Valuation & Marketing of Intellectual Property Joseph S. Holmes, MS, MBA President / CEO Acuity Edge, Inc. Adjunct Professor Duke University [email protected]

Valuation & Marketingof

Intellectual Property

Joseph S. Holmes, MS, MBA

President / CEOAcuity Edge, Inc.

Adjunct ProfessorDuke University

[email protected]

Federal Laboratory Consortium Mid-Atlantic Region Annual Meeting

Harbourtowne ResortSt. Michaels, MD

October 22-24, 2007

© Copyright 2007, Acuity Edge, Inc. All rights reservedhttp://www.acuityedge.com

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ValuationHow much is it worth?

Connecting IP with Market Needs

IP NeedsAssessmentHow do I formulate strategy?

MarketingHow do I match sol’n & need?


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How Often Does IP Reach Commercial Success?

“Less than 1% of patents make money” (http://www.perronepatents.com/other.htm)

“The more generous of estimates suggest that two to three percent of patents make money” (http://www.library.ohiou.edu/govdocs/patents.html)

“1 in 10 companies succeeds at sustained growth” (Christensen and Raynor, Innovator’s Solution, page 19, note 1)


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“Only 1.5% of NASA patents were used outside the Agency from 1959 to 1979 compared to less than 5% commercialization rate of the 30,000 patents held by the US federal government as a whole” (Jolly, Commercializing New Technologies, introduction)

3,000 Raw Ideas = 1 Commercial Success! (Stevens, Greg A., Burley, James, Research Technology Management, 08956308, May/Jun 97, Vol. 40, Issue 3)

Commercialization is a tough game to play

How Often Does IP Reach Commercial Success?


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Assessment, Valuation, & Marketing are Key

Source: Innovation EDGETM – Turning Visions Into Value by Joseph Holmes (Business Week, August 22, 2005)

Evolve: evolve the idea into something that benefits stakeholders and the customer

Drive: drive the idea forward using the 4 Es

Gate: subject idea to gates of development & evaluation

Extract: extract value for stakeholders and customers

At the heart of most innovation frameworks


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IP MARKETING


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ExecutionPreparation

IP Marketing – Direct Approach

Evaluation& Strategy

Targets

Pitch

Check

DistributeNavigateInteractQualify

Transition

Value Extraction


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Preparation Strategy: What’s the game plan? Targets: Who are our targets? Pitch: What is our message? Check: Is everybody on the same page?

6-12 weeks to ready the folio for active marketing


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Execution Distribution: Send collateral to targets Navigation: Find the right contact(s) Interaction: Facilitate Q&A Qualification: Determine if target will turn to lead Transition: Move into value-extraction phase

6-12 weeks to determine quality and quantity of leads


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Think in Terms of Product-Market Matrix

Products

Markets

P-M EVALUATION

• Customer (Profile?)• Need (Fit?)• Size (Large?)• Trends (Growing?)• Maturity (Readiness?)• Share (Penetration?)• Revenue (Lucrative?)


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IP VALUATION


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IPV Considerations

Types of IP

MethodsOfIPV

Types ofValue

WhoNeeds

IPV

IPValuation

(IPV)


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Types of Value

Fair value Fair market value Book value Market value Tax value Replacement value Loan value Investment value Use value

Value is in the eye of the beholder


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Typical Intellectual Asset Categories

GOODWILL

GoodwillGoing Concern

TECHNOLOGY

PatentsKnow-howCopyrightsTrade Secrets

TrademarksTrade NamesLogosConcepts, Design

MARKETING

LEGAL RIGHTS

ContractsPermits/LicensesNon CompeteLeasehold Interests

• No physical substance• Dependence upon

excess earnings• Last to appear; first to

disappear

COMMON ATTRIBUTES

CustomerDistributorSupplierWorkforce

RELATIONSHIPS


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Methods of Valuation

Valuation Approaches

Definition Common Uses Challenges

Cost Cost of replacement or reproduction

Insurance claims & disputes

Cost is a poor estimate of value

Market Value of comparable deals

Property value & stock market

Finding close comparables and adjustment methods

Income Present value of future cash flows (can include option methods)

Business valuation & academic circles

Certainty surrounding cash flow levels, timing, and risk-time discounting

Each method has unique pros, cons, & variations


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Challenges of Valuation

What methods? Certainty of data/future? How do capabilities differ from products? What discount rate? Value to whom about what?

How do we manage valuation challenges?


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Unique Tech Transfer Challenges

Early stage technology Utility may be unproven A capability, not a product Field of use licensing Applicability may change with time Paper vs “paper + support” The “Champion Factor”

Challenges exist, but try we must!


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Value Benefactors, Elements, & Influencing Forces

Valuation is a function of many factors.


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Essence of Discounted Cash Flow Analysis

Cash Flows$ Level

Years of IncomeCosts

Revenues

Value to owner = the value of each projected cash flow discounted to today’s dollars (aka discounted cash flow….commonly accepted valuation methodology). Using this method, one can value anything that can be monetized into cash flows. For example, $100 projected to be received 3 years from now at a 10% discount rate is worth $100/(1+10%)^3 = $75.13 (i.e., $75.13 invested today at 10% compounded interest would yield $100 in 3 years).


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EPV = Pn * FCFn

(1+dn)n

n = 1

L

EPV = Pn * FCFn

(1+dn)n

n = 1

L

Symbol Factor Comments

EPV Expected present value The value of the set of cash flows in today’s dollars (i.e., accounting for the time value of money & expected value concepts)

L Length of IP life Life of a US patent is now 20 years from date of application

n Year cash flow occurs Cash flows are assumed to occur at an annual basis (could be positive/income or negative/expense)

Pn Probability that cash flow at year n occurs

Likelihood that a given cash flow will happen (fraction between 0 and 1)

FCFn Free cash flow that occurs at year n

See finance texts for proper definition (could utilize net income as a rough figure for back-of-the-envelope calculation)

dn Discount rate at year n Interest rate you would expect from an investment of comparable risk-reward profile


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Framework for TT Valuation: ChecklistEconomic Societal Strategic

Payment - $ - trigger - schedule

Environment - prevention - remediation

Licensor advantage - competitive - brand

Royalty - % - basis - schedule

Human life - saves - physical - mental

Licensee advantage - competitive - brand

Equity - % - liquidity - dilution

Job creation - # - pay - tax impact

National advantage - competitive - brand

Other - tax credit

Other - life quality

Other - political


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VALUATION EXAMPLES


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Example: Improved Fire Detector

New smoke detector for the home 2x sensitivity as previous models at same cost Assume smoke detector market is 10M units per year

at $10 per detector ($100M annual market) Assume 10% net profit on sales and licensee receives

2% royalty on net sales Assume 10% market penetration per year for 5 years,

then patent expires Studies show that an increased sensitivity of 2x could

lead to 10% fewer fires, which kill 100 people per year in the US

(fictitious scenario – for example only)


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ECONOMIC BENEFIT

Profits/Sales 10%

Royalties/Sales 2%

Discount Rate 20%

1 2 3 4 5

Sales to Licensee ($) 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000

Profits to Licensee ($) 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000

Royalties to Licensor ($) 200,000 00,000 600,000 800,000 1,000,000

PV of Profits to Licensee ($) 833,333 1,388,889 1,736,111 1,929,012 2,009,388

PV of Royalties to Licensor ($) 166,667 277,778 347,222 385,802 401,878

PV of Profits to Licensee TOTAL ($) 7,896,734

PV of Royalties to Licensor TOTAL ($) 1,579,347

VALUE TO LICENSEE (ECONOMIC) $8 million

VALUE TO LICENSOR (ECONOMIC) $1.6 million


Years

Impressive, but…


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SOCIETAL BENEFIT

% fewer fires if tech adopted 10%

% annual adoption rate 10%

est value of a life ($) 3,000,000

1 2 3 4 5

Annual fire deaths without new tech 100 100 100 100 100

Drop in deaths if 100% adoption 10 10 10 10 10

Annual deaths assuming penetration 1 2 3 4 5

Value of lives saved ($) 3,000,000 6,000,000 9,000,000 12,000,000 15,000,000

PV of lives saved ($) 2,500,000 4,166,667 5,208,333 5,787,037 6,028,164

PV of lives saved TOTAL ($) 23,690,201

VALUE (SOCIETAL) $24 million


Years

Societal benefits influence negotiation?


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Summary Open innovation trends further validate technology

transfer

Keys to extracting value from IP include early-stage assessment, valuation, and marketing

Many patents never make money and a fluid financial market is not in place

Direct marketing is advised when selling/licensing IP (preparation & execution phases)


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Summary (cont’d) Every cell of a product-market matrix deserves its

own marketing plan & value estimation

Tech transfer requires methodology which is simple, precise/accurate, flexible, and universal

Use a simplified income method built upon a discounted cash flow technique for ballpark calculations (hold model constant and focus on gathering data and assumptions)


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Summary (cont’d) Consider accounting for three types of value:

economic, societal, and strategic (albeit economic is always key driver for valuation)

At the end of the day, the market decides value (valuation simply aids your negotiation and influences your perception of fairness)


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Joseph S. Holmes, MS, MBA

President / CEOAcuity Edge, Inc.http://www.acuityedge.com

Adjunct ProfessorMEM ProgramDuke Universityhttp://memp.pratt.duke.edu

(919) [email protected]

Innovation management & business strategy consulting

Documents

Valuation & Marketing of Intellectual Property Joseph S. Holmes, MS, MBA President / CEO Acuity Edge, Inc. Adjunct Professor Duke University [email protected]