Patent licensing disasters by Eli Whitney

Imagine inventing a devise that put America on the map, wrecked civilizations and changed the world, and you still end up dying broke. If you are a history buff, patent expert or licensing lover grab a copy of Big Cotton I forgot how great a read it was until I went through my notes again last night.

Eli was a bright young tutor from Yale heading South via boat to try his luck teaching the children of wealthy plantation owners. In a chance meeting he bumped into Katy Greene, the widow of a revolutionary war hero. Katy saw potential in the young poor teacher and asked him to sit in on a meeting of plantation owners. They had a big problem, an old problem; nobody could solve how to increase cotton processing speed. It took one worker 16 months, full time pulling the sticky green seeds out of enough cotton to make a 500 pound bale. After hearing the problem, Eli said he would come back with an answer. That week his big idea came while watching a cat trying to catch a chicken. He noticed that the chicken got away but the cat had feathers in his paws. That image jarred Eli’s mind into looking at the problem from a completely different direction.

“Instead of picking out the sticky green seeds one by one, why not comb the cotton away from the seeds?”

10 days later Eli came back with a working prototype that was so good, the basic mechanism and motion is still used today. Katy’s fiancé proposed he build the machines and he would license them out as fast as he could make them. He sent the design to Washington DC and Thomas Jefferson, the Secretary of State at that time signed his patent registration in 1794. The government was a lot smaller back then! Every cotton farmer in America wanted one. Greed took over and they charged the farmer 1/3 of the crop plus the cost to build a machine. Why all the excitement? The gin reduced the labor on 500 pounds from 16 months to 10 days! When they eventually added steam power or horses, they could produce 500 pound bales in 4 hours!

Improved gins came on the market with better licensing terms and they remained inflexible even in the face of a new issued patent on a competing product. By 1797 Eli had built 27 gins and nobody wanted them. He had set in motion the biggest economic upheaval ever to hit America, people around him were getting fabulously wealthy and he sat frozen with indecision. In relative terms it would have made the internet bubble look normal because almost the entire South was already dependent on farming. We cannot imagine how crazy it must have been to crank that gin wheel and know all the cotton you could crank had a buyer ready to snap it up.

Eli’s landmines we want to avoid with patent licensing:

• Alienated prospective customers with exorbitant royalty rates.

• Refused to license their design to other manufacturer to meet urgent demand.

• Opened themselves up to knockoffs because of their inflexibility.

• Went broke trying to repair the damage instead of changing course.

To see how staggering this invention was. The year of the invention, America exported 500,000 pounds of cotton to England. In 1800, just seven years later, it exported a whopping 17.8 million pounds! Think of the gold and silver pouring into the south to buy all the cotton and you watch everyone else get rich on your idea.

Just remember your best ideas are in the future. Don’t ever get married to a new innovation and become inflexible in the face of reality. The higher you price the license and royalties, the harder people will try to go around the patent. The really wealthy self made business builders put together a sting of winners, not one lucky grand slam. Next time you are at the negotiating table, remember Eli.