By: Mark Gaeto – Managing Partner
Software companies can rapidly monetize their intellectual property and broaden their market by licensing or selling their technology to larger tech companies.
In a sea of innovation and technology proliferation, monetizing 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. What’s more, large tech companies are under relentless pressure to innovate. They look to M&A and licensing to complement and enhance innovation via internal research and development.
“Technology transfer” or a technology product sale is a proven growth strategy that has been used by software companies for many years to rapidly monetize their intellectual property by leveraging the channels, brand and market position of larger firms. The potential? A considerable increase in sales, profits and market share. Here’s what software companies need to know about tech transfer 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, after a high of $56.5 billion in 2014, the first three quarters of 2015 already saw $57.9 billion invested into U.S. startups.
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 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 vendors, the efforts of small and mid-sized firms to sell products become 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 shareholders.
The potential of ‘tech transfer’
Successful commercialization of innovative technologies is a complex, many-sided effort, but there are tools that exist to encourage this activity. One approach to promote winning innovation – one that is gaining support from CEOs and boards – is technology transfer or sale.
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. Larger firms such as IBM, HP, SAP and Oracle routinely license their technology to form complementary business relationships.
For example, back in 1998, software giant Oracle and Network Computer, Inc. (NCI) came together via a licensing agreement. NCI granted Oracle a license of the NCI technology so that Oracle could promote, market and distribute sub-licenses of the NCI technology through its global distribution channels. Oracle filled a void in its product footprint. NCI established a global sales channel to grow its business. Over the last two decades, there are many similar examples.
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 or sale 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 vendor’s product suits.
Geographical and cultural issues may blind the efforts of some small and mid-sized vendors (or consulting firms with emerging software products). 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 ThinkWise Software in the Netherlands or SNP Schneider-Neureither & Partner AG in Germany. 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 enterprise applications or business intelligence (BI) suites – for example tax software, intellectual property management apps, formula management and environmental compliance. These small and mid-sized vendors can re-license a core app to an enterprise applications or BI vendor, which in turn sells the niche app as part of its suite. As the niche player’s client base grows due to the partnership with the larger vendor, it 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 – licensing
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.
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 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 or geographic regions.
Beyond licensing, some firms actually sell their intellectual property 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. In many cases, the final result could be a company sale.
This type of technology transfer can also be exclusive or non-exclusive. We have seen several IT service 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 bases to better market and distribute the application.
Of course, a full company sale can be an option as well.
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 or their investment bankers 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 intellectual property. – 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 intellectual property.
- Perform a search and comparison of similar intellectual property. – A vendor needs to make certain that it has free and clear ownership of the software. As part of protecting your intellectual property, 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 intellectual property can be applied or used
- Document the value the intellectual property 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 as well as indicate the value of this asset to potential licensors. The sheet should describe the asset, its value proposition, client base and so on.
- Conduct a confidential mail and call campaign. – This is a confidential and well-targeted 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 the 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 the 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. Depending on how the transaction is structured and paid for, this could be an extremely important negotiation point.
- Create a well-structured agreement and close!
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 its 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 practitioners. The 10 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 underused 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 is a managing director with Falcon Capital Partners, a leading mergers and acquisitions firm, where he directs their commercial technology practice.
Mark can be reached at 610-989-8903 or mgaeto@falconllc.com
