When Your Capital Strategy Kills Your Commercial Value

How “licensing-only” businesses can get caught in the angel/venture minefield.

Let’s walk through the math that every angel investor does.

This company is raising money at a 15 million dollar post-money valuation. For us as early-stage investors to justify that investment, we expect a 10x return. That means this company needs to exit at 150 million dollars. If it doesn’t, we’re better off putting our money elsewhere. It’s that simple.

So the obvious question is: why would someone pay 150 million dollars for this license?

That’s where things start to break down.

What Is the Acquirer Buying?

Our entrepreneur is not selling a product. They don’t have customers. They don’t have revenue — and they never will.

Their entire business model is built around licensing a patent.

If we stick with the investment math: we need a 150 million dollar exit to get our 10x return. So we have to ask, does this license have 150 million dollars of value to an acquiring company?

The answer is: probably not.

Especially for long-lead products, such as pharmaceuticals, medical devices requiring extensive clinical trials, aircraft/spacecraft, or even automotive improvements. Technologies such as plant seeds, for example, might take a dozen growing seasons (or more) before their technology is ready for market.

Why? Because that license has an expiration date. The technology is already disclosed in the patent. If the acquirer just slows down the negotiation, even for a couple years, the patent will expire.

Then the acquiring company gets the technology for free.

Patents Are Not Infringed Early in Their Lifespan. By Definition.

For most “licensing-only” businesses, patents are a lottery ticket. The bet is that the market will see the same thing you see, and they will infringe. Once the infringement begins, it takes several years for the revenue to grow to a point where enforcement makes sense.

For our intrepid entrepreneur who wants to strike a licensing deal well before infringement, the patent might have potential value but not realized value.

By definition, a patent that just issued cannot have infringement, so there is no “stick” that can be used to extract a license from a recalcitrant licensee. There is no leverage, so it is very difficult to get a license.

This is why it typically takes 10-15 years before a patent generates realized value from infringement. As an investment for angel/venture capital, this is far, far too long.

What I Wish I Told the Entrepreneur at the Beginning

Looking back, here’s what I wish I could have told the entrepreneur before he ever took outside funding:

Maybe angel investing and venture capital just isn’t the right fit for this kind of business.

This is a license-only model with no revenue and no customers. And the lack of revenue and customers is a serious issue — not just for valuation, but for risk.

Revenue is proof. It tells a licensee that someone has paid for the product. That the market sees value. That the invention actually solves a real problem. Without that, the licensee has to take on all the risk: the financial risk of development, the time and manpower required to scale it, and the reputational risk if it doesn’t perform in the field.

Unless the entrepreneur is willing to build the revenue-generating business that proves the market wants the business, a license does not command much value.

What Should the Founder Have Done Instead?

Here’s the play I wish he ran:

• Take the patent, the test data, and the proof of concept
• Walk into the acquiring company
• Ask for a job
• Offer the entire package — patent, data, and know-how — as part of an acqui-hire

This is a textbook acqui-hire scenario: the technology is promising, but it needs the infrastructure, regulatory support, and distribution channels that only a big player can provide. So the cleanest path is for the acquirer to buy the IP, hire the inventor, and move forward in-house.

What would that look like financially?

For a single patent family with no customers and no revenue, most patents trade in the $100,000 to $200,000 dollar range. Maybe $500,000 dollars on a good day. That’s not a windfall, but it’s real money. Combine that with a multi-year contract at a solid salary, and it’s a strong outcome.

That’s the win: cash in your work, get a career upgrade, and see your idea come to life at scale.

The Moment It Went Wrong

But that’s not the path he chose.

He took angel money. Then more money. Each round came with a valuation. And each valuation set a benchmark for the future — an exit price that had to be met.

Now, with a 14 million dollar post-money valuation, he has to deliver a 140 million dollar exit just to meet investor expectations. But the business is still just a license deal. There are no customers. No revenue. No contracts. Just a slow-moving tech transfer model in a long-lead industry.

The capital strategy was built for a rocket ship. But the business model is a rowboat. And unfortunately, that mismatch doomed the company from the start.