Software Licensing Featured Articles

Is it Better to Start a Biz or License the Idea?

By Mae Kowalke, TMCnet Contributor

It starts with an idea. But what software developers do after they come up with the next killer app can make a huge difference. Does the maker start a business to sell the idea, or do they license the technology to an existing firm for faster time to market and a better chance at industry-wide adoption?

“Ultimately it comes down to whether the entrepreneur just wants to get the product to market to make money or they want to be the captain of the ship and control what happens to the product,” Brad Nickel noted in a recent Main St. article on the topic. After being a successful tech entrepreneur himself, Nickel now serves as managing partner of Captiva Companies, a digital agency that helps startups and established companies take tech to market.

As Mark Zuckerberg (News - Alert) showed when he resisted the urge to sell Facebook in its early days, running a business around a software idea can be far more lucrative in the long run than licensing software or selling out to another business.

That’s because there’s more control when running a business, so developers can better steer their killer app to success.

By starting a business, however, there’s much more chance of failure. And even if the business is a success, it will take longer to reap the rewards. Starting a business requires both fundraising and good management, and there’s always the chance that another firm will come in and poach the idea or try to undercut the product. This makes starting a business around an idea a lot less certain than licensing the idea.

The downside of licensing the software is that it usually will only bring in an advance and royalties between 5 percent and 20 percent of net sales, according to the Main St. article. There also is a loss of control to some degree.

But the upsides of licensing also are significant. The idea immediately has a champion in the company licensing the idea, and it can be steered to market dominance because the firm already has distribution networks, experienced management and the capital to make the idea successful in the market.

Time to market also should be a factor when considering whether to run a business around an idea or license it out. While building a business around the software idea will take time, licensing typically can enable the idea to reach market in a matter of months. If the idea is one that others will catch onto relatively quickly, licensing makes a lot of sense.

Ultimately, there is no one right answer for every software idea. Whether to run a business or license depends heavily on the idea, the market and the founders who are making the decision.