If the key fits

The secret to successfully monetising R&D.

Every business starts out small. Whether or not yours fails, stabilises, grows or becomes the ultimate market disruptor lies entirely on your ability to create and leverage your ideas, innovations and assets.

If the goal is growth and market disruption, it’s important to be aware that your success is likely to depend on your intangible assets, as these are the key drivers of company value today. Intangible assets include your brand, data, relationships, confidential information and trade secrets, systems and processes, designs, software, patents and trademarks, which all work together to help companies build a competitive advantage.

One of the reasons small businesses become large businesses, is that they understand how to create, leverage and protect their intangible assets. However, there are many errors small businesses make when developing and commercialising new assets in the research and development (R&D) process, which can cause a business to drown in debt rather than soar to success.

Think critically about R&D

When it comes to R&D, merely having a great idea isn’t enough. In fact, sometimes truly great products and inventions end up failing because the right due diligence wasn’t done at the outset, or the wrong business strategy was employed when leveraging the asset.

Predicting whether an idea will be a success or failure ultimately boils down to two things. First, understanding the opportunity size, which is the amount of money that can be made from your idea; and second, understanding the options available to make money from your idea. It is not enough to just come up with something your competitors haven’t thought of yet – success will be dependent on what you do with your idea and how you can leverage it to drive business growth.

“A big part of monetising R&D is figuring out a solution to someone else’s problem.”

When it comes to opportunity size, a big part of monetising R&D is figuring out a solution to someone else’s problem and then working out the right strategy to bring it to market.

Many small businesses make the mistake of being focused on deployment, which involves turning an idea into a product (or service) that is then manufactured, marketed and distributed. While deployment is definitely an option, for a small business with innovative ideas but limited capital or market access, the option to sell or license your assets should also be considered.

Some of the highest margin industries in the world such as content generation, software, data and design are based on business models that involve the licence or sale of intangible assets rather than deployment. These businesses are also more likely to weather market disruption as they can typically evolve and adapt faster than businesses that are tied to heavy, tangible assets.

To determine the right strategy for your business, it is important to look at whether the assets you create through R&D are more valuable in your hands or in someone else’s.

Unlocking value through R&D

A good way to visualise this is to think about your assets as a key. This key might open several doors within your own business, but there is the potential that your key also works in someone else’s lock, opening a door that is highly valuable for them. If this is the case, then ironically the assets you’ve created could potentially be more valuable to someone else than you and a sale or licencing agreement may provide a more lucrative path to take.

For small businesses, if your “key” solves an issue for someone else, then the value of your asset is likely to bear little relationship to the economic value that your business is currently generating. This is because you will be able to leverage your asset into an entirely new market at a vastly different scale by licencing or selling to a larger third party who has access to that at-scale market.

To work out the options available and which strategy will prove most beneficial, it is worthwhile taking the time before getting started to question the assets that will be created through R&D; whether the assets are aligned to the business; the cost of development; the problem your development is solving; the risks of bringing it into market; how it will be protected; and who it is of most value to.

Addressing these will help you understand whether to invest your time and funds in R&D in the first place, as well as helping to provide a more measured view of how to utilise the intangible assets created and which business model will provide the best return on investment (ROI).

When working through this process it is also important to look at the likely timeframes required to see a ROI under each strategy and consider whether you can maintain cash flow while on this path, as well as being able to access the capital needed to implement your plans. In this regard it’s worth noting that sale and licence frequently generate returns faster than the path to building the physical distribution required for deployment – but deployment can also pay larger dividends in the longer term.

Protecting your assets

Once you’ve established that it is in fact a good idea to commit to R&D, it is then important to ensure you have the right strategy in place to protect the assets you develop. While many businesses spend lots of time doing R&D on the wrong things, the bigger problem is that when they do generate valuable assets through the R&D process, they forget to protect them.

This goes beyond considering legal mechanisms such as patents and trademarks. Instead it includes things like identifying which assets within your business are truly valuable; preventing confidential information from leaking; making sure you can assert ownership of the assets you develop; and ensuring you aren’t infringing on someone else’s brand or intellectual property rights, while at the same time also establishing the rights to your own assets and protecting them from being infringed.

If you can’t figure out how to protect the assets you generate through R&D, then you are effectively donating them to the public and making your business worse off in the process.

The key to success

Ultimately, for any small business it is important to distinguish between movement and progress. This is why it is important to begin any R&D process by undertaking proper due diligence to determine the size of the market opportunity, the likely value of the assets you will create, your ability to protect these assets, and whether you will be infringing on anyone else’s rights if you proceed with your R&D.

Understanding the answers to these questions will help reduce the likelihood of funds being sunk into the development of an asset that won’t provide a good ROI and will increase the likelihood of your R&D being successful.

This article first appeared in issue 33 of the Inside Small Business quarterly magazine