By BEAR BRANDEGEE
Today, many entrepreneurs are creating successful products and services by playing the technology-transfer game. The game is played by acquiring and converting patented innovations into fabulously successful commercial goods.
In the first of this two-part article, we explored fundamental guidelines for finding and evaluating intellectual property for license. In this part, we will examine three more basic rules to help you value and structure the technology licensing deal.
Rule 5: Technology valuation is an art, not a science. The valuation of new innovation is based on the underlying value of the technology (the value everyone can see) and on the value you assign it from your frame of reference (the value only you can see). The most practical way for you to answer the valuation question is to approach the process in three simple steps.
First determine the potential market for your new product in dollar terms. Start by researching competitor and product substitute sales. Be thorough and creative in your market research and conservative in your sales estimates.
Second, identify the long-term investment your company will need to make to transform the innovation into a market-ready product or service. To do this, identify at least three public companies that have developed and marketed similar inventions with comparable technologies. Then use their financial data as a working template for your own projections.
You’ll likely want to discount these comps to account for the more advanced status of these businesses. Also, take a look at the footnotes in annual reports of comparable companies. You’ll find all kinds of interesting details on leases, compensation packages and other key data that can help you project costs. My favorite sources for public company data are two Internet sites: www.sec.gov/edgar.htm and www.hoovers.com.
The third step in evaluating the intellectual property you are about to license is to review your corporate strategy and goals, and reconfirm that licensing this particular technology is a good fit. Double check your assumptions about the ability of your internal systems, finances and human resources to carry the load of the technology-transfer and development process.
This is a point when you want help in evaluating your hand before playing the next round. Having the help of an experienced player who can help make certain your strategy and resources are aligned with what may be your biggest corporate decision is imperative. This step will help you avoid pitfalls obvious only to those who’ve already been there, done that, and gotten the T-shirt.
Rule 6: To get the goods, you must walk the walk and talk the talk. While you may feel ready to sit at the negotiating table, the licensor may prefer to do business with a company the size of Genentech or Lockheed Martin. To increase the odds of winning the rights to a valuable intellectual property portfolio, you need to produce a compelling eight- to 10-page business plan.
To convince the licensing officer that you have a solid plan for developing the innovation to its fullest potential, consider including in your plan the following: a summary of your technology development and marketing strategy; an assessment of the existing and potential market and market conditions; a plan for staffing that identifies the skills and abilities you will hire; a discussion of potential challenges and opportunities; and milestones for product development and expected sales.
When producing your milestone chart, make sure that you can easily achieve the first four destinations. Success will build confidence among your staff as well as a level of trust between you and the licensor.
Rule 7: All deals boil down to licensing fees, royalties and substitutes for fees and royalties. As you approach the bargaining table, you will want to know the essential components of a licensing deal. When you get to this point, if you haven’t already, hire an attorney experienced in licensing new technologies.
Don’t make the mistake of passing on the play. Stay involved and participate in the negotiation process. Stop by the Association of University Technology Managers’ Web site at www.crpc.rice.edu/autm and get comfortable with the basic terms of the deal. Familiarize yourself with the tech-transfer trading chips known as licensing fees, royalty payments, patent costs, equity ownership, exclusivity of rights, and joint research agreements, to name the most common.
Take a keen interest in those items that will hit your bottom line. These include the upfront licensing fee and the follow-on royalty payments. You’ll want to determine the royalty percentage rate, its driver, net sales, and at what point the royalty payments kick in.
You want to avoid what I call “royalty drain,” which drains the cash right out of your bank account just when you need it for working capital. Finally, remember the adage we talked about in Part One of this series follow the money and follow the rights. Make certain that you negotiate for the rights that will give you the greatest competitive advantage over the long term.
While the technology-transfer game may sound like an endless round of Monopoly, it’s actually a game anyone with knowledge of the rules and a strong entrepreneurial drive can play to win. It’s true that you need a stomach for risk and the patience of a saint, but when you win, you create value not only for yourself and your company, but also for all those who benefit from the new products and services you introduced to the marketplace.
Bear Brandegee is a principal with Heisenberg Principals, a Los-Angeles-based management consultancy. She can be e-mailed at [email protected].
Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1941 with feedback and topic suggestions.
