It is better to have a prototype if possible for two reasons. One it helps give you proof of concept and two it gives the licensing company something tangible they can hold and do their own testing. I have to add that you can still get a product licensed without a prototype, especially if it is a concept that can be easily understood through a sell sheet or CAD drawings.
Make sure if you do have a prototype made that you do not send it to a company that has not instructed you to do so. Unsolictied materials can get lost, tossed out, misplaced etc. Can you afford to have another one built each time one is not returned? Making a video of your prototype working is another method of proof of concept that can be easily emailed or linked to on a private passworded page of your website only they have access too.