When you start a startup, among the various avenues you can take to promote it and make money from it is the so-called licensing. If you are thinking of finding new business opportunities in this way, you would do well to read the next few lines: there you will find the detailed explanation of the mechanism of operation of licensing (both “inbound” and “outbound”), the list of benefits and risks, the rules and regulations to be aware of as well as, of course, the best strategies to put into practice.
What is licensing?
The meaning of licensing refers to a particular type of agreement whereby a licensor gives a licensee the opportunity to use one of its intellectual properties. The latter concept includes four main categories:
- copyright is applied to literary texts, musical works, photographs and website design;
- the patent refers to the field of technology;
- trademark protects brands (and their logos);
- registered design refers to the appearance of a product.
The ability to use intellectual property, in the context of licensing, is granted under set terms, for a limited period of time, and in exchange for a fee or percentage of profits.
To learn more about how licensing works you will have to be patient a little longer: now, in fact, it is a priority to understand why licensing is so important for startups and SMEs.
Why licensing is important for startups and SMEs
Licensing is an important resource for an innovative startup (but not only). You need to know that there are two ways to go in this case: you can exploit licensing as a licensor, i.e., sell the use of an intellectual property while remaining the owner of it (in this case we speak of licensing out) or as a licensee, acquiring the ability to use the ideas, concepts and creations of others (licensing in).
The advantages, in the latter case, range from saving money to saving time to enter a new market. You have to consider, however, that licensors are wont to choose established companies as partners, so as to maximize the chances of achieving success through licensing. To become a licensee, therefore, it is considered almost essential to have a proven track record in the industry in which the licensor operates and a high level of financial strength. This may preclude some startups and SMEs from accessing this tool.
How licensing works
We promised to return to you to talk in more detail about the mechanism of licensing operation. Now the time has come.
Licensing, as mentioned, is an agreement between the person who owns the intellectual property (i.e., the licensor) and the person who intends to use or sell it in a wider market (i.e., the licensee). Such an agreement generally includes specifics about the purposes, the time period in which the licensee can exercise the acquired right, the territories in which it can do so, the expected payment (a fee or a percentage of profits), and the right of termination.
Licensor and licensee
Now, however, it is time to delve into the figures of the licensor and the licensee.
The former, also known as the licensor, is the one who sells the use of intellectual property. Among the various reasons why he may decide to do so is that he can leverage licensing as a marketing lever, increasing the popularity of his creation or brand and making them better known among his target audience.
The licensee, on the other hand, the one who acquires the right to use the intellectual property. This is done in the knowledge (or, at least, in the hope) that the potential of it may allow for increased business volume.
Strategies for implementing licensing in your business
Knowing who licensor and licensee are is not enough-you also need to know how you can become a licensor or licensee. The next few lines summarize the steps you need to take and the strategies you need to implement.
How to become a licensor: steps and strategies
Even before registering the intellectual property, there is an important step that the licensor must necessarily take: he must ensure that there are no patents or copyrights that prevent him from doing so. Once the intellectual property is registered, he must then develop his unique value proposition (USP), identify potential licensees and present his business idea to them.
How to become a licensee: opportunities and challenges
The licensee, for his part, must identify potential licensors with whom he can strike a deal, draw up a detailed presentation of his company, raise the necessary funds to carry out the deal, find the right licensor, contact him, and negotiate the terms of the deal so that the deal is as advantageous to him as possible.
Benefits and risks of licensing for businesses
Licensing, as mentioned, is an interesting opportunity for businesses but you should know that in addition to the advantages, it also hides some pitfalls. Let’s find out together the pros and cons of licensing.
Licensing advantages for startups and SMEs
Being paid for just the right to use one’s idea is already a great advantage for the licensor. Licensing, however, also allows the licensor to expand its presence in certain market segments or in countries that have not yet been reached (and that would not be possible to reach otherwise), without taking on the cost of entry.
For a licensee, on the other hand, the main benefit is to be able to exploit someone else’s idea and visibility, without the need to develop patentable technology or create a new brand. This, beyond the economic benefits, also saves money in terms of the timing of market entry.
Risks and how to minimize them
The greatest risk facing a licensor is that of being damaged in reputational terms by the licensee: the pitfalls in this regard are numerous and range from substandard or poor quality production to legal problems or media scandals. The choice of licensee, therefore, is a step to which you must pay close attention.
Another risk for licensors is that of ceding valuable knowledge, know-how and information to someone who may later become a competitor once the licensing agreement is over. To minimize this risk, the solution is to constantly maintain a development gap in your favor with respect to the licensee.
The main risk for licensees is related to the initial investment required to enter into the licensing agreement, which in many cases results in a guaranteed minimum sum that cannot be recouped, regardless of the sales results that will (or will not) be possible to achieve.
How to manage a licensing contract
There are a few things you need to know in order to best manage the licensing agreement: first, it is important that you know that it is an atypical contract, since it is not governed by the Italian civil code. As such, the parties to the licensing agreement (i.e., the licensor and the licensee) are free to determine the content of the contract within the limits imposed by law.
Generally, as already pointed out, a licensing agreement includes the purposes of licensing, duration, territories in which the agreement is valid, expected payment, and termination terms. An additional aspect to put in black and white is the scope of the license, which can be:
- exclusive (the licensor agrees to grant it only to the licensee and not to other parties, in a given territory);
- non-exclusive (the licensor reserves the right to grant it to multiple parties);
- unique (the licensor gives the licensee exclusivity but also reserves for himself the ability to exercise the licensed rights).
On the other hand, with regard to the duration of the license, you should know that, with the sole exception of the trademark, whose registration can be renewed an infinite number of times, intellectual property rights have a limited duration and, therefore, licenses should also be considered limited in duration, since it is not possible to license an exclusive right for a period that exceeds the duration of the right itself.
There is one more aspect to be clarified: by entering into a licensing agreement, the licensor guarantees the validity of the intellectual property rights and claims to enjoy their availability. This means, for example, that the person who wants to license a copyrighted work must guarantee that he or she is the author of it or has acquired the rights to its economic exploitation. Not only that, he or she must also ensure that the rights of third parties are not infringed.
Becoming a licensee: exploiting the ideas of others
In the next few lines we will focus on the figure of the licensee.
Through the licensing agreement, the licensor, while retaining full and absolute ownership of the title, grants the licensee the right to exploit it economically.
Economically exploiting the title means, for example, affixing the licensed trademark to one’s products or commercializing a patent-covered invention for the period stipulated in the license agreement. This, as already mentioned, gives the licensee the opportunity to make its entry into the market faster and more economically.
Establish product profitability
Establishing the profitability of the product is one of the fundamental steps a licensee must take: as a licensee, after making a list of potential licensors and gathering information on license holders to ascertain the market value of the intellectual property you can acquire, you must also assess all the practical aspects related to market launch and negotiate costs based on them as well.
Negotiating costs and royalties
Before entering into a licensing contact, the licensee must agree on terms related to the payment of acquired rights.
Keep in mind that payment can be in the form of a one-time payment or a periodic subscription (this is the case, for example, with the Saas model, i.e., Software as a service) or again in the form of royalties, i.e., percentages on revenues related to the exploitation of licensed rights. In several cases, however, there is a periodic payment of a guaranteed minimum, regardless of the revenues obtained.
Licensing in the Italian market
The Italian market plays a very important role in licensing. Our country, in fact, is among those that most take advantage of this particular business opportunity.
Analysis of the licensing market in Italy
Testifying to Italy’s central role in licensing are statements by Roberta Nebbia, Managing Director Licensing Italy and Licensing International Italy, who said in 2023:
“The licensing market is a growing market, driven mainly by Asian countries but with the U.S. and Canada still accounting for more than 50 percent. Italy is the ninth largest country in the world and the fourth in Europe after the UK, Germany and France, with retail sales estimated at around $4 billion.”
Rules and regulations to be known
Intellectual property is protected by law in order to prevent an idea from being exploited by others without having the right to do so.
You should know that the Industrial Property Code (IPC), enacted by Legislative Decree No. 30 of Feb. 10, 2005, introduced in Italy an organic and structured discipline on the protection, defense and enhancement of intellectual property rights, reorganizing and amalgamating more than 40 texts.
As we have already had occasion to point out, the licensing contract is not governed by the Civil Code and, pursuant to Article 1322 of the Civil Code, the parties may freely determine its content within the limits imposed by law. Regarding, however, the form, you should know that, under Article 138 IPC, the licensing contract is among the acts that must be transcribed at the Italian Patent and Trademark Office.
The future of licensing: trends and opportunities
The licensing market is rich and diverse, as well as continuously expanding. Among the main drivers of this market are the entertainment and character industries, as well as the toy and corporate brand industries. One of the phenomena that has been most in vogue in recent years is that of inter-brand collaborations, which make it possible to gain more visibility and reach targets that otherwise would not be possible.
Doing business with licensing: final tips for getting started
Among the different ways in which intellectual property titles can be economically exploited, licensing is undoubtedly one of the most common, worldwide and also in Italy. In the previous lines we have listed the steps to take to embark on this entrepreneurial adventure and the strategies to put in place, as well as some advice on the areas to focus on in the immediate future.
One last piece of advice on licensing is related to a famous quote by Bill Gates:
“Intellectual property has the shelf life of a banana.”
But what does it mean?
It should not surprise you that, in the world at any given time, there are many people working on the same topic. The overlap of ideas and records is, therefore, natural. The only way not to dissipate research work on a business idea is to keep tweaking the idea in search of the right innovation to maintain its relevance within the market.
Do you want to read all the articles related to the stage your startup is in?
