License Your Way To Freedom


This is a review of the book “One Simple Idea” by Stephen Key.

In his early 20’s, he worked for a toy manufacturer, and was sent to China for making sure the production went smoothly. Every time a piece of toy was produced, he was thinking “I can make a better toy than this”.
He noticed that the inventor of the company’s most popular teddy bear made millions in royalties, but didn’t do any thing other than showing up to a few meetings, so Stephen set out to be like him.
He quit his job to design toys, and in the beginning he lived off of his own freelance design business.
Today he has licensed more than 20 products in different markets and enjoying good earnings in royalties. He has taught thousands of students how to create or improve a product, then sell a license to a company and enjoy the royalties. Tim Ferriss was one of his students, where Tim licensed his own product Brain Quicken.
He hits hard on the fact that you don’t have to create the next big invention since sliced bread – but that you should rather go after improving an EXISTING product. Way more simple and easy, and still lots of money are to be made.
He also makes it clear that you SHOULDN’T apply for a patent on your new idea. Because it’s an expensive way to secure intellectual rights, even before validating the idea first.
With quotes from his own dad, he describes how he as a kid was adviced, that he should find a job that:

  • doesn’t require his precense
  • doesn’t require his hands
  • have a multiplying effect.

The License industry has in US alone a value of $500 billion – which is bigger than the phone AND magazine industry combined.
For example, in 2013 Samsung paid Microsoft $1 billion i royalties.
According to Stephen Key, licensing means “to take your idea and give someone with powerful resources the privilege to use your idea for a price. In return, the user gives you a rental-check, also known as a “royalty check”, 4 times a year.”
Royalty checks can be anything from $1 thousang to $1 mio every quarter.
Once innovation from outside a company was unheard of – today it’s widely known as “open innovation”.
Companies are hungry for your ideas and doesn’t care where the innovation are coming from, as long as it’s coming to THEM.
Google search “open innovation in 2003 = 200 links (unrelated)
Google search “open innovation in 2012 = 483 mio. links (related)
US ownership of intellectual property is the largest in the world. It’s twice the size of Chinas and 4 times the size of Japans and Germanys.
Best companies to target for your ideas: Midsized companies. (because they cold become number 2 or 3 in the market with your product)
Worst target = small companies (because they don’t have capital)
You can still pitch big companies, but big companies are more prone to BUY the whole idea/company/product, and rather won’t take the risk if it’s not already proven successful.
The window of opportunity is shrinking because the life cycle of products is shorter than ever.
A basic rule of thumb:
Benefits of licensing ideas to companies:

  • avoid risk
  • save time and money – companies already have manufacturing and distribution channels set up

Success story:
Someone approached Stephen with an idea that could solve his and many other guitar-players problem; a simple screw that could make it easier to change strings (or something like that).
The idea-man have made millions of dollars of this idea and licensed it to 30 countriesl
Should you build a company or just license your idea?

  • takes all risk
  • works hard
  • wears all hats
  • hires people
  • reap all rewards or lose it all

CIO (chief innovation officer)

  • no risk
  • let others do the hard work
  • license the idea to others
  • reap rewards no matter what

Questions to ask yourself before you start licensing an idea:

  • who are my competitors?
  • How does my idea compare to existing ideas?
  • How large is the market?
  • Who are my primary customers?
  • What are my potential sales?

Before you do anything: research the market well!
Don’t try to create your idea, and then create a market for it.
Instead: create a product for the market!
Make a full market research (or buy one).
Become an expert in a sub-niche.
Read reviews – do you see any complains?
Don’ think that you are an expert in a product, just because of the fact you are using it.
When you research the market – take notes and pictures of ALL observations.
Hele idéen bag “The One Thing” er omkring hvilken der betyder mindst arbejde og har højst sandsynlighed for succes.
Hér er 4 spørgsmål du kan stille, for at afføre, om du har en “vinder”:

  • Does it share a common problem?
  • Does it have a “wow” effect?
  • Is there a larger market?
  • Does it use common production methods and materials?

Is should solve a problem in a simple and understandable way.
Validate the idea
Fx by crowdfunding.
Eskil Nordhaug made StayblCam, but wasn’t sure if other people were interested. So he launched a crowdfunding campaign in the hopes of hitting $35k. But his idea received $123k.
Later he received license requests from manufacturers from Brazil, middle east and Japan.
But remember: crowdfunding is a lot of work. And remember to always label your idea as “patent pending” when you promote it – if you don’t, you risk losing monetary rewards, if anyone infringes.
Make sure that you have percieved ownership, before you share with the world.
Is it possible?
Companies are only interested if they can (find out these before you design, prototype, apply for patent or present it for companies):

  • integrate the idea easy and quickly in their existing production line
  • use existing, or closely-related distribution channels
  • profit

The more you know about costs and manufacturing, the bigger change there is that a company wants to cooperate.
How to find the production method and price

  1. search on google, youtube, and
  2. contact a “contract manufacturer” that produces something similar
  3. get a list via an association or institute

After you found a contract manufacturer, you;

  1. file a PPA (provisional patent application)
  2. send a NDA agreement
  3. send design/drawings and ask for a price to produce it (include “patent pending” and ask for price for 10k, 100k and 1 mio pieces)

Also get quotes from Alibaba, but don’t send your exact idea. It’s too risky to send your idea overseas.
You should design for marketability, manufacturability and profitability.
To prototype or not to prototype
If you are going to make a prototype, make it as CHEAP as possible!
It definitely do NOT have to look perfect.
If a company are interested, send them (after you filed for PPA);

  • picture/video of the prototype
  • Benefit statement
  • Sell sheet
  • ask for feedback

Basically, there are 3 different types of prototypes:

  • “works like”
  • “looks like”
  • “works/looks like”

Works like”
Tom Christensen invented “Disclub” and recorded a private Youtube video where he demonstrated the idea. The prototype was very raw, but it could not be seen on the video. It doesn’t matter. The licensee could see the idea work and bought it.
Looks like”
A 3D or 3D model.
Works/looks like”
A mix. But only use this in rare cases.
Cheap ways to create prototypes

  • use existing items and mix them
  • sculpted model with fx foam score, clay, tree, metal, rubber, etc.
  • Paper or cardboard
  • silicone
  • Plastic vacuum forming
  • 3D printing
  • virtual (3d model)

Even if a company ask you for a prototype, they really rarely need it.
If it’s easy for you to send, go for it!
If not, then focus on refining and improving the idea/prototype.
You can apply for more than one PPA as you’re finishing the idea. When the idea is complete, you can collect all the PPAs to one single nonprovisional patent application.
A PPA lasts for 12 months, have the same IP (intellectual properties) as a patent. When the 12 months runs out, you can choose to let it expire, or apply to turn it into a real patent. It’s like a countdown timer.
First apply for PPA when good research is done and you’re ready to contact potential licensees.
(my question: how do I include “patent pending” on the 3D model I send to a manufacturer, if I have to wait to file for PPA?)
Keep a diary with ideas and detailed progress of your ideas.
Stephen Key didn’t get a patent on rotating labels, but after some research and more applications, he now have 15 patents on HOW the rotating labels are made – the manufacturing process.
Just because someone says “no thanks” to your idea, it doesn’t mean that others will too.
Make a list A and a list B of all potential licensees (A = top choices. B = second choices).
The best people in a company to pitch your idea to, are:

  • brand manager/director
  • Product manager/director
  • Marketing manager/director
  • Sales manager/director

…with marketing and sales being the best!
Remember… if you get a no, always ask for feedback!
Hvis en virksomhed vil have “exclusive rights” to use your idea, it’s fine. But only if they can give enough in royalties.
Royalty percents is about 5-7%. Start by asking for 7%, and then settle at 5%.
But it’s very different from product to product, industry to industry.
Your licensee can pay the patent.
Sometimes your licensee can pay an advance fee, but don’t ask for too much.
Inkludér i licens aftalen:

  • a minimum payment
  • an “improvement clause” which means that if any improvements is made to the idea, you will still be the owner
  • have audits included. So if you think something is fishy about the numbers, a CPA (certifiet public accountant) will have to look through the sales numbers. But: make sure to state that if you’re wrong about your suspicion, then YOU will pay for the CPA. On the contrary, if there IS something wrong, licensee will pay the CPA, the royalties missing and interest.
  • Use words “sales of units” instead of “sales in dollars” – fx “10,000 units” instead of “$55,000”.

The wholy 10 step process

(summing up)

  1. study the market
  2. innovate for the market
  3. validate your idea
  4. Prototype
  5. One-line benefit statement
  6. One-page sell sheet
  7. Protect your idea with a PPA
  8. Get a company to say “yes”
  9. Get a good win-win license deal
  10. Keep the ideas and profits coming!

And here’s a cool video from the author!


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