Firmex Harvesting Intangible Assets


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Andrew J. Sherman shares insights and expertise gleaned from his work with some of the world's leading companies who have capitalized on intellectual assets such as patents, trademarks, customer information, software codes, databases, business models, home-grown processes, and employee expertise. Featuring instructive examples from his book on how companies large or small can implement IP-driven growth and licensing strategies, foster a culture of innovation, turn R&D into revenue, and much more.

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Firmex Harvesting Intangible Assets

  1. 1. @Firmex, #FirmexMCHarvesting Intangible AssetsUncover Hidden Revenue in Your Company’s Intellectual Property Andrew J. Sherman, Esq. Firmex Webinar Series Jones Day 51 Louisiana Avenue, N.W. May 22nd, 2012 Washington, D.C. 20001-2113 1:00p.m. to 2:00p.m. 202-879-3686©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 1
  2. 2. About Firmex Firmex is focused on providing the best virtual data room solution for managing corporate transactions and financial complianceJoelLessem Who uses Firmex?CEOFirmex • Firmex community includes over 200,00 users worldwide • Conducted over 10,000 deals in the last 18 months Why offer an M&A Master Class? • As part of our value-added service, we believe it is important to offer educational resources to our expanding community ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 2
  3. 3. Andrew J. Sherman Mr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,700 lawyers worldwide. He is the author of 23 books on business growth, capital formation and the leveraging of intellectual property. His twenty-second (22rd) book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your Company’s Intellectual Property, (AMACOM) was published in October of 2011. Other recent titles include the best-selling Mergers and Acquisitions from A to Z, third edition was published by AMACOM in 2010. He is also the author of the 2nd edition of the Due Diligence Strategies and Tactics, which was published in the Spring of 2010. His Twenty-third book Essays on Governance, will be published June of 2012. He has appeared as a guest and a commentator on all of the major television networks as well as CNBC’s “Power Lunch,” CNN’s “Day Watch,” CNNfn’s “For Entrepreneurs Only,” USA Network’s “First Business,” and Bloomberg’s “Small Business Weekly.” He has appeared on numerous regional and local television broadcasts as well as national and local radio interviews for National Public Radio (NPR), Business News Network (BNN), Bloomberg Radio, AP Radio Network, Voice of America, Talk America Radio Network and the USA Radio Network, as a resource on capital formation, entrepreneurship and technology development. He has served as a top-rated Adjunct Professor in the Masters of Business Administration (MBA) programs at the University of Maryland for 23 years and at Georgetown University for 15 years where he teaches courses on business growth strategy. He has served as General Counsel to the Young Entrepreneurs’ Organization (YEO) since 1987. In 2003, Fortune magazine named him one of the Top Ten Minds in Entrepreneurship and in February of 2006, Inc. magazine named him one of the all-time champions and supporters of entrepreneurship.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 3
  4. 4. Introduction: Challenges, Opportunities, Myths and Call to Action©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 4
  5. 5. The Risks and Challenges of the Intangible Asset Class• The markets have trouble understanding that which they can’t touch or feel – yet theparadigm shift continues at a rapid pace driven by technology and social media• Investors have not figured out yet how to properly value intangibles, banks have not yetfigured out how to lend against intangibles as collateral and the accounting professionhas not yet figured out how to treat these assets properly on financial statements (Lev)(The Extinction of Goodwill)• Companies of all sizes and types, universities, governments, NGO’s, trade associationsdon’t know how to properly manage these assets nor do they have systems andstrategies in place to drive stakeholder value, new business models, markets and profitcenters (a crisis of strategy, systems, governance and leadership) (AOL)• So … our economy is increasingly being driven by a vehicle that nobody knows how toproperly drive and which has no clear path forward….©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 5
  6. 6. The Opportunities• The increasing strategic importance of intangible assets in our society asdrivers of shareholders value• Trillions of dollars worth of intangible assets already exist and are waiting tobe harvested to foster innovation, economic growth, productivity and jobcreation on a global basis (but some will rot on the vine or spoil if not harvestedon a timely basis) (the Dangerous Assumptions of Complacency and RITA)• Even a modest effort can create tangible and measurable results (“P&G’s $3billion sideline” WSJ March 20, 2012)©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 6
  7. 7. The Opportunities (Cont’d)• Intangible assets are becoming the premier driver of business strategyand M&A (Google® buys $12.7b of Motorola® patents)• The capital efficiency of most intangible asset harvesting strategies andthe access to the credit/equity markets for companies of all sizes and typesas the financial markets better understand the value and strategicimportance of this asset class will be a key driver of growth and profitablemargins• Uptick in patent litigation and trolls (over 2,800 patent infringementlawsuits in 2010 – doubled in 10+ years)©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 7
  8. 8. The Myths• It’s not just about money (it’s about attitude/culture/passion/ timemanagement) (The Tao of Steve Jobs)• It’s not just about patents (brand equity, systems, know-how, processes, channels, relationships, databases, bestpractices, culture, governance, etc. are all critical strategic intangible assetsthat drive shareholder value)• It’s not just about break through innovation (most intangible assets offerpathways to incremental opportunity)• It’s not just about the private sector (look at the AUTM ratios and upsidepotential, governments, trade associations, etc.)• It’s not just about economic reward (the advancement of society, culture, evenour ability to co-exist relies on a human race that wants to innovate for psychicreward, peer recognition, career accomplishment, legacy, etc.)WebEx CLE Verification Code: 051512©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 8
  9. 9. Some Insights From One of the World’s Greatest Innovators “Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.” -- Steve Jobs RIP – 10/5/11 1. Do What You Love (Passion is everything) 2. Put A Dent In The Universe (How will you define your legacy?) 3.Kick Start Your Brain (What is the definition of insanity?) 4. Sell Dreams. Not Products (Understand what your customers truly want) 5.Say No To 1000 Things (Discipline. Rigor. Focus. Screens and Filters. Prioritize. VC Model.) 6.Create Insanely Great Customer Experiences and Master the Message (Define and build your brand) 7.Inspire Evangelists (No man is an island)©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 9
  10. 10. Key Economic Trends and Intangible Assets©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 10
  11. 11. The Shift From a Tangible Asset-Driven Economy to an Intangible-Driven Market is Well Under Way Intangibles information gap Intangible book value Tangible book value Source: Ocean Tomo©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 11
  12. 12. The Shift Is Taking Place In Multiple Industries Intangible Value as a % of Total Market Capitalization by Sector 100% 90% 80% 70% 60% 1975 50% 2005 40% 30% 20% 10% 0% als s ner gy teri rial ry p le s ar e ials vices gy ties E a d ust tion a r Sta lth C in anc er olo U tili M In cr e me He a F sS chn er Dis o ns u a tion n Te s um C nic atio n mu orm Co co m Inf T ele©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 12
  13. 13. Source: Ocean Tomo©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 13
  14. 14. Intangibles +/- 70% in M&A …another version of the intangibles information gap Tangible, 30% Goodwill, 47% Ernst & Young: Acquisition Accounting – What’s Next for You? (global data from 2007). Intangible, 23%©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 14
  15. 15. Here’s What’s Really Happening Percent of NFB output Intangible capital.16 • Computerized information.14 – Software Tangible – Databases.12 • Innovative property.10 – R&D, broadly defined Intangible.08 – Copyrights and licenses.06 Intangible vs. tangible investment rate – Designs.04 rises over time in the United States • Economic competencies – Marketing and branding.02 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 – Strategic firm practices Source: Corrado and Hulten (2010). Last point plotted is 2007. 15©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 15
  16. 16. This Investment Created a New (albeit invisible*) Kind of Capital Total Corporate Value Financial Tangible Intangible Capital Capital Capital *not on the balance sheet 16©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 16
  17. 17. It’s about knowledge assets©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 17
  18. 18. Understanding Intangibles©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 18
  19. 19. Intangible Assets • The drivers of shareholder value that we can’t touch or feel • Assets that transcend the four buckets of intellectual property law • Assets that transcend the definition of goodwill and traditional balance sheet accounting • Assets that all companies of all sizes and all industries have access to, but rarely fully engageWebEx CLE Verification Code: 051512©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 19
  20. 20. Types of Intangible Assets & Intellectual Property Cultural Assets Human Assets • Leadership and Governance • Investment in the advancement and • Organizational Norms and Habits interchangeability of workforce • Trust and Integrity (career advancement) • Mission, Vision and Values • Skill expertise of workforce • Communication and Goal-setting (competence and experience) • Accountability • Special • Transparency certifications, awards, security • Reward and Compensation Systems clearances, etc. • Decision-making Systems • Functionality and performance of teams • Commitment, motivation, attitude and loyalty • Problem solving skills • Creativity©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 20
  21. 21. Types of Intangible Assets & Intellectual Property (Cont’d) Relationship Assets Practices and Routines Assets • Corporate reputation and external/internal • Know-how and show-how (codified in brand image perception manuals and informal procedures and • Status, strength and influence over channel tacit rules on workplans) partner relationships • Systems and processes (VAR’s, dealers, distributors, wholesalers, f • Information transmission, flow and ranchisees) management • Vendor relationships • Knowledge, management and capture of • Customer relationships best practices • Investor/banking relationships • Training systems • JV and Alliance Partners • Sales, Marketing and Branding Strategies • Customer Relationship Management Systems©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 21
  22. 22. Branches of Intellectual Property Law IP Trademarks & Trade Patents Copyrights Brands Secrets Trade Dress©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 22
  23. 23. Evolving Strategic Views Towards Intellectual Assets (IA)Traditional Enhance the company’s competitive advantage and strengthen its ability to defendView its competitive position in the marketplace (IA as a barrier to entry and as a shield to protect market share) (reactive and passive approach)Current Should not be used merely for defensive purposes but should also be viewed as anView important asset and profit center which is capable of being monetized and generating value through licensing fees and other channels and strategies, provided that time and resources are devoted to uncovering these opportunities (especially dormant IA assets which do not currently serve at the heart of the companys current core competencies or focus) (proactive/systemic approach)Future Premiere drivers of business strategy within the company and encompass humanView capital, structural/organizational capital and customer/relationship capital. IAM systems need to be built and continuously improved to ensure that IA assets are used to protect and defend the companys strategic position in domestic and global markets and to create new markets, distribution channels and revenue streams in a capital efficient manner to maximize shareholder value (core focus/strategic approach)©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 23
  24. 24. Why are so many companies typically sobad at leveraging their intellectual capital? • Lack the time (too busy) • Lack the desire (too lazy) • Lack the skills/expertise/systems (too ignorant or disorganized) • Lack the vision (too focused on their niche) • Lack the resources (too capital-constrained) • Lack the leadership (too thin at the top) • Lack the market (too focused on technical excellence) • Lack the demand (clients do not require innovation or value if in the delivery services)©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 24
  25. 25. Intellectual Asset Management (IAM) (The IP Discovery, Management and Mining Process)• IAM systems facilitate collaboration and help break down silos in communications regarding new product development, the harvesting of intellectual assets and provides training to employees at all levels on the importance of the protection and leveraging of intellectual property.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 25
  26. 26. Reviewing Current IAM Practices• What is the real commitment to R&D and innovation at all levelswithin the company? Are strategies and budgets focused only on “homeruns” or “singles and doubles?”• What IAM systems, procedures and teams are in place now?• How and when were these systems developed? Are they obsolete orno longer consistent with the company’s current strengths, focus orgrowth objectives?• Who is responsible/accountable for managing these systems withinthe company? Who is empowered to make decisions as to whichprojects will move forward and which will not?©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 26
  27. 27. Reviewing Current IAM Practices (Cont’d) • What are the ideas/technology harvesting, filters and procedures for innovation decisional analysis (as to whether to move forward/budget allocation/timetable, etc.) currently in place? How does information about creative new ideas flow within your company? Where does it start? Where does it end? • Is the strategy and the process for harvesting and leveraging intellectual assets more reactive or proactive? • What are the real or perceived internal (politics, red tape, turfmanship, budgeting processes, organizational structure) and/or external (market conditions, state of the art moving quickly, competitors strategies, etc.) silos, barriers and hurdles that stand in the way of better IAM practices and procedures? • What can be done to remove or reduce those barriers?©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 27
  28. 28. IAM System Goals • Catalogue and manage the inventory and status of the company’s proprietary and intangible assets • Use of technology (software, intranet, telecommunications, IM, etc.) to encourage and support communication and data-sharing about new intra-company and industry-wide innovation and intellectual property • Internal processes, filters (including resource allocation) and decision-making systems for intellectual asset development and harvesting • Foster innovation which strengthens customer relationships and builds shareholder value • Open-ended brainstorming on new applications and value-added improvements to existing products, services and technologies©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 28
  29. 29. IAM System Goals (Cont’d) • Roles and accountability for creating, implementing and enforcing IAM system standards (internally and externally) • Management of strategic interdependent relationships • Determining how IP assets will be owned (holding companies, tax issues, etc.) • Analysis and implementation of strategies to leverage and monetize these assets©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 29
  30. 30. IAM System Goals (Cont’d) • Defending what you own via IP litigation and enforcement (including licensing) • Defending claims of infringement by others • Identifying opportunities for “licensing in” • Periodic “pruning” of dormant IP assets • Viability/Staleness/Obsolescence • Too far away from current core focus • (Sale/Licensing/JV’s/Donation) • Reducing costs of R&D/Patent maintenance and filing costs©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 30
  31. 31. Intellectual Assets Drive Growth Strategies and Generate Revenues Protectable Possible Market Opportunities Intellectual Property and Revenue Sources • Spin-off new companies • Patents • Joint ventures, strategic • Trademarks partnerships & alliances • Copyrights • Technology & software licensing • Trade dress & trade secrets • Outright sale of new technology • Distribution channels • Co-branding • Show-how & know-how • Franchising • Databases & customer info. • Enter new markets • Software & proprietary algorithms • Develop new products • Customer & partnerships • Brand-extension licensing • Proprietary processes & systems • Technology transfer • Knowledge & technical workers • Cooperatives, consortiums, • Exclusive licenses/access to federations technology • Training & consulting services • International expansion • Government contracts©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 31
  32. 32. Questions & Answers©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 32
  33. 33. Book Winners!• –• –• –• –• – Congratulations! We will be following up with you shortly to get your mailing address.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 33
  34. 34. Thank You Our next webinar is Tuesday 19th June, 1pm Eastern Sourcing New Deals in an Increasingly Networked World It used to be that the fate of private companies, and the entrepreneurs and teams who built them, rose and fell based on their “connections.” Did the founder know the right people? Did the right buyers know they even existed? Were they in the right place at the right time? That undemocratic and completely unscientific way of sourcing, managing and executing financial transactions has led to tens of thousands of companies suffering from missed opportunities and poor outcomes. New online platforms are changing the way in which deals are sourced. AxialMarket is founded on the conviction that combining the leverage and distribution of intelligent online networks with large real-time data sets can transform the way in which private companies connect with capital and opportunity. Know how to catch the right waves and the right deals with the right techniques. Presented by Peter Lehram, CEO of AxialMarket. Today’s Recorded Webinar & Slides will be available in a follow-up email shortly.©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 34