In a corporate environment preoccupied with the risks and opportunities of disruptive technology, the inadequacies in investment appraisal are alarming. Many early-stage tech companies starve through lack of funds. Others feast on funding before fading to irrelevance. Some thrive.
In an attempt to pick the winners, some investors use this beguilingly simple formula:
Differentiated Technology + Attractive Market + Intellectual Property = HIGH VALUE
As attractive as it seems, the formula doesn’t always hold
At this stage let’s assume that the first two components of the equation have been appropriately assessed. In other words:
The third leg of the equation is often misconstrued – leading to false hopes of sustainable differentiation,
The mere existence of IP does not protect differentiation.
Despite the complexity of IP, it only takes the addition of a single word to validate the equation:
Differentiated Technology + Attractive Market + QUALITY IP = HIGH VALUE
How can one assess the quality of IP protection? Consideration should be given to a range of legal rights.
Patents: Patents are subject to a lengthy and complex examination period, during which the scope of claims can narrower significantly. So the first question is whether a patent has been granted. Even after grant, patents provide
Trade Secrets: The term ‘secret’ is easy to use. In practice, secrets are hard to keep. Rigorous contracts and robust procedures are required to maintain confidentiality. The value equation doesn’t hold true if controls don’t prevent inadvertent disclosure, or if contracts don’t adequately protect against disclosure by employees and suppliers. Another potential gap in the equation is that trade secrets provide no protection from third parties reverse engineering the technology or creating similar inventions of their own.
Copyright: This is an unregistered right that can protect documented know-how, designs, integrated circuit designs, and computer software code. However, in the context of technology, copyright protects the expression of the work and not the idea or process underlying the work. Remember that, in the absence of
Designs: Protect the visual design of objects that are not purely utilitarian. In most
Trade Marks: Although brands do not protect functional differentiation, skillful marketing can be used to protect perceived quality. (See Extending the Economic Life of Technical Innovation: Brand Alchemy?)
Further complications arise from IP being jurisdiction specific. Strong rights in your home market do not imply protection in
Don’t forget the patent landscape! Even if your investment target has
Gauging the economic strength of IP is complex. We recommend a value-based assessment prior to investment. A previously published article, IP Valuation & Capital Raising, provides a case study illustrating the use of a Tech Rating to support a valuation.
Contact Glasshouse Advisory's Valuations team to learn more about how we can help your business.