – not to mention, the continued need to raise capital to meet growth targets and investor needs.
“Technology transfer” is a proven growth strategy that has been used by software companies for many years to rapidly monetize their IP by leveraging the channels, brand and market position of larger firms. The potential? A considerable increase in sales, profits and share of market. Here’s what software companies need to know about tech transfer in order to do it successfully.
The Challenge of Innovation Proliferation
Innovation in the software industry continues at a healthy pace as hundreds of new offerings are launched into the market daily. In fact, during second quarter (2007) alone, $1.5 billion in venture capital flowed into software startups – more deals than any quarter since 2001.
However, innovators need to compete in a maturing, crowded, highly-competitive, and noisy marketplace. They need to respond to the ongoing structural change of the industry – with globalization, consolidation, new workforce strategies and increasing margin erosion all playing a role.
To address changing market conditions, grow their business, and take advantage of opportunities, vendors are not only introducing new products but also new business models and go-to-market approaches. The goal is to rapidly commercialize one’s intellectual property.
This is especially true for small software vendors. As the market consolidates and CIOs continue to standardize and shrink their portfolio of technology, the efforts of small and mid-sized firms to sell products becomes increasingly difficult.
These marketing challenges are one of the reasons that consolidation is rampant in the software industry today. Rather than go it alone, smaller vendors choose to sell themselves to larger companies to broaden their product’s opportunities and to raise cash to repay investors.
The Potential of “Tech Transfer”
Successful commercialization of innovative technologies is a complex, many-sided effort, but there are tools that exist to successfully encourage this activity. One approach to promote winning innovation– one that is gaining support from CEOs and boards — is technology transfer.
Long an accepted practice of capitalizing on research and development done at universities and scientific laboratories, technology transfer is now increasingly common between businesses. It helps connect businesses that own and develop technology, with other businesses that are in a better position to build out and/or market technology.
The licensing of intellectual property is the most enforceable type of technology transfer. It is also a proven way to rapidly monetize a firm’s intellectual property.
Licensing is not something new. It’s a practice that has been best used by larger players. Larger firms such as IBM, HP, SAP and Oracle routinely license their technology to form complementary business relationships.
For example, in 1998 software giant Oracle and Network Computer, Inc (NCI) came together via a licensing agreement where NCI granted Oracle a license of the NCI technology so that Oracle could promote, market and distribute sublicenses of the NCI technology through its global distribution channels. Oracle filled a void in their product footprint. NCI established a global sales channel to grow its business.
Deciding What to “Transfer”
For software vendors wishing to grow revenue and/or remain independent, it is possible to carve out a software asset or segments of code for potential license to other companies. Many firms have an inventory of non-core or non-strategic software assets. Software that may be of minor importance to one software vendor, could be complimentary and of great value to another vendors’ product suits.
Geographical and cultural issues may blind the efforts of some small and mid-sized vendors. Many software firms that are strong in a specific geography or industry have products that can be taken to other markets through licensing. Consider the highly regarded products from Planon B.V. or SAPERION AG. These firms have a strong European client base. Their North American presence is evolving as they adapt to U.S. business culture and approaches. Launching into North America could be augmented with a strong local licensor.
Some vendors use the re-licensing of technology to seed the market. It makes perfect sense for certain niche applications to be embedded into broader ERP or BI suites – for example tax software, IP management apps, formula management and environmental compliance. These small and mid-sized vendors can relicense a core app to an ERP or BI vendor, who in-turn sells the niche app as part of their suite. As their client base grows due to the partnership with the larger vendor, the niche player can up-sell or cross-sell into the newly created install base.
Again, the practices above aren’t new. But we believe the technology transfer approach can be better exploited today – especially by mid-sized and small software businesses.
How Tech Transfer Works
In a typical tech transfer situation between two software companies, a license is a written grant of rights from one entity to another for specific purposes. One firm (licensor) owning the intellectual property grants another company (licensee) the right to develop and/or commercialize the intellectual property.
In order to commercialize a technology, the licensee will develop, market, sell and support the software asset. In effect, the licensor is transferring the technology – or rights to the software technology – to the licensee in return for financial reward, which is usually a royalty payment based on net sales.
A license can be exclusive, meaning the licensor may not grant to another party the same access to the intellectual property, or non-exclusive, meaning the licensor may grant rights to other licensees. The scope of the license can be wide enough to include all applications and industries, or narrowed to specific applications, market segments, as well as geographic regions.
Beyond licensing, some firms actually sell their IP or source code in order to immediately monetize it – for an upfront lump sum. In this situation the seller of source code may also negotiate an operating arrangement with the buyer to further develop and support the source code for a certain period of time.
This type of technology transfer can also be exclusive or non-exclusive. We seen have several IT services companies transfer applications that they developed for a small set of clients, by selling source code to firms that have more substantial capabilities and client-base to better market and distribute the application.
Implementing a Tech Transfer Strategy
The process of tech transfer is daunting for some companies – but it shouldn’t be. Our experience has identified 10 main practices that experienced vendors follow.
- Document the intellectual property in sufficient detail – Develop and package a complete set of computer programs, procedures, and associated documentation and data/content designated for delivery to a customer or end user.
- Have a qualified attorney protect the IP – Intellectual property rights can be protected through patents, copyrights, and trade secrets. If a company has something of value, it must have an experienced attorney go through the process of protecting the IP.
- Perform a search and comparison of similar IP– A vendor needs to make certain that it has free and clear ownership of the software. As part of protecting your IP, an attorney should also perform this service.
- Characterize the market opportunity – This document should enable any potential partner to understand the context of the market opportunity, the rationale for pursing the opportunity and how the opportunity aligns with their overall business focus and strategy. Key tasks include:
- Identify how IP can be applied or used
- Document the value the IP can deliver to users
- Size the market and determine targets by segments, geographies, industries
- Identify competitors and like products
- Determine a reasonable sales forecast
- Determine what exclusions are required
- Build a “sell-document” – The objective of a sell document is to take the above analysis and create a confidential and concise overview of the software asset and indicate the value of this asset to potential licensors. The sheet should describe the asset, its value proposition, client base, and so on.
- Conduct confidential mail and call campaign – This is a confidential and welltargeted campaign directed at CEOs of the agreed upon universe of potential licensors.
- Build a pipeline of interested parties; pursue and qualify each – The mail/call campaign is the vendor’s opportunity to connect with and qualify the other party’s interest and decide if a face-to-face visitation is appropriate. If the party does qualify as a potential licensor, a mutual non-disclosure agreement is signed and appropriate next steps are scheduled.
- Select final licensee – With a final licensee identified, a letter of intent can be negotiated and due diligence activity can begin.
- Obtain an actionable launch plan from final licensee – Make the new relationship actionable by detailing how the product is marketed and sold into the intended market and what roles and responsibilities each party has to make the launch a successful one.
- Close deal and structure a solid agreement.
The most important of all the steps? The market launch plan. It is critical that the licensee detail how the IP will be promoted, who is responsible for what, and how it will achieve its forecasted number of units sold. The process takes anywhere from 4-12 months with an average of 9 months to successfully complete.
The Tech Transfer Opportunity
Of course, there are some drawbacks to licensing. The licensor loses control of the commercialization effort and gives up a major portion of the profits – or worse, the licensee may not perform as anticipated.
However, the benefits of tech transfer can far outweigh the drawbacks. Tech transfer helps firms avoid the risk and the costs required to develop, promote, sell, and support software. In certain situations, we’ve seen technology transfer partnership discussions evolve into a more serious and strategic discussion of merger and acquisition. The most dramatic benefit? A firm can greatly shorten it’s time to cash.
There are various forms of licensing and compensation. Selecting the best match for a particular company calls for not only the services of an experienced attorney; it requires assistance from experienced go-to-market practioners. The ten steps mentioned above require a deep level of industry experience, a rich rolodex to swiftly find potential licensees, and the business savvy to position the asset, and negotiate the best price with the right terms and conditions.
The innovation that is pervasive in the software industry is a valuable asset – and one that is too often underutilized by vendors. Technology transfer can significantly help augment the selling and marketing efforts of mid-market and small software companies, enabling CEOs and their management teams to achieve their growth targets.
Mark Gaeto
Managing Director
mgaeto@falconllc.com
