A recurring challenge for innovators is how to earn a reasonable profit from their investment in patenting. There are a number of paths to the goal line, but each typically requires substantial work.
One potential path to profiting from a patent is by bringing to market one or more products having customer-valued features that are protected by that patent, thus deterring competitors from trying to offer similar features. But launching a new product can require design, prototyping, manufacturing, marketing, distribution, and management skills that not every innovator possesses. Thus, an innovator might want to assemble a professional team that brings these skills to the table. Yet, building a solid team that can fill all these roles might be very expensive (and time consuming). Therefore, unless the innovator is independently wealthy, they might decide to seek substantial capital to help them get their patent-protected product to market. The acquisition of that capital might take the form of loans or possibly the sale of ownership shares in the business.
An alternative path is to license or sell the patent to an established player in the market, with the expectation that the investment of their capital, experience, personnel, and facilities will allow products protected by the patent to reach and thrive in the market. Yet even for this path, establishing a value for the patent or patented concept is necessary if the innovator is to strike a deal that each side finds satisfactory.
So what’s the value of a patent, or its underlying inventive concepts? Given the risks of failure, those who choose to provide the resources that will lead to a patented product reaching the market typically want to profit handsomely from their investment. Lowering their risk of failure can lower the return they require from their investment.
How can an innovator lower the risks to investors? Before we squarely address that question, keep in mind that investors tend to dream of buying a risk-free and endless stream of profits (as opposed to gushing but unsubstantiated promises).
Although the typical investor’s dream is unrealistic, the closer the innovator can come to fulfilling that dream for potential investors, the more interested they will be in investing in the innovator’s concept. For example, when you’ve already demonstrated that you can earn profits from your innovation and are merely seeking capital to scale-up your business, investors perceive a much lower risk, and therefore will likely accept a considerably lower return on their investment and/or will be comfortable investing considerably more in exchange for a much smaller ownership share or interest rate.
When profitability has not yet been proven, investors might accept proven revenues and dropping costs, but typically will demand a smaller investment, larger ownership share, smaller inventor royalty, or higher interest rate. This same tendency holds to an even greater degree if the product has not yet been sold. Even less appealing, from an investor’s perspective, is a situation where the product has not yet been designed, prototyped, or market-tested, but only patented. When the innovative concept is even younger, such that only a patent application has been filed, or even worse, not yet filed, it’s rare to find any investor who will take a risk on the innovation at any price, even if solid market research shows there is strong customer demand for the innovation. Again, investors want high ROIs and low risks. The further the investment opportunity deviates from that desire, the less interested and/or more demanding the potential investors likely will be.
With that in mind, the answer becomes much clearer. To raise its attractiveness to investors, do everything you can to prove your innovative concept. For example, prove its patentability by getting your application to quickly issue as a patent. To increase its value further, prove your innovative concept truly works via prototyping. Want an even better deal? Prove there’s a genuine market desire for products that implement your innovative concept. Can you take it further, and prove that you unquestionably can successfully manufacture the product and that people will willingly pay your desired price for it? Best of all, can you show you can earn a healthy profit on your sales of the patented product?
While these tasks might seem insurmountable, keep in mind that the costs to design and engineer a product have dropped considerably over the years due to advanced computer-aided design and computer-aided engineering software. Likewise, 3D-printing and advanced software have made the prototyping of products much easier and cheaper. Finally, the investment in money and time needed to create and run a website where you can advertise and take orders for your product seems to drop every year as well.Who knows, in removing risks for investors, you might find that you can, and even enjoy, successfully bringing products to market. You might even discover that you don’t need investors so desperately after all, and instead can bootstrap delivery of your innovation to the market.