Getting Bought by Google: Or another technology heavyweight - MaRS Best Practices


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What do technology majors or other desirable purchasers really seek? What do they value that would not be obvious unless you had been through such a deal? How can past success be replicated? Does IP really matter? And most importantly, how does one build a strong valuation?

Using practical case studies, this presentation focuses on aspects of acquisitions that may be new to many entrepreneurs.

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Getting Bought by Google: Or another technology heavyweight - MaRS Best Practices

  1. 1. MaRS Best Practices:Getting Bought by a HeavyweightAnthony De Fazekas, Miller ThomsonDan Servos, Locationary
  2. 2. Introduction•  Building a valuable startup•  Goal: strategies that can lead to BIGGER EXITS•  Insights from Dan Servos, Locationary, previously Social Deck•  Lessons learned, and things observed in the deal rooms
  3. 3. Introduction, cont.•  Interactive Session•  IP Best Practices
  4. 4. Dan Servos! Chief Operating Officer"Confidential – Do not Distribute without Permission
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  9. 9. IP is HOT!!!•  IP is very hot, especially now•  IP, especially patents, are playing an important in the traction of new companies, new technologies•  IP of early stage companies is being noticed and a real enabler in investments, in strategic relationships with large tech partners, and in acquisitions•  Patent licensing companies e.g. Mosaid, IBM Licensing are making a lot of money. New patent licensing companies are popping up all the time, e.g. i4i•  It is NOT TRUE that IP is only noticed if you have a multimillion dollar war chest – experience proves the contrary •  Nobody wants to be the next NTP •  Contingency patent cases in the U.S. have changed everything •  Established companies are very interested in early mover IP
  10. 10. Do what the big companies do, but more cheaply….•  Develop an IP strategy•  Prioritize, do as much as you can with internal resources, and scale the IP as the business scales•  Ensure you are developing IP assets that map as clearly as possible to your strategic opportunities
  11. 11. What is IP Strategy?•  Mining and Protection of IP in a way that is consistent with a “business strategy”•  It can be a highly structured document, or more of an “approach” to IP•  What is not: “knee jerk filings”•  Looking for “platform” filings•  “Omnibus” filings are often ideal, and also the least expensive•  Build IP in areas, and directed specifically at opportunities, where traction is likely to occur (examples)•  Make difficult IP decisions (e.g. pulling the plug on portfolios for strategic reasons)•  Companies that develop, update, and follow an IP Strategy, tend to develop an “IP Culture” which helps build significant value•  Some of the attributes of “IP Culture” are “inclusion” in IP efforts, integration of IP objectives in various aspects of business, and generally more “bang for buck” for IP
  12. 12. Struggles with disclosure•  Really should not disclose your invention publicly, before you have developed an IP strategy•  But you need to know, realistically, what your “invention” is•  High level marketing may or may not disclose the invention•  Generally speaking use “selective disclosure”•  Try to have NDAs in place, but have plan for how to deal with important disclosures without NDAs•  Remember: not all NDAs are created alike!
  13. 13. Forms of IP – “The Social Network”•  October 1, 2005 Facebook completes its university expansion•  Initially patents are not filed (Mike Z was somewhat anti-patent initially…)•  But in 2006 Facebook embarks on protection of various aspects of their innovation for example: –  Technologies for feeding updates for your “wall” –  Technologies for updating your profile, and matching you to potential friends automatically –  Specific user workflows that embody “user engagement” innovation –  “Next territories” that Facebook wants to occupy such as “social gifting”
  14. 14. Why is Facebook interesting?•  Fairly typical IP strategy that start-ups can follow as well, from the outset•  Illustrate different “layers” or protectability•  Really all that matters is the usual “standards” of patentability•  Although admittedly there are “strong” and “weaker” patents•  But what is most important is the idea/ business “strong” or “weak”???
  15. 15. Starting Point of a Patent•  Important market differentiation•  Business methods are hard to patent, but implementation of a business method in a practical system (e.g. Amazon) is much easier•  Provides some useful advantage: –  New platform –  Components may be old, but combination/adaptation/ integration is non-obvious perhaps because of synergy resulting from the new combination –  Less expensive, easier to transport –  More entertaining –  “Natural” interface, e.g. Autodesk
  16. 16. “Normal” Patent Timeline•  File a US provisional, prior to “public disclosure”•  Be caution with beta tests, pilots etc.•  File possibly “follow on” provisional covering important enhancements in advance of release•  File an international (PCT) application within one year of first provisional•  Within 4-5 months receive PCT search report•  Must file “national phase” filings within 30 months of first provisional in most countries
  17. 17. What are tech majors looking for?•  Big potential market•  A domain that is “heating up” that they did not have plans for•  A strong team•  Less about technology, and more about “deep expertise”
  18. 18. Legal and Housekeeping Aspects•  Good housekeeping. –  Properly documenting and addressing the business structure•  Having good advisors –  (e.g. an advisory board, mentors etc.)•  Professional advisors –  (e.g. lawyers and accountant and others) –  Sewing good positive relationships in the eco system•  Avoiding “problem agreements”•  Be ready for “each stage” e.g. technical due diligence
  19. 19. Behind the scenes•  Behind the scene negotiations –  The form of the deal will depend on whether it is an asset/technology sale versus a share sale versus a licensing arrangement/joint venture•  Real life back and forth regarding valuation (valuation will be a combination of art and science – unlike in traditional businesses where you valuate a company based on revenue and goodwill, startups look at the future potential)•  Value touch points – what seems to interest tech majors, again and again (personnel, validated evidence of traction and IP if there are IP objectives at play)•  Due diligence: what matters and what does not? (Keeping the house in order, documenting agreements and arrangements, keeping minute books up to date, consideration of a non-disclosure during due diligence phases)
  20. 20. Things to avoid…•  Complex legal structure•  Ownership of technology or IP is not properly documented –  Contributors may come out of the woodwork (the skeletons ) –  Inadequate consideration for assignments•  IP is oversold – IP is weak –  Narrow claims, –  Overly abstract patent apps•  Patent protection does not cover key markets
  21. 21. How much does IP really matter?•  Chilling effect of patents while company gains traction is generally very important•  When choosing between two companies focusing on the same technology, the major generally tries to buy the company with IP before the one without IP•  The IP usually provides a bump in valuation – sometimes 10%, sometimes 30%, sometimes more – it depends•  Sometimes the transaction mostly about IP – especially when there are competitive concerns - Bumptop•  The point is: it is hard to predict, so it is important to do what you can (reasonably), and whatever IP is filed, make sure it is as strong as possible
  22. 22. Best Practices•  Make sure you are not reinventing wheel: “right” amount of searching•  Avoid long prior art lists – they can hurt you especially in prosecution•  Choose patent targets very carefully –  Construct strong scenarios of patentability around key value propositions –  Grab early as possible priority dates, but drive sufficient detail into applications•  Start off with omnibus applications (you can divide later, but you cannot aggregate)•  Focus on platform filings!!!!!•  Focus not only on technology but value delivered by technology•  Describe specifically implications of technology on potential acquirers e.g. our technology would integrate with….. By….
  23. 23. Best Practices, cont.•  File robust provisional patent applications initially, for flexibility•  PCT applications will provide within 4-5 months a reliable search report to get your bearings•  Build disclosures that explain the nature of innovation clearly•  Clear focus on domains that resonate with Examiners – automation, analytics, architecture, non-obvious user workflows etc.•  Need a clear plan on what prosecution is likely to yield, and what this may deliver for the company•  Clear plan to scale IP coverage, if this make sense, and if necessary recalibrate (IP strategy needs to be reset all the time)
  24. 24. Best Practices•  What is the “right” amount of IP coverage for this company, at this point?•  Sometimes it is important to wait to file patent later, once the development pipeline yields further detail that can make claims more robust (don’t blow the bank on subject matter that realistically is unlikely to yield strong claims).•  Establish clear goals for prosecution, and reset goals based on progress of prosecution and market movement•  Be careful not to let international protection consume resources better spent elsewhere•  Figure out what is the “right” or “realistic” amount of protection, and make sure that you have a good explanation for your decisions•  A cogent strategy is more important than a patent portfolio
  25. 25. Best Practices, cont.•  Availability of a compelling, distilled IP strategy•  Evidence that company “lives” the IP strategy•  Protection of IP, using careful agreements•  Organize your documents well: user engagement, customer feedback, agreement used at different times e.g. privacy policy
  26. 26. Questions??? Anthony De