The lesser known spin-off strategy is when the original parent company breaks off to form a new company. The primary reason for this, is that companies may want to market a new product under a different name, or divert attention to R&D projects that languish due to not fitting into current strategies of the parent. Packaging the project as a standalone entity creates a focus and may potentially grow the development of the technology. This option may be suitable for technology companies that have a pipeline of IP and products. A biotechnology company for example, may spin out parts of its biotech developmental pipeline into a separate company. At Inner Maven we can assist inventors to consider the pros and cons of spinning out your IP into a separate company.

Pros

• Forming a spin-off can highlight the value of a division that has been overlooked within the parent company. Breaking off into a new company will motivate previous managers to have a greater sense of responsibility in terms of performance and provides greater clarity. Alternatively a new, highly focused CEO might be recruited to drive the company and commercialisation of the IP.
• A spin-off allows the inventor (usually a company) to retain direction of the invention and allows them to retain the ability to develop and control know-how and future IP.
• The inventor may be interested in taking on more or a partial role in the commercialisation process rather than licensing out the technology.
• The technology in question may require further development; breaking out can accelerate the speed of commercialisation, compared to retaining it as part of a large development portfolio.
• Outside parties that may not have been interested in the activities of the parent company, but are interested in the technology of the spin-off, can be brought in as equity partners.

Cons

• The company could lose the synergistic benefits of having multiple business units working together and face increased risk due to lessened diversification.
• Financial risk: The spin-off may not perform as well as expected. By breaking off, the new company will sacrifice the security of having costs covered by the parent.
• High cost: Being an independent company means the spin-off company will incur additional corporate costs associated with certain service and internal management systems which have been previously provided by the parent company. These additional costs can be quite high.
• Reduction in the economies of scale including borrowing capacity, costs of employment and general operating expenses.

Start-ups are small, newly created and in a phase of development seeking growth and entry into markets. The entire concept is considered quite risky as business outcomes are unknown and high amounts of resources and time are required by the founder. Arguably, more than any industry, medical device and biotechnology companies have the potential to have a measurable impact on healthcare, medicines and other world issues. Entrepreneurs in this field face the additional challenge of melding science with business, with high expenditure on research & development. As an entrepreneur, running your own company requires great persistence, flexibility and hard work, but the end result is the ability to create a product that may benefit the health of countless individuals, and hopefully reap financial benefits as well.

Here are the pros and cons of embarking upon a start-up:

Pros

Flexibility

One of the main reasons why inventors decide to ‘go it alone’ in their commercialisation, is the perks of flexibility and control – eg. setting up your own hours, creative control and unlimited earning potential. Entering into partnerships or joint ventures means you also need to consider the needs of the other party, which may be contradictory to your own needs.

Increased productivity in decision-making

As a sole owner, the only party that is involved in decision-making is you. No voting, collaborations or team meetings.

Uncompromised vision

As a sole proprietor, your vision is uncompromised. Having a singular vision can provide direction, in contrast to partners that may have differing views that lead to compatibility issues.

Cons

High Risk

In contrast to partnerships and joint ventures where there is a degree of risk sharing between parties involved, start-ups face a higher risk of business failure. A recent Harvard study noted that 75% of startups fail.

Failures and Setbacks

One of the unique challenges faced by biotech and medical device companies are dealing with setbacks and failures. A technology may fail in the final stages of clinical trials and adverse events and regulatory inaction can delays the commercialisation of a product. Embarking upon a start-up is not for the faint of hearted, but requires extreme persistence and commitment.

Running out of cash

A fundamental reason for start-up failure is running out of capital. The CEO or director must understand the funds available and how much capital needs to be raised to achieve certain milestones. Patenting an invention, then commercialising your idea can be expensive and full costs often aren’t known up front.

Specialist knowledge in capital raising is often crucial to getting a start-up off the ground and through the early stages; this is where Inner Maven as a trusted advisor can assist.

Joint ventures are a form of strategic alliance where a temporary partnership is formed between two or more parties, seeking to leverage shared markets, IP, knowledge and, of course, expenses and revenue. The degree of ownership is dependent on the agreement. Partnerships and joint ventures are quite similar; however the underlying difference is that partnerships may involve continuing a long-term business relationship, whereas a joint venture may be based on a single business or project. Beginning a joint venture with a business that has complementary abilities and resources can make a lot of sense and assist in the commercialisation pathway, but the pros and cons need to be considered before embarking on this strategy:

Pros

• Joint ventures agree to share profits and losses in a particular ratio. This also implies that risk and costs are spread amongst the parties
• Diversification of businesses allows companies to enter related businesses by producing new products
• Opportunity to gain access to new markets. This is of particular relevance if it is a foreign collaborator.
• Opportunity to learn new expertise and gain commercialisation and research and development capacity
• Greater access to resources including specialised staff and technology. Partners may complement one another in that one may have access to new and improved technology but lacks capital, whereas the other may have capital but does not have the technology.
• Use of existing marketing arrangements, distribution networks or advisors (ie. Patent attorneys, business consultants or grant writing specialists) is possible to save on time and resources. Increased flexibility as joint ventures have a limited life span and only serve a proportion of each partner’s business.

Cons

• Slower decision making as the objectives and management style of each partner/ inventor may differ, leading to the need to compromise
• Time and effort to find a new partner that is an organisational and cultural fit. A lot of time is needed to establish a positive relationship.
• Imbalance in the share of capital, resources, investment, etc. may create tension points in the relationship.
• Poor integration and poor co-operation may lead to the collapse of a business. Up to 60% of joint ventures end up failing.

Inner Maven can assist in defining and managing a clear path to market and in establishing the correct structures and relationships along the way.

Licensing agreements are contractual arrangements that allow a licensee to use, manufacture or sell particular assets with permission from the contractual owner. Licensing has been integral for smaller companies to gain access to resources, including specialist regulatory expertise or manufacturing and marketing capabilities. These are usually only resources that larger pharmaceutical partners or medical device companies may possess. The essential component is to be able to adequately evaluate the technology on offer, to ensure all value is captured. Here are the pros and cons of licensing agreements from the licensor’s perspective:

Pros

Revenue

The biggest advantage to a licensing agreement is the potential for the inventor to earn revenue passively, through a continuous stream of income without having to exert effort or lose ownership rights. In other words, the licensee does most of the commercialisation work to make profits and the licensor will receive a percentage of the profits, without outlaying capital to fund the venture. In addition, the licensor will not have to incur expenses related to product distribution, marketing, sales, manufacturing, design work, etc. This revenue stream may continue for many years.

Efficiency

It may be more efficient to license out new products if the firm does not have the funding capacity or commercialisation resources to take up production of the intellectual property themselves.

 Market Entry

A licensing agreement may enable a firm to enter foreign markets more quickly. There are fewer risks imposed upon the firm compared to the regulatory and financial ramifications of setting up locally. A license will also allow for products to be supplied locally when there is no opportunity to manufacture in the locality. The licensor may also learn about new customer segments and the possibility of redesigning their products to meet their needs. Overall, licensing may assist the company to commercialise its IP or enter new markets more effectively and with greater ease than on its own.

Cons

Risking Loss of the IP

Intellectual property owners assume risk when they choose to license their products. A licensing agreement may open the doors for piracy or owners may have the technology stolen or replicated in the absence of good legal representation and a strong patent strategy. Monitoring a licensee’s use of the licensed product is also costly. A good example is software piracy and its illegal distribution.

Dependency

When the licensor is licensing the technology in exchange for royalties based on sales, then the proportion of revenue earned is dependent on the performance of the licensee to make sufficient levels of sales. The licensor is also dependent upon the licensee to make quality products with its technology, to ensure that its reputation is maintained. In these instances, it may be worth negotiating a guaranteed annual minimum royalty.

Control of Technology

A negative aspect to licensing is that a company’s control over the technology is weakened. The technology has been transferred to the licensee, who is free to use the technology to their discretion.

At Inner Maven, our consultants can assist you to look at the pros and cons of your considered market strategies, to ensure your technology reaches the market in the most profitable manner. In addition we are well versed in the many factors you must incorporate into a well-developed licensing agreement.