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Licensing vs Direct Sales: Which is Right for Your Business?
Hard-tech startups need to choose a business model early
When I built my first startup long ago, we invented a technology to make applications run faster over the internet. But we were a small team of engineers and coders and the idea of manufacturing and selling network infrastructure to compete with giants like Cisco looked daunting.
So we thought that if we could license the technology to Cisco and all its competitors, that would be so much easier. We could focus on building the technology and everyone could include it in their routers.
When we approached potential partners, most of them were excited. But when we discussed license fees, we discovered they weren’t willing to pay more than it would cost to create similar functionality themselves. And worse, they didn’t understand how tricky it was to get right, so they underestimated the cost of building the functionality by a factor of three.
It didn’t take long to realize licensing wouldn’t make sense. So we bit the bullet and transformed ourselves into a network equipment manufacturer. It wasn’t easy, required a lot of money, and it took forever to convince skeptical customers that we had a better solution. But in the end, we were successful and the company was acquired by a…
