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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
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  • Introducing a new perspective
    © Mission HQ Pty. Ltd. All Rights Reserved
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  • What justifies the price difference?
    © Mission HQ Pty. Ltd. All Rights Reserved
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    $220
    $19.95
  • A cost approach
    © Mission HQ Pty. Ltd. All Rights Reserved
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    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
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  • 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
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  • 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
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  • 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
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  • 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