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Valuing Intellectual Property
 

Valuing Intellectual Property

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This presentation was prepared for the 2010 Australian Innovation festival by Mission HQ. It provides a framework that we utilise in consulting engagements for the valuation of technology based ...

This presentation was prepared for the 2010 Australian Innovation festival by Mission HQ. It provides a framework that we utilise in consulting engagements for the valuation of technology based intellectual property.

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    Valuing Intellectual Property Valuing Intellectual Property Presentation Transcript

    • Valuing Technology Based Intellectual Property
      An Innovation Catalyst™ Seminar
      Prepared and Presented by
      Marcus Tarrant
      Managing Director
      Mission HQ Pty. Ltd. ATF the Innovate Trust
    • Contact Details
      Marcus Tarrant
      Managing Director
      Mission HQ Pty. Ltd. ATF the Innovate Trust
      Marcus.tarrant@missionhq.com.au
      +61 3 9005 9710
      www.missionhq.com.au
      Guest Presenter
      Matthew Bowler
      IP Valuation Pty. Ltd.
      Matthew.bowler@ipvaluaton.com.au
      www.ipvaluation.com.au
      © Mission HQ Pty. Ltd. All Rights Reserved
      2
    • Copyright ©2010 Mission HQ.
      The content, format, structure and communication technique utilised in this document are the intellectual property of Mission HQ Pty. Ltd.
      This document is strictly classified as “Commercial in Confidence” and intended only for recipients expressly authorised by Mission HQ. Any modification or distribution under altered expression, by any means, in its entirety or in parts, to any person without written approval from Mission HQ is expressly prohibited.
      Natural Persons or bodies corporate may not copy, retransmit, distribute, publish or otherwise transfer any copyrighted material to third parties or contractors without the express permission of Mission HQ.
      This document is intended to reflect MISSION HQ’s high-level overview of the IP Valuation Process. It does not constitute formal professional advice or a recommendation to potential licensors, tax advisors, inventors or other third parties as to a course of action in respect of the processes addressed, and should not be relied on as such. All care is taken in the preparation of this document but MISSION HQ bears no responsibility as to the contents of this document and disclaims any liability with respect to its use or misuse.
      Intellectual Property & Disclaimer
    • Seminar Agenda
      © Mission HQ Pty. Ltd. All Rights Reserved
      4
    • Some Quotes
      “IP Valuation isn’t rocket science, its much more difficult.”
      Unknown
      “Valuation is in many ways simply the quantification of business strategy, strategic planning frameworks and execution capability”
      Marcus Tarrant
      © Mission HQ Pty. Ltd. All Rights Reserved
      5
    • About Mission HQ Pty. Ltd.
      © Mission HQ Pty. Ltd. All Rights Reserved
      6
      Some recent past clients of Mission HQ and the team:
    • Mission HQ staff track record in IP Valuation
      For litigation purposes (Software Technology)
      Established foundation valuation for Arbitration
      For M&A activity (Mining Technology)
      Movement of IP from entity in administration
      For IP warchest (Telecommunications)
      International IP transaction facilitated
      For Investment Purposes (Clean Energy)
      $50m investment by Aust ASX co in UK Aim listed entity
      For Tax Purposes (Clean Energy)
      Manage transfer pricing impacts of shifting IP to overseas entity
      For project selection (Optical Communications)
      $1.5m in additional funding provided to accelerate development
      For Grants applications (Materials)
      Successful grant application
      For IP Assertion Programmes (Biotech)
      Enabled investment into Assertion programmes
      © Mission HQ Pty. Ltd. All Rights Reserved
      7
    • How can we help?
      Running IP surfacing workshops
      Running workshops to structure the creation of alternate business models for valuation purposes
      Building valuation financial models
      Advising on or supporting your valuation process
      Conducting complete IP valuations
      Facilitating IP transactions
      © Mission HQ Pty. Ltd. All Rights Reserved
      8
    • Top 6 Valuation Mistakes
      1 – Thinking that value is a well-defined and well-understood term.
      2 – the value of an intangible is equal to the price someone is willing to pay.
      3 – value is equal to the cost of creating an item.
      4 – there should be only one accepted method for valuing intangibles.
      5 – patents cannot be valued credibly because each one is unique.
      6 – The value of a company’s intangibles is the difference between its market value and the value of its tangible assets.
      © Mission HQ Pty. Ltd. All Rights Reserved
      9
    • What is value? – Whiteboard Discussion
      What are some of the characteristics of Value?
      Value is Dynamic
      © Mission HQ Pty. Ltd. All Rights Reserved
      10
    • Is Value equal to the price someone is willing to pay
      Discussion
      © Mission HQ Pty. Ltd. All Rights Reserved
      11
    • Is Value is equal to the cost of creating an item
      Discussion
      © Mission HQ Pty. Ltd. All Rights Reserved
      12
    • Summary - Characteristics of value
      Value is not
      Consistent
      Stable
      Easily predictable
      Value is
      Dependent on other factors
      Context is critical
      Dynamic
      © Mission HQ Pty. Ltd. All Rights Reserved
      13
    • Introducing a new perspective
      © Mission HQ Pty. Ltd. All Rights Reserved
      14
    • What justifies the price difference?
      © Mission HQ Pty. Ltd. All Rights Reserved
      15
      $220
      $19.95
    • A cost approach
      © Mission HQ Pty. Ltd. All Rights Reserved
      16
      Tangible Cost
      • Leather
      • Plastics
      • Production costs
      • Marketing costs
      • Labour
      • Logistics and Distribution
      Tangible Cost
      • Canvas
      • Plastics
      • Production costs
      • Marketing costs
      • Labour
      • Logistics and Distribution
    • An intangible asset approach
      © Mission HQ Pty. Ltd. All Rights Reserved
      17
      Nike Trademark
      Nike Air Patents No 12345345
      No 347654321
      Distribution model
      Trade Secret on sole bonding
      Production technique for bonded plastics
      Patent: 9897134
      Design registration on sole
    • Intangible asset valuation
      © Mission HQ Pty. Ltd. All Rights Reserved
      18
      $ Valuation
      Production technique for bonded plastics
      Patent: 9897134
    • Intangible assets provide a new way of looking at your organisation
      Intangible Assets another dimension
    • Lets start by thinking broadly
      © Mission HQ Pty. Ltd. All Rights Reserved
      20
    • what are intangible assets?
      Intangible Assets
      intellectual assets (IA)
      intellectual
      property (IP)
      intellectual capital (IC)
      patented technologies
      trade marks
      designs
      copyright
      databases
      trade secrets
      key skills
      know-how
      processes
      market data
      information
      un-recorded inventions
      data
      business relationships
      licenses
      branding
      reputation
      human resources
      What are intangible assets?
    • Skandia Concept of Intangible Assets
      Market Value
      Financial Capital
      value of all physical and monetary assets
      Intellectual Capital
      Human Capital
      ‘thinking’
      • competence (knowledge and skills)
      • attitude (motivation, behaviour, conduct)
      • intellectual agility (innovation, imitation, adaptation)
      Structural Capital
      ‘non-thinking’
      Organisational Capital
      • infrastructure
      • processes
      • culture
      Customer (Relationship) Capital
      customers, suppliers, shareholders,
      alliance partners, other stakeholders
      Innovation Capital
      renewal and development value
      Process Capital
      Intellectual Property
      Intangible Assets
    • Adam and Oleksak Concept of Intellectual Capital
      Market Value
      Intellectual Capital
      Financial Capital
      Human
      Capital
      Structural Capital
      Relationship Capital
      Business Model
      Management
      Intellectual Property
      Network
      Employees
      Processes
      Brand
      Customers
    • Human Capital
      This indicates tacit knowledge, skills, abilities and experience embedded in individuals within an organization.
      intellectual agility for adaptation, innovation and cross-fertilisation.
    • Structural Capital
      knowledge and rules embedded within organizational routines, including
      mechanisms and structures of the organization,
      assets linked to methodologies,
      technologies and processes,
      licenses,
      patents,
      trademarks,
      research and development strength,
      architectural competencies which enable a firm to integrate component competencies in new and flexible ways
    • Relational Capital
      This involves every existing business network linking an organisation to partners (distributors, suppliers and alliance associates)
      at higher and lower regions of its value stream;
      corporate image and perceptible reputation;
      building blocks of customer base,
      customer loyalty,
      market connectivity.
    • Business Model
      This consists of competitive ability, extent of market control, knack for business development and rationality of strategy.
      Covered in further detail later in this presentation.
    • Aspects of Valuation
      © Mission HQ Pty. Ltd. All Rights Reserved
      28
    • What constitutes Intellectual Property?
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • -30-
      Intellectual Property Foundations – what is IP?
      Intellectual property rights are the legal rights which result from creations of the mind (such as inventions, literary and artistic works, and symbols, names, images, and designs used in commerce).
      IP rights can be broadly categorised into two groups: IP rights which are registerableand those which are not.
    • Forms of IP
      Copyright
      applies to original works or art, literature, music, films broadcasts and computer programs
      Patents
      apply to any device, substance method or process which is new, inventive and useful
      Plant Breeders Rights
      applies to registered plant varieties
      Confidential information
      applies to any information that is demonstrably kept confidential
      Registered Designs
      applies to features of shape, configuration, pattern or ornamentation which gives a product a unique appearance
      Circuit Layout Rights
      apply to layout designs for integrated circuits and computer chips
      Trademarks
      apply to a word, phrases, letter, number sound smell shape, logo or picture that distinguishes good and services from another
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • -32-
      Intellectual Property Foundations
      Patents
      A patent is a right granted for any device, substance, method or process, which is new, inventive and useful.
      Patents do not protect artistic creations, mathematical models, plans, schemes or other purely mental processes.
      A patent gives the owner the exclusive right to prevent others from exploiting the invention the subject of the patent.
      The term of an Australian standard patent is 20 years.
    • Conducting an IP Valuation
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • The IP Valuation Pyramid
      © Mission HQ Pty. Ltd. All Rights Reserved
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      Solution Layer
      Methodology Layer
      Profile Layer
      Foundation Layer
    • Foundation Layer - Purpose
      Why are we valuing the asset?
      Helps to set the goals and objectives for the valuation
      © Mission HQ Pty. Ltd. All Rights Reserved
      35
    • Foundation Layer – Description (1)
      What is the asset?
      Form of intellectual asset(s)
      Inter-relationship between intellectual assets
      Remaining asset life
      Strength of protection assessment
      © Mission HQ Pty. Ltd. All Rights Reserved
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      P Characteristics & Valuation
    • Foundation Layer – Description (2)
      © Mission HQ Pty. Ltd. All Rights Reserved
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      P Characteristics & Valuation
    • Foundation Layer – Premise (1)
      How will the asset be used?
      This is often the most complex component of establishing the valuation foundations
      Highest and Best Use Criteria
      Alternative Premises of Value
      Value in continued use, as part of a going-concern business enterprise
      Value in place, but not in current use in the production of income
      Value in exchange, as part of an orderly disposition
      Value in exchange, as part of a forced liquidation (fire sale)
      Requires development of a business model to better understand how the technology will be exploited and what revenues may be attributable.
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • Foundation Layer – Premise (2)
      Not to just value the technology on the current business model.
      We look at any potential business models that the client is free to pursue given IP encumbrances
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • The 9 Element business model Matrix
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • The business model matrix
      © Mission HQ Pty. Ltd. All Rights Reserved
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      Value Proposition – What are you offering?
      Capabilities/Resources – What skills and capacity do you require?
      Partnership – Who do you need to work with?
      Activities – What will you do?
      Costs – What are your significant costs likely to be?
      Relationship – What formal and informal relationships are required
      Channel – What are our channels to market?
      Revenues – What will our customers pay for?
      Customers – Who are our customers?
    • 1. The Value Proposition
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • Defining the value proposition
      -43-
      Value can occur in any of the following elements
    • Mapping out your value proposition
      -44-
    • -45-
      Evaluation Process
      Simplify a customer’s evaluation process
      Example: ISELECT
    • -46-
      Value Co-Creation
      Through various technological advances the integration and participation of the customer in the value creation process is increasingly possible.
      Together with the knowledge and networks of customers additional value can be created and facilitated.
      Examples: Ebay & Amazon
    • -47-
      Purchasing Process
      Customers highly value an efficient, simple and convenient purchase process.Example: Creative Mobile Technologies back-seat swipe and entertainment for Taxi Cabs
    • -48-
      Set-Up/Installation
      In some cases set-up or installation is necessary. The simplification of this process is of enormous value to the customer.
      Example: Dick Smith: Mobile Techxphert Services
    • -49-
      Use/Operation
      In many cases most of the value in a value proposition comes from the use or operation of an actual product or service. However, to differentiate themselves companies try to create value beyond a simple product or service.
      Salesforceis carefully creating additional value by offering continuous updating "behind the scenes" and providing easy access to complementary products by third party vendors.
    • -50-
      Maintenance & aftersales support
      Value is often created during the maintenance and after-sales phase. This can be either by offering high quality service or by offering a value proposition that minimizes the need for maintenance & after-sales.
      Example: The attractiveness of salesforce.com’s value proposition essentially comes from the fact that the hosted software model (application service provider - ASP) minimizes the need of software maintenance by the customer.
    • -51-
      Ending and value transfer
      In many cases once a customer does not need a product or service anymore he has to terminate the service or dispose of the product.Example: BMW Recycling Programme
    • 2. Capabilities/Resources
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • 2. Capabilities/Resources
      What physical assets does our business model require?
      Factory
      Machinery
      Etc.
      Intellectual Assets
      Trademarks (licensed or owned)
      Patents
      Processes
      Systems
      Human Resources
      Skills
      Team structures
      Financial
      Access to finance
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • 3. Partnerships
      Describes the network of suppliers and partners that will make the business model work
      Joint Ventures
      Strategic Alliances
      License agreements
      Service agreements
      Outsourcing arrangements
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • 4. Activities
      The activities outline the most important things that the organisation will do.
      Production
      Problem Solving
      Platform management
      License management
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • 5. Costs
      Outlines the primary areas of cost under the business model
      Fixed Costs
      Variable Costs
      Economies of scale
      Key cost rachet points
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • 6. Relationships
      What relationships other than partnerships may be required.
      Particularly relevant in web 2.0 companies, where a customer has data vested with the company.
      © Mission HQ Pty. Ltd. All Rights Reserved
      57
    • 7. Channel
      What channels to market with the model employ?
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • 8. Revenue
      What element of our value proposition will our customers actually pay for?
      Asset Sales
      Usage fees
      Subscription
      Advertising revenue
      Renting or leasing
      Licensing
      Financing
      © Mission HQ Pty. Ltd. All Rights Reserved
      59
    • 9. Customers
      The different groups of people or organisation that the organisation hopes to reach and serve.
      Segmenting requires:
      Distinct groups and value segments
      © Mission HQ Pty. Ltd. All Rights Reserved
      60
    • Foundation Layer – Value Standard (1)
      Fair Market Value
      Fair Value
      Market Value
      Investment Value
      Collateral Value
      Arm's-Length Standard
      Other Standards of Value
      © Mission HQ Pty. Ltd. All Rights Reserved
      61
    • Foundation Layer – Value Standard (2)
      Preferred standard is fair market value
      Who will be the assumed buyer of the asset?
      Represents how value is tied back to the valuation purpose.
      Fair market value is the most common standard adopted in both legal and accounting frameworks
      Accounting standard on Fair Market Value FASB 157
      © Mission HQ Pty. Ltd. All Rights Reserved
      62
    • Profile Layer – Legal Profile
      Legal opportunities dictating the scope and limitations of the asset.
      Commercialisation agreements
      License agreements
      Asset control
      Encumbrances
      Legal scope of protection
      Breadth of claims
      Geographical coverage
      Market coverage
      Scope for monopolistic recourse
      IP landscape/Freedom To Operate
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • Profile Layer – Business Profile
      Business issues dictating the scope and limitations of the asset.
      Refers to the specific characteristics of the commercialising entity
      Surrounding intellectual assets and intellectual capital that will work to support or detract from the core asset value
      Capacity to bundle with other intellectual assets
      Capacity to get the technology to market through existing relationships and processes
      Product support and complementary technologies
      Porter’s 5 forces model provides a useful framework for assessing the impact of the business profile on valuation
      © Mission HQ Pty. Ltd. All Rights Reserved
      64
    • Profile Layer – Financial Profile (1)
      Financial issues dictating the scope and limitations of the asset.
      Projected revenues, costs and capital requirements associated with commercialising the asset
      Estimated time to commercialise the asset
      Estimated cost of non-infringing alternatives
      Cost of capital associated with the asset (Discount Rate)
      Financial capacity to commercialise
      Requires the construction of a financial model
      © Mission HQ Pty. Ltd. All Rights Reserved
      65
    • Profile Layer – Financial Profile (2)
      © Mission HQ Pty. Ltd. All Rights Reserved
      66
    • Profile Layer – Financial Profile (3)
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • Methodology Layer
      There are 4 primary valuation methods:
      Transactional
      Cost
      Income
      Binomial/Option
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • Methodology Layer - Transactional
      Represents a recent price paid for similar intangible assets under similar circumstances
      Review recent, relevant transaction information
      Listed entities are the best
      Proprietary transactional databases
      License transaction journals and information
      Transaction data can never be ignored as part of a valuation exercise, it must be review and its relevance to your valuation either accepted or denied.
      Typically involves two steps, screening and adjustment
      © Mission HQ Pty. Ltd. All Rights Reserved
      69
    • Methodology Layer - Cost
      Assumes that the current replacement cost to develop is a good proxy for the value of the asset
      Look at the cost to design around a patent or patent family
      A particularly useful approach when legal protection is weak, ie. How much would it cost a potential licensee to re-create or work around
      This method should not be confused with Historical cost or accounting cost
      This method is generally not used for assets that have been granted a monopoly
      © Mission HQ Pty. Ltd. All Rights Reserved
      70
    • Methodology Layer - Income
      Values the asset on a best estimate of its ability to generate future cash flows
      Has 3 primary components
      Economic Life (i.e.. Patent life)
      Projected Cashflows
      Discount rate
      DCF (Discounted Cashflow) is a foundation of the income method
      Other analytical factors should influence your discount rate.
      A terminal value, beyond the economic life of the asset may be applicable (e.g.. Panadol)
      Must cater for both direct and indirect cost and income
      Requires detailed financial modelling by month and year
      Generally the most applicable when valuing technology
      © Mission HQ Pty. Ltd. All Rights Reserved
      71
    • Methodology Layer - Binomial/Options
      Takes into account future, contingent events
      Methods were originally developed for pricing of stock options
      real options,
      Assumes that value increases as the level of uncertainty decreases
      Most useful for highly capital intensive activity with a high degree of uncertainty
      binomial options
      Otherwise known as decision tree analysis
      The impact of alternate pathways is explored and modelled.
      Montecarlo simulations.
      Models a low probability of pay off across a large number of potential iterations
      © Mission HQ Pty. Ltd. All Rights Reserved
      72
    • Choosing the appropriate methodology
      © Mission HQ Pty. Ltd. All Rights Reserved
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    • The solution
      Deliverables include:
      Valuation document
      Scenario analysis
      Financial model
      Statement of Value
      © Mission HQ Pty. Ltd. All Rights Reserved
      74
    • How can we help?
      Running IP surfacing workshops
      Running workshops to structure the creation of alternate business models for valuation purposes
      Building valuation financial models
      Advising on or supporting your valuation process
      Conducting complete IP valuations
      Facilitating IP transactions
      Thank you for your attendance
      © Mission HQ Pty. Ltd. All Rights Reserved
      75