Selling an Idea? How to Sell Your Idea to a Company
Do you have a great idea for an invention but no money, talent, or time for entrepreneurship? Learn here how to sell your idea to a company.
Selling an Idea? Do you have a great product idea that can be brought to market but lack the talent or time for entrepreneurship? Or perhaps you're a skilled inventor and entrepreneur, but prefer to spend your time developing ideas rather than starting and growing a business? Instead of launching a startup yourself, there's another approach: you can sell your idea to a company.
That sounds logical in itself: it's much easier to sell the idea to a company that has the knowledge and resources to successfully bring it to market than to struggle with it yourself for a while, right? Unfortunately, it's not that simple. An idea resides in your mind and you can't just pull it out to sell to someone! You need to do a bit more for it. An idea is abstract and needs to be transformed into a tangible product or service before it can be sold.
An idea is the spark of creativity, an abstract concept that originates in the mind. An invention, on the other hand, transforms that idea into tangible reality. It's the step from mere thinking to actually creating something new and useful. Ideas can emerge anywhere, but inventions often require technical development and practical application.
This process often requires time, resources, (a lot of) money, and effort. You need to convince a company to get excited about your idea and willing to put in the effort and work with it. That means something needs to happen before the idea can be sold. It needs to be made as tangible as possible. If you want to sell an idea, you need to prove that it's possible to actually realize the idea. Create a working model, a drawing, a description, a prototype, and whatever else you can think of. In short: turn your idea into an invention! You can go as far as you think is necessary. Even a makeshift prototype that's a bit rough around the edges but does what it needs to do might be enough.
By the way: There are two ways to make money with an idea: you can try to sell or license the idea to a company. That's not quite the same. In the first case, the idea is no longer yours afterward, and you can't do anything else with it, and in the latter case, the idea remains yours but you essentially lend it out in exchange for compensation. In both cases, it means you're selling your idea to a company that further develops it and takes care of all the business tasks to bring the product to market and sell it.
Just like there are logical steps to start your own business, there's also a smart way to approach selling or licensing your invention. In short, selling an idea is challenging, but it's definitely possible if you take the right steps, make the right preparations, and approach the right target audience. It often requires a combination of creativity, business acumen, and perseverance. It's not easy to achieve, but how to go about it is outlined below in a series of steps.
How to begin: Gather Information
Google is your friend! Information is easily accessible in this era, and the more information you have, the better off you'll be. Before even considering approaching potential companies to sell your idea, make sure you've gathered sufficient information on the following issues:
The Market: Is there a market for your idea? This means gathering as much feedback as possible about your own idea. Focus group testing, even among friends and family, is a good way to do that. Focus group testing is a research method where a group of people come together to discuss their perceptions and opinions on a certain topic. This method is often used in marketing and product development to gain insight into how consumers view a certain development. This may sound complicated, but you can of course also do it with friends, family, or, if you're still studying, fellow students.
In addition, you also need to gather data on similar and competing products, for example, information on what's already on the market, what's being sold, and who's producing it. It's important to collect data on similar and competing products to gain insight into the market. This includes analyzing existing products, their features, pricing, and market players. This information is important to convince a company to buy your idea later on.
Do some legal homework. Try to find out if the invention already exists (see elsewhere on this site for how to approach this), if the invention might still be patentable, and (also very important) if it can be produced without infringing on other existing patents. What other rules does it need to comply with? The more information you can gather about regulatory issues or necessary legal steps, the better.
Also, look into production possibilities. How would something like this be made in a factory? Is it, for example, possible that the production of your invention requires unique materials or unusual manufacturing techniques? That makes it a lot more difficult for a potential buyer of the idea to produce the invention.
The Next Step: Prepare a Professional Presentation
Once you've gathered all relevant information, you need to present it to potential buyers of the idea. Together with your most effective tool - a three-dimensional prototype model - you need to develop a simple, so-called teaser. This is a document to convey all the information you've gathered.
Your teaser should be a one or two-page document that clearly states the following:
- The problem, challenge, or need the product addresses
- The features and benefits of the product
- The market for your product
- The legal status of your invention (i.e., are you the sole owner, has a patent been applied for, copyright or trademark info)
You should also draft an introductory letter to accompany the teaser, introducing yourself, explaining why you're contacting the potential licensee, and establishing a time when you plan to follow up.
Set Your Goals
You've gathered and prepared your information. What now? Your next step is to determine the most suitable contacts for this great new business opportunity. As a first step, I recommend making a list of at least 30 potential targets. As with any type of sales, the more prospects, the better. It's a numbers game, and most companies will naturally reject you for one reason or another. What you can do is create a more targeted list that will yield more effective results.
So how can you identify companies that are a good fit for you? If it's a consumer item, it's as simple as a day of shopping in town. Go to a store where you expect your product to be sold and note down the names of manufacturers making similar products. You might already know many of these companies from your earlier market research.
Another way to identify potential manufacturers is by identifying industry associations. Visit their websites and look for member lists. Furthermore, you can check websites of fairs and conferences where companies that might be interested in your product exhibit. At major trade fairs, you can often search by keywords. So there are various ways you can search online for potential partners who might be interested in your idea.
Qualify Your Targets
Once you've generated your list of about 30 companies, you'll want to prioritize or "qualify" them based on which ones best fit you and your product. There are a number of factors to consider when qualifying potential licensees:
Company size: Large companies are easy to recognize and generally have great distribution networks. However, small companies might derive more benefit from your invention and often offer better prospects. Small companies generally have fewer personnel for product development "in house" and are less burdened by administrative and legal red tape and multiple layers of bureaucracy, making them easier to approach and negotiate with.
Geography: Although you don't have to limit yourself to local companies, they do offer advantages. With companies nearby, you can leverage all the contacts you have locally and arrange personal meetings more easily (which is always valuable).
Similar product line: The better your invention aligns with a company's existing product line (as long as it doesn't directly compete), the more logical it is for them to get involved with it, especially if it gives them a product that competes with a rival company.
Access to a decision-maker: The easier you can identify the decision-maker and reach out to them directly, the more efficient contacting a potential licensor will be. (Note: if after several calls you can't determine who the right contact person is - or contact him/her - you'd better focus on other targets.)
Manufacturer's reputation: Find out the track record of the company for working with inventors and ask for personal references if possible.
Bingo: Close the Deal
You're now armed with information, presentation material, and a list of popular prospects. How do you know you're getting a good deal? Understand that there are no fixed rules or conditions when it comes to negotiating a license agreement. The perfect agreement is one that gives both you and the manufacturer exactly what you want. Therefore, the terms are entirely negotiable, and the outcomes can vary greatly.
However, keep the following points in mind as you negotiate your deal. First and foremost, start with realistic expectations. In other words, don't expect a million-euro deal. Secondly, aim for enthusiasm. Ideally for you, as the inventor, is to receive as much upfront cash, as high a royalty, and as high an annual minimum payment as possible. Of course, the manufacturer aims for less risk, which means a lower upfront payment, lower minimum payment requirements, and as low a royalty rate as possible. But what do these terms mean exactly and how can you get the best deal for your idea?
Upfront payment. This is the money the licensee pays the licensor upfront, before development or sales begin, for the transfer of rights. This can be a direct payment but usually takes the form of an advance on (future) royalties. The amount of the upfront payment varies. However, it's not uncommon for an inventor to request an upfront payment that covers the costs of the patent application. Another way to arrive at an acceptable amount is by relating your payment to the expected sales expectations for the first year.
Royalties. These are payments to the licensor based on a percentage of the product sales of the licensee. So if you earn a 2% royalty, it means you receive 2% of, for example, the wholesale price of each unit sold. The typical royalty range usually runs from 2% to 5%. Again, the further developed or the more proven the invention is, the less risk for the manufacturer and the greater the chance you'll receive an upfront payment or higher royalties. From my perspective, the royalty is the most important part of the agreement because if the market responds to the product, the manufacturer will do well, and the inventor can earn a good income.
Annual minimum. This is the contractual requirement that the licensee pay the licensor a minimum amount of royalties, regardless of the actual royalties owed from sales. For me, the purpose of annual minimums is to ensure that the manufacturer dedicates sufficient effort and resources to promoting the product. Therefore, I believe annual minimums are most important in the early years of the agreement - when the product is launched - to ensure that the licensee prioritizes this item sufficiently in deploying marketing efforts.
Exclusivity. Most manufacturers will want exclusive rights to distribute the product worldwide. However, this is subject to negotiation. Depending on the motives of each party, the agreement could divide the markets in many ways. Mostly used in this respect are geographical boundaries (countries or continents).
It's important to realize that these four components are interrelated: meaning that the more you get in one area, the more you may have to concede in another area. As with any negotiation, both parties will likely make concessions. Determine which of these components best suit your short and long-term needs and negotiate from there. There are plenty of books offering negotiation techniques. The most salient tip I can give is to employ a "non-adversarial" approach, aiming to create terms that are a win-win for both parties. Good luck!