Intellectual Property Finance
Training of Trainers Program on Effective Intellectual Property Asset
Management by Small and Medium-sized Enterprises (SMEs)
Bishkek, November 20 and 21, 2013
Anil Sinha, Head
Small and Medium-sized Enterprises (SMEs) Section, WIPO
Intangible assets defined
“Intangible assets are all the elements of a business
enterprise that exist in addition to working capital and
tangible assets. They are the elements, after working
capital and tangible assets, that make the business work
and are often the primary contributors to the earning
power of the enterprise. Their existence is dependent on
the presence, or expectation, of earnings”
•According to Valuation of Intellectual Property and Intangible Assets, Second Edition, by Gordon V. Smith
and Russell L. Parr, 1994, (“Smith and Parr”), page 83:
Characteristics of intangible
assets
Property open to legal enforcement and transfer of
ownership
Produce revenues in their own right
Assets that generate additional resources / cash
flows / profits over and above those which the
business would otherwise make if it did not own
the rights in question
What are Intangible Assets?
Intellectual Assets
Intellectual Property
Trademarks
Publishing
Patents
Rights
Brand logos
designs
Most
Copyrights
Information
Intellectual
Capital
Trade
Secrets
databases
Industrial
Design
Software
Know-How
Confidential
Customer
Capital
Knowledge
Providing
Value
Unpatented
Human capital
Information
Technology
research
Platforms
Tangible
Strategic Intellectual Property Management Executive Course Geneva Tony Hadjiloucas September 2007
Least
Why intangible assets are important?
PwC research shows that total intangible assets comprise, on
average, nearly 80% of companies’ value1
Intangible assets may be the only thing of significant value in
the business.
This is because:
- They provide barriers to entry
- They differentiate products (even commodities)
- They provide a more stable and profitable earnings stream
- They can have a long life (e.g. brands / trademarks)
- They may provide international recognition
- They may be capable of being leveraged into new
geographic or product markets (e.g. Virgin, Orascom)
1 Based
on analysis of the purchase price allocations relating to 175 transactions made by US companies during 2004.
SPECIAL FOCUS CHAPTER Valuing IP and determining the cost of capital John Rugman and Tony Hadjiloucas PricewaterhouseCoopers LLP.
http://www.wipo.int/academy/en/execed/sipm/goa_mar_07/pdf/Valuing-IP-Cost-capital-05.pdf
Managing IP Assets -Denise Raybould,
Associate, BDO Kendalls
Stages of Technology Transfer:
From Research Support to Economic Growth
More in Tax
Federal
State
Startups
Research
Inventions
Support
Disclosure
Corporate Endowment
Patents
Licenses
Revenues
New Products
Economic
Higher Standard of living
Growth
New Jobs
IS A COMPANY READY?
• Business plan?
• Stage of development of the company
• Type of investment?
• Valuation?
• Management team ready?
• Has the management team enough time and energy to raise
funds?
• Is the team shaped to talk to investors?
• Does the company know where to go?
Add value before raising capital
Documentation and Presentation
Government grants
Intellectual Property Protection
R&D Partners
In principle agreements
Licences
Customers
SOURCES OF START-UP CAPITAL (USA)
OTHERS
(3,9%)
GOVERNMENT LOANS
(1,1%)
MORTGAGED PROPERTY
(4,0%)
VENTURE CAPITALISTS
(6,3%)
FRIENDS
(9,0%)
EMPLOYEES / PARTNERS
FAMILY MEMBERS
BANK LOANS
PERSONAL SAVINGS
(12,45)
(12,9%)
(14,4%)
(78,5%)
Other ways of raising money through IP
Licensing
Sale
Auctions
Donation
Grants
Methods of Valuing
Market Approach
Cost Approach
Income Approach
Valuation approaches - Overview
Valuation approaches
Market Approach
Look at market
transactions
involving the sale
of comparable
assets
Cost Approach
Reproduction/repla
ce-ment costadjusted for
depreciation and
obsolescence
Income Approach
Present value of
earnings
attributable to the
asset or costs
avoided as a result
of owning the asset
Market approach
sale of comparable
Valuation approaches
Cost Approach
Income Approach
Market Approach
Difficult to apply to intangibles: sufficient number of transactions
of truly comparable assets is rarely available
Cost approach
reproduction cost
Valuation approaches
Market Approach
Income Approach
Cost Approach
Dose not capture expected returns
Good for intangibles that do not directly generate cash flows: e.g.
software for internal use and workforce
Good to cross check with income approach
Income approach
value of earnings
Valuation approaches
Market Approach
Cost Approach
Income Approach
Most common approach for intangibles:
- Captures expected future returns
- Estimate values for unique assets
- Based on cash flows or earnings generated
- Based on costs avodance
Typical methodologies for example
intangible assets
Example intangible assets
Typical valuation method
Brand / trademark
Market benchmarks and income
based method (e.g. relief from
royalty and excess earnings)
Customer relationships
Income based method value
Key employees / non-compete agreement
of earnings
Income based method value
Software
of earnings
Which cash flows?
Cost Approach: Replacement cost
Overall cross checks (Return on assets, residual goodwill etc)
Always preferable to apply two or more methodologies to cross check results
Pros and cons of each approach
Income
Approach
ADVANTAGES
DISADVANTAGES


Relies on the ability to accurately forecast
future performance

Ensuring consistency of measure of
economic income and cost of capital

Estimating remaining useful life of asset

Generally not feasible because transactions
regarding intangible assets are often unique
to that particular asset

Much of the information necessary to make
meaningful comparisons is not publicly
available

Costs associated with developing intellectual
property generally have little to do with the
value inherent in the right to exploit that
property

Difficult to apply because data not readily
available

May require numerous adjustments to
financial data

Market
Approach
Cost Approach
Considers the estimated remaining
life of the asset and appropriate
risk-based rate of return at which to
discount cash flows
Captures the unique economic
features of the subject intangible

Provides compelling empirical
evidence of value

Relatively easy to apply

Conceptually pleasing

When comparable market data not
available

When intangible is of unusual type
and not normally income producing

Works well with internally
developed intangibles or in
liquidation scenarios
Strategic Intellectual Property Management Executive Course Geneva Tony Hadjiloucas September 2007
IP Due Diligence
In order to obtain financing whether debt or equity
those who are providing the financing will need to be
satisfied as to whether the company is worthy of it.
Important to be “investor ready”. That is show that
you have taken all possible steps to identify, protect
and manage your IP assets.
START-UP CAPITAL
25% start with less than $5,000
50% start with less than $25,000
75% start with less than $75,000
Less than 5 % with $ 1,000,000 or
more
The Paradox of Access to Finance
Banks
Venture Capitalists
Stock Exchange
have money
But argue that there aren’t enough good
projects
What is a good project?
A Good Project!
A good project is a project presenting in the
eyes of an investor:
acceptable risk profile
a good perspective of return
this means:
access to market = innovation
profits
THE ENTERPRISE FINANCING PROCESS
Stage in
Cycle
R&D
Start-up
Proof of
Type of
Funding
Concept
Funding
Early
Accelerating
Sustaining
Maturity
growth
growth
growth
growth
Replacement
Seed
First
Second
Development
Capital
Corn
Round
Round
Capital
Development
Capital
Public Sector
Founders, family and friends
Source of
Business angels
Funding
Venture capital funds
Corporate venturing
Public listing / IPO
Investment Continuum
High Founder, friends
and family
Level of
Investment
Risk
Assumed
by Investor
Business Angels
Venture Capitalists
Corporate VC
Equity Markets
Commercial banks
Low
Seed
* “Angel Investing”
Osnabrugge & Robinson
Start-Up
Early Growth Established
Angel market addresses the $500K investment
gap between love money and serious money
VENTURE CAPITAL (Formal & Informal)
►
Institutional operators (formal venture capital)
Private subjects
► Banks
► Insurance
► Corporate venture capital
►
►
Non-institutional operators
(informal venture capital)
►
Business Angels
FORMAL AND INFORMAL EQUITY
PROVIDERS
Business Angels Formal venture
capital
Personnel
Entrepreneurs
Investors
Firms funded
Small, early stage
Large, mature
Due diligence
Minimal
Extensive
Investment's
location
Of concern
Not important
Contracts used
Simple
Comprehensive
Monitoring ex-post Active 'hands-on'
Strategic
Exiting the firm
Of lesser concern
Highly important
Rates of return
Of lesser concern
Highly important
* Source: van Osnabrugge, 1998, p.2
FORMAL AND INFORMAL EQUITY PROVIDERS
VC
BA
– Easy to find via directories
– Difficult to find
– Your request is only one among many
– Request often strong personal
hundred a VC receives
involvement
– Can often via syndication provide large
– Limited amount to invest
investment
– Investment decisions often quick and
– Thorough and formal due diligence and
investment process
– Exit route very important
less formal
– Syndication more and more usual
– Exit route less in focus
BUSINESS ANGEL (BA) - Definition
“A Business Angel is a middle aged male with reasonable net
income, personal net worth, previous start up experience, who
makes one investment a year, usually close to home or office,
prefers to invest in high technology and manufacturing ventures
with an expectation to sell out in three to five years time”. (Kelly
and Hay, 1996)
”Business angels (informal investors, independent investors) are
investors who provide risk capital directly to new and growing
businesses in which they have no prior connection”.
(Harrison and Mason, 1996)
BUSINESS ANGEL (BA)
Attitudes, behaviour and characteristics:
• male, rarely female
• successful experience as an entrepreneur or manager
• high net worth individual and / or sophisticated investor
• have a declared propensity to invest and to risk in a start-up
firm
• invest their own money (around 50K – 250K euro) (part of their
cash
capital: 20 - 30 %)
• Seeking profit, but also fun (seeking minimum 20% return)
• are willing to share their managerial skills and their enterprise
background
• often invest in their region of residence
• make one investment a year
ANGEL’S – Success Stories
Company name
Angel Investor
Business
Investment
Value at Exit
Apple Computer
(Name Witheld)
Computer
hardware
$91.000
$154 million
Amazon.com
Thomas Alberg
Online
bookshop
$100.000
$26 million
Blue Rhino
Andrew
Filipowski
Propane
$500.000
cylinder
replacements
$24 million
Lifeminders.com
Frans Kok
Internet e-mail $100.000
reminder
service
$3 million
Body Shop
Ian McGlinn
Body care
products
£4.000
£42 million
ML Laboratories
Kevin Leech
Kidney
medical
treatment
£50.000
£71 million
Matcon
Ivan Semenenko Bulk
containers
£15.000
£2.5 million
Source: partially adapted from unpublished data provided by Amis Ventures in 1999
ANGEL STRATEGY
High-growth start-ups: new businesses that are likely to see sales
grow to around € 1M and employment to between 10 and 20
people in early years and export oriented.
Key selection criteria of risk capital investors (generally):
• New products or technological improved products in an existing market
• A product or service that can be taken to market without further
development (i.e., past the initial concept stage)
• Creation of new markets
• Company’s growth should be expected to be higher than market growth
• Increase of market share against competitors
• Superiority regarding competitors
ANGEL DUE DILIGENCE PROCESS
Technology
Technology development
Product development
Process development
Product supply
Deliveries
Market
Marketing
Sales
PR
Competitors
Organization
Recruitment
Board
Network of service suppliers
Office
Economy / Finance
Cash forecast
Finance activities
Cost estimate
Budget
IPR
Angel Motivations
Altruistic - willing to provide:
Advice - financial and management
Contacts - broad range to assist in development of venture
Hands-on Involvement - at basic level, if required
Governance - Board of Directors / Advisors
Credibility - sends good signals to customers, partners & investors
Pragmatic
Will hand off involvement to next level of investors …
Therefore will use same criteria as VC to evaluate opportunity
57% of companies with angel investment achieve VC funding
10% of companies with no angels achieve VC funding
Dr. Allan Riding, Carleton University research on Ottawa angels
Types of Business Angels
Professional
Doctors, lawyers, accountants
Micromanagement
Very hands on with lots of
experience, but may be toxic
Enthusiast
Usually retired, investing is a
hobby, little value add
Corporate
Retired senior managers
looking to support their
investments or create a new
senior job for themselves
“Millions of years of evolution, and
that’s the latest model?!?”
Entrepreneurial
Most active, successful
entrepreneurs looking to
diversify portfolio or expand
current business
Amgen: A Capital Venture
World’s largest biotech company
Founded 1980
$19 million venture capital investment
2007 Financial Year
$14.8 billion revenues
$4.8 billion profit (before tax)
Market capitalisation: $51 billion
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Venture Capital
Invest in:
Private companies with high growth potential
Launch, early development, or expansion
Management buy-outs and buy-ins
Raise funds for investment from:
Private and public pension funds
Endowment funds
Foundations, corporations, wealthy individuals
Looking for >5-fold return on
investment within 5 years
36
Venture Capital
Profit and risk sharing (high risk – high return)
10 to 15% of portfolio will give very high returns
Detailed due diligence
High level of hand holding
Ownership and control of business shared
Patient, flexible financing (5-7 years to exit)
Highly selective financing – importance of deal flow
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Thank you for your attention!
anil.sinha@wipo.int