Finance for non financial managers ppt by paramesh a
Moving Early Stage Technologies
1. Phyl Speser, J.D., Ph.D.
Foresight Science & Technology Incorporated
www.ForesightST. Com
Phyl.Speser@ForesightST.com ~ 401.273.4844, ext.35
LES Strategic Alliance Committee 2009 Seminar Series
Foresight Science & Technology
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2. Deals Have to Pencil
Process Contribution to Total Project Cost
(excl. Investments)
0.4
0.35
0.3
The substantive process
drives the cost
Cost in % of Total
0.25
0.2
0.15
calculation
0.1
0.05
0
Log & Disp
Financing
Design
Impl & Eng
Test Mgt
Prc & Equip
Dist & Srvc
Mfg Pl & Ctrl
Research
Management The cost calculation,
Net Operating Income/Loss and
Cummulated Cashflows with Breakeven
Net Operating Income/(Losses)
together with the
revenue projections,
Net Difference of Cummulated Cashflows
400000000
350000000
300000000
250000000
200000000
150000000
drives the net value
100000000
50000000
0
36525
37256
37986
38717
39447
40178
40908
41639
42369
43100
43830
44561
-50000000
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3. Risk Reduces the Value of a Deal
Cost vs. Delays for all Risks along Value Chain
Technical and firm specific risk
30%
are the basis for the discount 25%
Resulting Cost Increases
rate. 20%
15%
10%
Market risk is a probability
distribution for outcomes.
5%
0%
0% 5% 10% 15% 20%
Resulting Delays
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4. Discount Rates
Risk Level Approximate DR(%) Description
Risk Free 10-18 Existing product, high demand,
building more of the same
Very Low Risk 15-20 New well understood technology
for an existing product
Low Risk 20-30 New features, well understood technology
into an existing market
Moderate Risk 25-35 New product, well understood technology
into market with competition
High Risk 30-40 New product, not well understood
technology into an existing market.
Very High Risk 35-45 New product, new technology, new
market
Extremely High Risk 50-70 New company, unproven technology,
new market
Source: Richard Razgaitis, Early Stage Technology
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5. Identify Risks that Defer Income
or Raise Costs
Focus on the Significant Risks
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6. Mitigating or Avoiding the Risks
Increases Value
Targets and Means Matrix
Objective 1 (Reduce/Increase)
Objectives Action Plan
Objective 5
Objective 3
Objective 4
Objective 2
Measure
Time Line
Resources
Required Who? JFMAMJJASOND
Task 1
Task 2
Task 3
Task 4
Task 5
Progress
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7. Value Contribution Royalty Rates
Any numbers in green found in the following fields can
be changed and will be reflected in the tables below
Factor Rate Weight Impact
Industry Norm 0.0% 0.0 0%
Significance (Breakthrough add 5-10%, Major add 0-5%%, Minor subtract 0-3% 0.0% 3.0 0%
Refinement/Maturity of Technology (High add, Low subtract) 0.0% 2.0 0%
Breadth and Strength of IP Protection (Yes add, No subtract) 0.0% 2.0 0%
Portfolio, Not Single Patent Being Licensed (Yes add, No subtract) 0.0% 2.0 0%
Exclusive Market Position in Field of Use Gained (Yes add, No subtract) 0.0% 3.0 0%
Immediate Utility in Market (Yes add, No subtract) 0.0% 2.0 0%
Commercially Successful (Already Successful in Market add, Not Yet Proven in Market subtract) 0.0% 3.0 0%
Competition Exists which Will Inhibit Ability to Exploit (Yes subtract, No add) 0.0% 1.0 0%
Foreign Rights (Yes add, No subtract) 0.0% 3.0 0%
Sales Conveyed or Highly Likely (Yes add, No subtract) 0.0% 2.0 0%
Duration (Over Ten Years add, Under Three Years subtract) 0.0% 1.0 0%
Upfront Payment Required (Yes subtract, No or Conditional add, Standard neutral) 0.0% 2.0 0%
Minimum Royalties (Yes subtract, no add, Standard neutral) 0.0% 2.0 0%
Know-How Included in Deal (Yes add, No subtract, Standard neutral) 0.0% 3.0 0%
Support/Training Provided After Initial Transfer (Yes add, No subtract, Standard neutral) 0.0% 2.0 0%
Maintenance and Enforcement Burden (Licensee subtract, Licensor add, Standard neutral) 0.0% 2.0 0%
Exposure to Liability (Yes subtract, No add, Standard neutral) 0.0% 2.0 0%
Total 0%
Add to Industry Norm 0.00%
RATE 0.000%
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8. Licensing/SpinOut & TRL
Social Networking – Monitoring and Collaboration
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10. Li-ion Battery Functional Decomposition
(B) Product Risks
B-1.0 Lithium Ion Battery
B-001 Available Energy
B-002 Calendar Life
B-003 Cold Cranking Power
B-004 Cost
B-005 Cycle Life
B-006 Efficiency
B-007 Equivalent Electric Range
B-008 Max. System Weight
B-009 Operating Temperature Range
B-010 Peak Pulse Discharge Power
B-011 Production Price
B-012 Regenerative Pulse Power Green indicates a goal with
B-013 Self Discharge specific numerical values
B-175 Safety
B-014 System Recharge Rate
Red indicates a risk or
B-015 System Volume
B-016 Thermal Runaway
common design hurdle
B-1.1 Cathode without a quantified goal
B-017 Cost
B-018 Electrochemical Capacity Yellow indicates a goal or a
B-019 Ionic Conductivity characteristic without a
specific value
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11. Economic Paradigms and
Dominant Designs
Product Innovation
Stage
Bundle of Features
Standard User
Interface
Process Innovation
Stage
Eliminate Steps
Improve Reliability
Improve Efficiency
of Resource Use
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12. Paradigms for the Economy Control
Over Power & Communication
Revolutionary War: Local Markets, Water/Wind Power, Mail,
Batch/Power Tool Assisted Production, Yankee (Knowhow)
Innovation
Civil War: Regional Markets, Steam Power, Mail, Mass/Semi-
Mechanized Production, Tinkerer Innovation (Systematic Trial and
Error)
World War I: National Markets, Fossil Fuel Power, Phone,
Automated/Mechanized Production, Engineered Innovation
(Structured Trial and Error)
World War II: Global Markets, Fossil Fuel Power, Radio
Communications, Continuous Production, Seed Corn Innovation
(R&D Driven)
Vietnam: Global Segmented Markets, Fossil Fuel Power, Digital
Communications, Distributed Production, Managed Innovation (Open
Innovation)
Climate Change: Electric Power, Digital Communications,
Asynchronous Production, Network-Centric Innovation (“Floating
Networks”™) Foresight Science & Technology
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13. Open Innovation Presumes a
Stable Paradigm
Source: Wayne Johnson
Vice President, HP University Relations, “Globalization: Implications for ERCs,” Worldwide,
November 17, 2005
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14. A Product’s Utility is Constrained
by the Dominant Design
Bohn Knowledge Level Utility ≈ Value
Skills/Know-how
Extension
Extension
Enabling
Core Strategic
Extension
Competing Enabling
Time
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15. Impact of an Economic Crisis
Climate Change: Electric Power
CUMULATIVE REVENUES
0$
Idea Basic Applied Product Process Market
Research Research Development Engineering Introduction
TIME
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17. Obama is Embracing Disruptions
of Dominant Designs
Electric Power, Digital Communications,
High Sales Asynchronous Production
Low Labor Skill
Embryonic/ Growth Maturity Decline/
Emerging Disruption
Pioneering products Dominant design Generic products New functionalities
High product More process High process High product
innovation innovation innovation innovation
Growing demand Stabilizing demand Stable demand New demand
Low volume Higher volume Very high volume Market convergence
Proprietary focus Standards focus Cost focus New markets
Many new entrants Many failures Stable players New competition
Standards wars Acquisitions Consolidation Barriers to entry drop
Scale wars and divestitures New business models
Supplier wars
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18. Obama Agenda is Accelerating the
Rate of Change in Dominant Designs
VarietyRate of Slow or “One Rapid or “Faster-
Change Time” Paced “
Many Segment Driven Dynamic Needs
Needs (Fishing Tackle)
(Screwdrivers) Batteries
Renewable Clean
Energy Generators
Few Infrastructure Social Network
Driven Needs Driven Needs
(Hoes) (Cell Phones)
Smart Grid Hybrid and
Electric Vehicles
Based on Sanderson and Uzumeri, Managing Product Families, (Iwin, 1997)
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20. Disruption Creates Windows of
Opportunity
Trajectory
Technology 2
Requirement
S
2c
Yield Trajectory
S
Requirement S 1c Technology 1
S 2b
1b
S
1a S
2a
Time
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21. Historical Example: The Zipper
Button C lothing
Manufacturer Manufacturer
Button C lothing
Manufacturer Manufacturer
Market
Force
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23. Strategic Alliances are a Way to
Hedge Your IP Portfolio
Extension
Enabling
Extension
Extension
Enabling
Li-Ion Li-Air
Extension
Enabling
Lead Acid
Time
Network-Centric Innovation
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24. Sweet Spot for Alliances Expands
in Periods of Disruption
Market Familiarity STRATEGY
Control:
Internal
Development
Divest or Acquisitions
Paradigm Monitor In-License
Shift Partner:
Joint Ventures
Reduces
Market
Development Alliances
Familiarity Network- Internal Ventures
Out-License
Centric Divest:
Partner
Innovation Assignments
Sales
Control Monitor:
Technology Venture Capital
Development Educational
Acquisitions
CORE
Adapted from Roberts and
Berry, SMR 1988.
Technology Familiarity
Dominant Design Shift Reduces Familiarity
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25. Real Options
Provides management investment options
Invest
Wait
Abandon
Useful where a progression (stage gate®) based on
risk elimination can resolve return on investment
Market or technical uncertainties affect value of IP
NPV is difficult to estimate or near zero
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26. In Periods of Uncertainty the
Value of Hedging Increases
Low Likelihood of receiving new information High
High Uncertainty
Managerial Flexibility
Moderate High
Flexibility Value Flexibility Value
Ability to respond
Room for
Low Moderate
Flexibility Value Flexibility Value
Marco Antonio Guimarães Dias, Petrobras and PUC-Rio,
Low
Brazil, 2003,www.puc-rio.br/marco.ind/
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27. Traditional Relationship Models
Six Sigma –
Licensing
Joint Venture,
or Equity
possibly
leading to
Farm Teaming – Cooperative R&D acquisition
Contracts with Right of First Refusal
Or Equity Investment
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28. Deals Make Sense When They
Increase Payoff
Partnr Partner Partner
Wants Deal Walks
SME
SME Wants $10m, $0.0m,
Deal $0.5m -$0.05m
SME Walks $0.1m, -$0m,
-$0.05m -$0m
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29. NetworkCentric Innovations Make
Sense Where They Increase Payoffs
Partnr Partner Partner Partner
Moves Steps Abandons
SME Forward
TTO Moves >$15m, $5m, $0,
Forward >$10m $0.05m, +-$0.03m
TTO Steps $5m, +-$0.03m, $0,
$0.05m +-$0.03m +-$0.1m
TTO +-$0.03, +-$0.01m $0,
Abandons $0 $0 $0
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30. Rate of NPV Capture is Related to
the Quality of the IP Portfolio
NPV (million $)
NPV = PV of Total Revenues – Costs
NPV as a function of
P
Linear Equation for the
NPV (“Business Model”): spreadsheet value
NPV = q (P)-C
P (forecasted
price of the portfolio,
P = Σ 1…nIP xx p)
• The quality of IP (q) affects the NPV line slope.
• q measures the value of:
−C portfolio average technology value at current TRL/
forecasted fair market value of current products
• q is a measure of potential utility
that in the inverse of the discount rate
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31. If NPV = q (IP xp) − C = (0.2 x 500 x $18) – $1750 = + $50 million,
do you develop the portfolio now if the Discount Rate is 10%?
t=1
E[P+] = $19 ⇒ NPV+ = + $150 million
Wait
50%
t=0
Abandon
50%
E[P] = $18 / technology E[P−] = $17 ⇒ NPV − = − $150 million
NPV(t=0) = − 50 million $
Rational manager will not exercise
this option ⇒ Max (NPV−, 0) = zero
At t = 1, the portfolio NPV is: (50% x 150) + (50% x 0) = + $75 million
The present value is: NPVwait(t=0) = 75/1.1 = 68.2 > 50 so wait
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32. Suppose the same case but with a higher NPV.
NPV = q (IP x p) − C = (0.22 x 500 x $18) – $1750 = + $230
million t=1
E[P+] = $19 ⇒ NPV+ = $340 million
50%
Move Forward
t=0
E[P] = $18 / technology 50% Wait
E[P−] = $17 ⇒ NPV − = $120 million
NPV(t=0) = $230 million
At t = 1, the portfolio NPV is: (50% x 340) + (50% x 120) = $230 million
The present value is: NPVwait(t=0) = 230/1.1 = $209.1 < $230.
Deep-in-the-money (high NPV) means exercise the option
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36. Take:
• Call Options
for non-exclusive
or exclusive licenses
Aggregate Technologies
•Option fee funds
from TTOs,
maturing the
Mature with SMES with:
technology
• R&D Awards
• Other Subsidies
• If technology takes
• Sales or Other
off, option is
Commercialization
exercised.
Success
• Can sell option prior
exercise date with
approval to improve
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37. Early Stage Exit
Horizontal Alliances 1. Spin-Out Joint Venture,
RDLP or RDLLC License to LLC Member,
2. License to Small Business
Vertical Alliances 3. Sell Option
Joint R&D Venture 4. Abandon and Write Off
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39. • Nothing happens without a sale.
David Speser
• If opportunity doesn’t knock,
build a door.
Milton Berle
• A well-defined imagination is the
source of great deeds.
Chinese Fortune Cookie
Thanks. Phyl Speser
Chair, Strategic Alliance Committee and CEO, Foresight Science & Technology
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