The next three blogs will address three topics important to inventors:
Today’s topic: Finance
One of the greatest challenge for inventors is that of how to finance their inventions.
Inventing is a high-risk profession – less than 3% of patent holders profit from their inventions. A key reason behind the long odds is simply that most costs of inventing are front-loaded and profits, if any, come much later.
Among the front-loaded costs of invention are:
- Patent filing and prosecution – costs of $5,000 – $8,000 or more per patent are typical
- Prototyping – costs may be small or large, but these costs accrue early in the process
- Product development, packaging, marketing – the vast bulk of these costs occur before and during rollout of the product – before any revenue has come in
Unless you have a rich uncle, you will need to be at least as creative with financing as you are with developing your invention. In a previous blog, I discussed ways to finance on a limited budget.
Rather than duplicate that material here, I’d rather look at a strategy for financing creatively.
The best strategy is to license your product to a manufacturer who can get the product into a large, profitable “footprint” of retail stores and, in the process, produce a large revenue stream of product sales. The licensee will pay you, the licensor, a small royalty percentage of gross sales minus returns and adjustments.
There are definite trade-offs to licensing.
You have minimal cost and minimal risk: the licensee assumes all costs of manufacturing packaging, marketing, distribution and sales, including returns. (As an inventor who has manufactured and distributed my own product, I can assure you there are many headaches from that choice.)
The licensee, however, will treat the product as if it is their own. Their vision for the product that will certainly differ from yours. They may choose cheaper materials, eliminate some features you like and focus on features or aspects you wouldn’t. You may have a say in some of the decisions, but not all. You must be willing to compromise and “let go” of your baby.
On the other hand, receiving a potentially lucrative royalty check each quarter is vastly more attractive than working for an unappreciative boss.
Stay tuned for Part III: Feedback!