Valuing Intellectual Property

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
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
5

About Mission HQ Pty. Ltd.
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
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
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.
9

What is value? – Whiteboard Discussion
What are some of the characteristics of Value?
Value is Dynamic
10

Is Value equal to the price someone is willing to pay
Discussion
11

Is Value is equal to the cost of creating an item
Discussion
12

Summary - Characteristics of value
Value is not
Consistent
Stable
Easily predictable
Value is
Dependent on other factors
Context is critical
Dynamic
13

Introducing a new perspective
14

What justifies the price difference?
15
$220
$19.95

A cost approach
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
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
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
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
28

What constitutes Intellectual Property?
29

-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
31

-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
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The IP Valuation Pyramid
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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
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
36
P Characteristics & Valuation

Foundation Layer – Description (2)
37
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.
38

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
39

The 9 Element business model Matrix
40

The business model matrix
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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
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Defining the value proposition
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Value can occur in any of the following elements

Mapping out your value proposition
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-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

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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.

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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
52

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
53

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
54

4. Activities
The activities outline the most important things that the organisation will do.
Production
Problem Solving
Platform management
License management
55

5. Costs
Outlines the primary areas of cost under the business model
Fixed Costs
Variable Costs
Economies of scale
Key cost rachet points
56

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.
57

7. Channel
What channels to market with the model employ?
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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
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
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
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
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
63

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
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
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67

Methodology Layer
There are 4 primary valuation methods:
Transactional
Cost
Income
Binomial/Option
68

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
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
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
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
72

Choosing the appropriate methodology
73

The solution
Deliverables include:
Valuation document
Scenario analysis
Financial model
Statement of Value
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
75

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Valuing Intellectual Property

by Marcus Tarrant on May 23, 2010

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Valuing Intellectual Property — Presentation Transcript