From the VC desk: add licensing to the materials start

Home
Search
Collections
Journals
About
Contact us
My IOPscience
From the VC desk: add licensing to the materials start-up toolkit
This content has been downloaded from IOPscience. Please scroll down to see the full text.
2014 Transl. Mater. Res. 1 020201
(http://iopscience.iop.org/2053-1613/1/2/020201)
View the table of contents for this issue, or go to the journal homepage for more
Download details:
IP Address: 148.251.237.47
This content was downloaded on 01/02/2015 at 20:13
Please note that terms and conditions apply.
Opinion
From the VC desk: add licensing to the materials
start-up toolkit
Andrew Haughian
Pangaea Ventures, 1500 West Georgia Street, Vancouver V6G 2Z6, BC, Canada
E-mail: [email protected]
Received 15 September 2014
Accepted for publication 15 September 2014
Published 29 October 2014
Translational Materials Research 1 (2014) 020201
doi:10.1088/2053-1613/1/2/020201
Venture capital investments in ‘hardware’ companies such as advanced materials start-ups have
typically focused on productization and scale-up as the key value creation activities. Partnering
in the form of joint ventures, joint development or distribution agreements have traditionally
been the business model of choice. Licensing models are often shunned, with the argument
being that you leave money on the table and your ability to influence is lost, while fate is determined by corporate and market forces beyond your control. Valid points! But these issues can
often be mitigated and should be weighed against the advantages of licensing, of course in the
context of the market dynamics and industry structure that is faced.
Licensing becomes a more obvious choice when the market entry barriers are high. The obvious examples are large and mature markets with economies of scale, a depreciated capital asset
base, regulatory hurdles, and oligopolistic market behavior at play. The energy and industrial
markets, where materials technologies are often employed, certainly fit this bill. Overcoming
these barriers and replicating the capabilities of established firms can be a monumental task,
even with some of the partnering business models that are often pursued. In these cases, a licensing strategy may reap the benefits described below.
Credibility
The age-old problem faced by all start-ups is a crisis in credibility. With industrial and energy
industry players often focused on risk mitigation techniques such as performance guarantees,
bankability, supply contracts, warranties, etc, it is a tremendous challenge to meet the risk tolerance needed by these customers. No market presents a greater challenge in this regard than the
automotive battery market. Pangaea portfolio company Envia Systems has therefore established
a licensing business model along with its ecosystem of partners in order to bring their technology to market. A license model allows a licensee to control risk, while going a long way in
establishing credibility for the licensor. Ovonics established licensing as a viable strategy in
Translational Materials Research 1 (2014) 020201
2053-1613/14/020201+3$33.00
© 2014 IOP Publishing Ltd
Transl. Mater. Res. 1 (2014) 020201
Opinion
the electric vehicle market with their licensing of nickel metal hydride technology, and they
were eventually acquired by BASF. There are many considerations in picking the best licensee
partner(s), but picking a brand name that will lend credibility should be at the top of the list.
Capabilities
Successful start-up companies are singularly focused on being the absolute best in the world at one
thing. But creating a successful company and executing on a business plan requires developing a
multitude of capabilities. Picking the best licensee partner should involve selecting the organization with the best alignment. Market leadership, a synergistic technology and manufacturing platform, and a culture of innovation are a must. But a more subtle consideration is finding a partner
where the relationship is more than just receiving a check at the end of the month. In a two-way
licensing partnership, some capabilities of the partner will naturally rub off, strengthening start-up
capabilities in second-generation technologies or different markets.
Cash
I often hear about licensing deals being considered primarily as a way to generate early cash
flow. In the early days, cash is king, and this is indeed a noble motivation. Entrepreneurial
enthusiasm is a wonderful thing, but in our experience, large up-front license fees are often
absent, except in the case where significant capital has already been spent to prove a technology
and scale it up. More realistic expectations are that an early licensing model can reduce capital
spending requirements in the early days, when capital is most expensive or not available at all.
Unfortunately, potentially reaping these rewards in a materials-based start-up is not trivial.
Licensing technologies from research institutions is well established. Similarly, licensing has
been successfully used for decades in the venture-capital-supported industries such as IT, semiconductors and biotech. Licensing models in these industries are tried and true, and have formed
the basis for many a 10 × plus venture-capital return. However, energy or industrial markets
place less value on IP compared to IP-centric businesses such as IT and biotech. Deal creativity
can be the order of the day. The four tactics described below should be considered in formulating
a start-up company licensing strategy.
License in non-core markets
Start-ups need to focus. A classic and obvious strategy for a materials business with ‘platform
technology’ is to license the technology in non-core markets. But even a licensing deal can create a significant draw on management and technical resources, so care must be taken to ensure
core activities are not disrupted. Considering how the license relationship strengthens core activities is a must. The impact on exit scenarios must also be considered.
License generation one
All start-ups should focus on creating a minimal viable product. But in many industrial and
energy markets, for example thin-film solar, that minimum may be difficult for a venture-funded
start-up to achieve even with a superior underlying technology. Getting technology into the
2
Transl. Mater. Res. 1 (2014) 020201
Opinion
market as soon as possible is critically important, while the real game-changer continues to
brew. Licensing is an obvious strategy. The key here is that the next-generation technology must
be substantially differentiated in terms of IP and product benefits, such that a ‘Gen One’ licensee
does not effectively undermine the possibility of successfully commercializing ‘Gen Two’.
Control materials supply
An ideal licensing situation is when there are levers in addition to IP that can be incorporated
into the licensing negotiation. One lever is the control of a key ingredient(s) used in the production process. This could take the form of leveraging an established relationship with a third-party
supplier. It could also involve keeping production of a foundational material in-house, while
licensing applications and/or functionalization IP. If exclusive access to materials or control of
an upstream process can be established, an IP license could be coupled with a supply contract.
This combination creates a stronger negotiating platform capable of achieving a more lucrative
and sustainable relationship. Taking this concept further, when dealing with companies based in
countries with weak IP laws, replacing a license with a contract-based agreement may provide
a stronger legal footing to work with.
Continually innovate
You have to sympathize with a licensee who spends every day grinding it out in the global marketplace as checks go out the door. In their mind, the licensor might be doing nothing more than
reaping the fruits. No company wants to send cash out of the door, and this can motivate behaviors such as developing work-around IP, tough negotiation on terms, or even more unscrupulous
behavior such as masking real production or financial volumes. Teserra is a successful public
company with technologies widely applicable in the semiconductor and display industry. Their
IP licensing business model has been largely successful because a core team continually updates
and innovates the IP portfolio. When a licensee understands that a relationship will buy them
a sustainable advantage based on continual innovation, the willingness to pay more lucrative
royalties over the long term greatly increases.
Meaningful impact
If these tactics are used in formulating a licensing strategy as part of broader business planning
activities, licensing can have the potential for meaningful impact for a materials start-up. While
licensing may not be the hammer in the business model toolkit for a materials start-up CEO, a chisel
might be an appropriate analogy. Sometimes you need to do a little carving to create a masterpiece.
Andrew Haughian is partner at Pangaea Ventures—a venture capital (VC)
firm based in North America that invests in breakthrough advanced materials
technologies. He is a member of the editorial board of Translational Materials
Research.
3

Download Report