By Renuka Sena
Mindvault Sdn Bhd
An edited version of this article was published on 28 June 2004 in the [email protected] pullout of The Edge, Malaysia’s leading Business & Investment Weekly.
In today’s exceedingly competitive markets, the use and protection of Intellectual Assets is often the difference between continued success, and impending failure of a business. This is particularly seen in hi-tech companies as compared to traditional business because hi-tech companies only have minimal tangible assets but a multitude of Intangible (or intellectual) assets.
In a traditional business (e.g. manufacturing), the assets of the company generally lie in its physical assets namely its production lines and plant and machinery. Whilst these traditional businesses may also have intangible assets such as know-how, product brands and distribution/customer lists, on balance when compared to high tech companies, the assets of a traditional business primarily is reflected in its tangible/physical assets. Compare this with a hi-tech company where the assets of the company are largely reflected in knowledge and experience of management, R&D capability and intellectual property (patents, copyrights). These high-tech companies therefore have less “assets” to show in the books even though they may potentially have higher growth rates than a brick and mortar business.
In the search for capital and investment, the challenges faced by a new economy company, therefore, are numerous. Let’s face it, whether old economy or new, cash is still king. The value of either type of business stems from its ability to generate revenues. The second consideration is that the basic fundamentals of investment whether from angels, VCs or even in IPO subscriptions is for the “investor” to analyse the potential of the business to survive and generate sustained revenues.
Factors that influence investment are founded on analyses of past track record, management abilities, business models, assets (both physical and intangible) market acceptance and competitive landscape. These factors are usually analysed from a risk and rewards perspective. In today’s fast paced and competitive landscape, it has now become critical for investors to also evaluate the Intellectual Assets portfolio of a company to ascertain how these assets can increase the revenue or life-cycle of a business so as to CONTINUE TO GENERATE RETURN ON INVESTMENT.
Valuation of Intellectual Property
Most intangible assets generate premium returns for the businesses that own them, either through increase in revenues or through cost reduction. The key to utilising these assets to generate returns therefore lies in the alignment of strategies for Protection, Management and Commercialisation of these intellectual assets.
Despite the fact that Intellectual Property is increasingly bought, sold and licensed in return for revenue, valuation of IP generally attracts a degree of scepticism. This arises principally because there is doubt as to whether IP can be valued RELIABLY. This doubt has certainly held back the recognition of the value of Intellectual Assets in financial statements. In transactions where Intellectual Assets have been bought together with a business, purchasers prefer to refer to this value as “goodwill” instead of placing a value on these assets in their balance sheets.
There are many methods used to value IP but unfortunately there is a lack of global consensus as to which methods are preferred. Due to the difficulty in analysing and making forecasts of the “value” of intellectual assets, MORE THAN ONE valuation approach should be utilised. Typically the approaches used in valuation are:
The Cost Approach
The Market Approach
The Economic Benefit Approach
When valuing IP, is it more important however to understand the factors that influence the risks associated with the IP – be it technological, market or competitive. Here therefore reliable and timely information is key. Access to the right information will allow investors to evaluate the risks associated with the business and the ability of management to mitigate and manage these risks – thus making valuation more an “art” as opposed to “pure speculation”.
Where to Start?
An IP audit is the most cost effective solution to identifying your hidden assets. An audit allows for a systematic examination of what is owned, what is being created by employees or independent contractors, what is used and what is acquired from third parties. The audit report will assist in the evaluation of current and ongoing commercial significance of the IP assets to the companies’ present and future plans. This assessment will allow the business to focus on the commercial potential of a particular IP asset.
In addition to the above, IP audits may reveal vulnerabilities in ownership and protection of IP and therefore is useful as a risk management tool or mechanism. Therefore it can be seen that audits are a very necessary step in a chain of related steps that will ensure that your IP asset is contributing to your company’s bottom line.
However as with the financial audit, it is advisable to conduct the IP audit with the assistance of an experienced IP specialist that not only can recognise the IP but also can put in place an Intellectual Asset Management (IAM) Plan that will assist in monitoring and commercialising these assets.
How IP can be used in commercialisation
As leverage to obtain better purchase price or other benefits;
To increase the valuation of a company when seeking venture capital or strategic investment. The value of a company can sometimes be many times the value of its physical assets or stock, because of the strength of its IP.
Strategic partnerships can be formed between 2 companies that have complementary IP to jointly create and commercialise a better product.
To block out competition in this increasingly competitive world where market share is often volatile.
As security for loans from financial institutions or as collateral for debt financing.
The above issues and challenges will be dealt with in a seminar held on 1st of July 2004 by Mindvault Sdn Bhd and supported by Bursa Malaysia. At this seminar participants will gain:
An understanding of differences between various forms of IP rights and how each IP contributes to the overall value of the Assets/Technology
Knowledge of how IP can drive earnings through commercialisation strategies
“Tools” that can be used to predict market penetration of new products/technologies
Insights on how to assess IP portfolios with the best chances of success
An appreciation of factors to consider when valuing IP