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Technology Commercialization6 min read

Technology Commercialization: When to Manufacture, When to License

The manufacture-vs-license decision can make or break a technology company. A framework for making the right choice based on capital, demand, and vision.

You've spent years developing it. The patent is filed. The prototype works. Investors are asking the question you've been avoiding:

"Are you going to manufacture this yourself or license it?"

It's not a simple question. The wrong answer costs millions. And most innovators make the decision based on instinct, not analysis.

The Three Paths to Market

Every technology company faces the same commercialization decision tree:

Path 1: Self-Manufacturing

You build the product. You own the entire value chain from R&D to customer delivery. You capture the full margin.

Path 2: Contract Manufacturing

You design the product. A third party manufactures it. You own the customer relationship but outsource production.

Path 3: Licensing

You license the IP. Someone else manufactures, markets, and sells. You collect royalties.

Each path has a different risk profile, capital requirement, and revenue potential. The key is matching the path to your situation.

Path 1: Self-Manufacturing

When It Makes Sense

You have strong demand validation.

You've talked to 50+ potential buyers. You have pilot commitments or signed LOIs. You know the market will absorb 10,000+ units annually.

Your margins justify the capital investment.

Gross margins are 60-75%. Net margins are 30-40% after COGS. You'll generate $5M+ in annual revenue within 24 months.

IP protection requires manufacturing control.

Your technology has trade secrets that can't be protected through patents alone.

The Capital Requirements

Total First-Year Investment: $1.2M-4.5M
  • Tooling & Equipment: $500K-2M
  • Working Capital: $300K-1M
  • Operations: $400K-1.5M annually

The Risk Profile

High Upfront Capital: You're committing $1-5M before you ship your first unit. Long Ramp-Up Time: 12-18 months from decision to scale production. Margin Upside: If everything works, gross margins are 60-75%.

Path 2: Contract Manufacturing

When It Makes Sense

You have validated demand but not at scale.

You've closed 5-10 pilot programs. But you don't have certainty on 10,000+ unit annual volume yet.

Capital is constrained.

You don't have $2M+ for manufacturing equipment. You'd rather test the market with $200K-500K.

Speed to market matters.

Contract manufacturers have existing capacity. You can go from prototype to production in 3-6 months instead of 12-18 months.

The Capital Requirements

Total First-Year Investment: $150K-800K (80-90% less than self-manufacturing)

The Tradeoffs

Lower Margins: Gross margin drops from 65-75% to 35-50%. Less Control: You don't control production schedules or quality processes. Flexibility: If demand underperforms, you've risked $200K instead of $2M.

Path 3: Licensing

When It Makes Sense

You don't have capital for manufacturing.

You're a research lab, university spinout, or inventor without $200K+ for commercialization.

The market is large but fragmented.

Your technology applies to 10 different industries. No single manufacturer can address all of them.

Your core competency is R&D, not commercialization.

You're great at inventing. You don't want to run a product company.

The Licensing Orchestration Model

Most inventors approach licensing wrong. They find one interested company, negotiate terms, and accept whatever's offered.

The result? Licensing fees that are 60-80% below market value.

The Better Approach: Create a Competitive Bidding Environment
  • Identify 8-10 Potential Licensees across global markets
  • Engage Simultaneously with progressive disclosure
  • Deep Dive Analysis into top 3-5 candidates
  • Orchestrate Simultaneous Test Programs to create competitive pressure
  • Activate Demand-Side Pull by exciting end customers
  • Negotiate from Strength with multiple interested parties
  • Real Example: A client with patented magnetic bearing technology used this approach:
    • Engaged 10 global manufacturers
    • Narrowed to 3 top candidates
    • Structured territorial licenses across 3 continents
    • Total licensing fees: 350% higher than single-company approach

    The Decision Framework

    Question 1: Do You Have Validated Demand at Scale?

    If YES (50+ customer commitments): Consider self-manufacturing If MAYBE (8-15 pilot commitments): Consider contract manufacturing If NO (concept stage): Consider licensing

    Question 2: How Much Capital Do You Have?

    If $2M+ available: Self-manufacturing is viable If $200K-800K available: Contract manufacturing fits If <$200K available: Licensing is likely the only path

    Question 3: What's Your Long-Term Vision?

    Build a product company: Self-manufacturing or contract manufacturing Stay focused on R&D: Licensing Test the market first: Contract manufacturing

    The Hybrid Approach

    Many successful companies start with contract manufacturing and transition to self-manufacturing as demand scales.

    Years 1-2: Contract Manufacturing
    • Test demand with $200K-500K investment
    • Validate product-market fit
    • Build customer base and recurring revenue
    Years 3-4: Transition to Self-Manufacturing
    • Use revenue from Years 1-2 to fund equipment investment
    • Bring manufacturing in-house to capture full margin

    The Bottom Line

    There's no universal right answer. The right commercialization path depends on:

    • How much capital you have
    • How confident you are in demand
    • What your long-term vision is

    But here's what's universally true:

    Validate demand before you commit to manufacturing.

    Whether you choose self-manufacturing, contract manufacturing, or licensing, make sure you've talked to real buyers. Make sure you know pricing thresholds, integration requirements, and procurement cycles.

    Because the worst commercialization decision isn't choosing the wrong path.

    It's committing to any path without validating that customers will actually buy what you're building.

    Topics
    technology commercializationcontract manufacturinglicensing strategyIP monetization

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