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An interesting fact about personal finance startup Mint.com, which recently sold to Intuit for $170m: the account aggregation technology that powers Mint.com is licensed from a company called Yodlee.
Yodlee, which was founded in 1999, has raised over $100m in funding. While it operates its own consumer-facing personal finance website, its core business is in licensing its technology to others. Its licensees include startups similar in nature to Mint.com as well as major financial institutions like Bank of America.
Unlike Mint.com, Yodlee hasn't yet achieved a liquidity event. Largely because of that, Michael Arrington of TechCrunch has dubbed Mint.com "Yodlee's YouTube". He explains:
A lot of people at Adobe weren’t all that happy when YouTube was acquired by Google for $1.65 billion in 2006. After all, YouTube was just a pretty front end to the core Flash web video technology created by Adobe. YouTube got rich. Adobe got peanuts.
Mint, which sold to Intuit earlier this week for $170 million, is Yodlee’s YouTube. That’s because, like YouTube, the core technology behind Mint wasn’t developed in house. It was licensed from Yodlee, who got paid very little for what they provided.
Arrington goes on to state that his sources indicate Yodlee has earned around $4m in licensing fees from Mint.com over the past two years (hardly chump change) but he still suggests that Yodlee should have asked for equity in Mint.com.
To support this notion, Arrington notes that Hite Capital, which sold the mint.com domain to Mint.com, negotiated for equity that will earn Hite Capital millions in the Intuit acquisition. An apples to oranges comparison since Hite Capital was actually selling an asset, not licensing a technology.
In my opinion, Arrington is wrong in suggesting that technology licensors should ask licensees for equity and I think it raises some key issues that entrepreneurs who decide to go into the business of licensing their technology to others should consider.
Back to Adobe for a moment. While YouTube and its investors reaped billions selling a company that relied heavily on Flash, the idea that Adobe got peanuts from the YouTube acquisition is absurd. Flash and the Flash ecosystem have generated billions upon billions of dollars in revenue for Adobe. John Dowdell, an Adobe employee, disputed Arrington's claim that "a lot of people at Adobe weren’t all that happy when YouTube was acquired by Google for $1.65 billion in 2006", stating that "inside Adobe I did not see anything to substantiate this assertion". He went on:
It’s true that Adobe’s customers do get wealthy from the investment in developing the Flash Platform (which ironically deflates the “Adobe lock-in” debating point). But the success of the YouTube effort helps confirm the new opportunities available to everyone. Google’s vote-of-confidence was good news.
Which gets to the heart of the issue: if your company licenses technology, you're an enabler. Not an investor. Knowing the distinction is really important. While equity-in-lieu-of-cash is something every licensor can consider when faced with a prospective licensee that doesn't have a huge bank account, it's hardly advisable for licensors to make it a habit of asking for an ownership stake in their licensees for several reasons:
- It's a turn-off to potential customers who can afford to pay. If you're licensing a technology for, say, $1m/year and you have a potential customer ready to pay that amount in cold hard cash, asking for partial payment in equity is, frankly, likely to be seen as greedy and insulting.
- Revenue is the lifeblood of a licensing business. Without it, it's difficult to continue developing your technology and providing the support your licensees rely on. Taking equity from some customers in lieu of cash therefore creates business risk that is in the final analysis shouldered by licensees who do pay cash.
- Equity deals are complicated. While it's easy in hindsight to look at Mint.com and say "Yodlee should have taken equity", the truth of the matter is that equity deals can be time-consuming and costly to negotiate and for all the time and money invested in making them happen, most will amount to nothing.
- Equity deals can create friction. With an equity stake in a licensee's business, a licensor takes on a whole host of shareholder-related concerns that could make the relationship far more contentious. After all, the licensor's interests in eventually getting paid could be counter to the company's interests in how it builds and runs its business. Additionally, equity-based licensing arrangements potentially create perceived conflicts of interest that can drive away other licensees (and potential licensees).
- Equity deals can erode value. Your technology has value that can be measured in dollars and cents. But when you trade it for something with a subjective value (i.e. illiquid stock in a startup), you send the message to other licensees and potential licensees that your technology's value is negotiable.
While there's a valid debate to be had over the pros and cons of licensing as a business model (as opposed to doing something consumer-oriented), if you decide to go into the business of licensing your technology, stick to what works: charge a fair price, invest in continued development, offer fantastic support and smile when your licensees succeed. Leave investing to venture capitalists and Monday-morning quarterbacking of your licensing deals to bloggers.