Intangible Asset Valuation

Transcription

1 Intangible Asset Valuation Methods and Application

2 Workshop Topics 1. Business Valuation Research 2. Valuation Approaches Market-based valuation Cost-based valuation Income-based valuation 3. Conclusions IC 2 Global Commercialization Group and Robert M. Hunter, YES Technologies acknowledged for some slide materials. 2

3 Reality to Consider: 1 It is MUCH easier to start your invention and licensing process with a customer that has a problem, than with a solution looking for a problem of value. 3

4 When Do Companies Write Checks for New Ideas? THEY DON T These are often viewed as generously provided and developed 4

5 How to convert an idea into a property, your property Ideas are free for all to use Must protect your ideas as an asset Convert it into intellectual property Governments have created a variety of forms of intellectual property Depending on the situation, different or multiple forms are most appropriate 5

6 Types of Intellectual Property Patents Utility (technology), design and plant Plant variety Trade secret Copyright Semiconductor mask work Trademark/service mark 6

7 Reality to Consider: 2 One must use appropriate forms of intellectual property protection to secure your idea as an asset, so you have something to sell! 7

8 What are the Odds for Making Money from a Patent? Odds of obtaining a patent Overall, about percent If you hire a patent practitioner, over 90 percent The real question is what do the issued claims actually say, what competitors do they exclude? Odds of making money from a patent One in 50 patents is licensed/assigned One in 100 new products makes money So, your odds are about 1 in >5,000 10

9 Reality to Consider: 3 It costs just as much money to develop and patent a worthless idea as a valuable one: Choose a valuable one and focus on it 11

10 When do companies pay money for intellectual property? ONLY WHEN THEY ABSOLUTELY HAVE TO!!!!! 12

11 Valuing your intellectual property Amount a willing buyer will pay to a willing seller Valuation methodologies 13

12 Business Valuation Research 14

13 Business Valuation Research Overall questions to ask about the general value of technology before getting started Understanding the licensee s needs Competition Risks Total value 15

14 Technology Positioning Is the licensed technology an essential and primary feature of the product being considered? 16

15 Perceived Benefits How strongly does the customer value the benefit that this technology provides? What improvement in performance does the technology provide? How strong a competitive advantage will this give the licensee? 17

16 Company Adoption Issues Capital investment required to implement the technology? Switching costs? Marketing costs? 18

17 Competitive Space Are there other existing technologies or products? Does the technology lower the cost of production? How? How much? 19

18 Market Dynamics What are the dynamics of the target market? Market size Growth rate Market share 21

19 Risks Understand the risks through the eyes of the licensee Know the risks before going into valuation and negotiation 22

20 Technology Risks Will this technology work? Do the research timelines match the licensee s? How much will it cost? 23

21 What is the Intellectual Property? Flignor and Orozco, Ipthought.com 24

22 Asset Value of IP Flignor and Orozco, Ipthought.com 25

23 Asset Value of IP Flignor and Orozco, Ipthought.com 26

24 IP Risks How strong is the IP? What is the company actually buying? Narrow rights? 27

25 Market Risks Will the market continue growing? Market penetration? Obsolescence? 28

26 Governmental Risks What new regulations might change? 29

27 Total Value Consider total value of potential technology not just patents know-how people research equipment software tools facilities 30

28 Valuations Approaches 31

29 Market-Based Valuation A valuation placed on a technology by comparisons made to similar technologies and deals Identical technologies are ideal Comparable technology deals are more common and practical Seeking to establish a ball park value Quicker, simpler than other more complex methods and widely used 32

30 Finding Comparable Deals Look at prior deals in the TTO Internal data, sister universities/organizations Other TTOs with similar technologies Local entrepreneurial sources 33

31 Sources for Market-Based Valuation Published licensing surveys Published licensing deals Published court cases License price lists or rates offered 34

32 Steps to a Market-Based Valuation Build a basket of comparable technologies Compare technologies and licenses Estimate a basic value 35

33 Research Market Rates Market rates can vary widely based upon industry Industry Computing Hardware 1-5% Software up to 30% Biotechnology 4-18% Health Care 2-10% Devices 2-6% Automotive/Industrial 2-4% Consumer Electronics <1% Baseline rate 36

34 Sample Market-Based Valuation Company Upfront Royalty Equi ty Startup Geography Industry Platform Technology From Universit y Intel $25,000 2% N N US Semicon No Yes 50% Toshiba $30,000 4% N N Asia Electronic s Axon $100,00 0 Weight Yes Yes 20% 1.5% Y Y US Memory Yes Yes 5% QPon $ % N Y US Electronic s No No 5% Siemens $40,000 2% N N Europe Lab Equip No No 15% Baidu $50,000 0% N N Asia Computer s Etc. Average $41, % Weighted $32, % No Yes 5% 37

35 Market Comparables Disadvantages Example Spreadsheet mab deals deals provided, 15 with some financials provided via MedTRACK Contextual Deals in 2006 very different than 2008, 2009 and 2011 What is similar between a comp deal and your deal? What facts and financials do you lack? 38

36 Cost-Based Valuation A valuation that is based upon the cost of reproducing a substitute for the technology Relevant when licensee has the ability to simply design around the technology Used often for early-stage technologies without established market 39

37 Cost-Based Valuation Often used for software Works best when R&D costs can be identified and end-market revenue is uncertain 40

38 Replacement Cost Method The cost to buy asset of equal value (e.g. buy another technology or company) The cost to make or reproduce a substitute asset (e.g. design your own software, create a new solution) 41

39 Costs of the Buyer Time to market Personnel Opportunity cost Intellectual property protection Obsolescence 42

40 Cost-Based Valuation Disadvantages Does not address the technology s true value Use in combination with other methods and research 43

41 Income-Based Valuation A valuation that is based upon the present value of future cash-flow streams; represents true economic value of the technology Relevant when future cash flows can be determined Can be time-consuming and complex Depends upon assumptions and inputs 44

42 Income-Based Valuation 45

43 Market Penetration/Adoption What is accurate about this model? What is inaccurate about this model? 46

44 Assumption Market: $2,000,000,000/year Patent Life: 10 years Total Market: $20,000,000,000 Our Percentage: 10% Total Market Value: $2,000,000,000 Our Costs: $20,000,000 Our Value: $1,980,000,000 47

45 Assumption Market: $2,000,000,000/year Patent Life: What about Time? 10 years Total Market: $20,000,000,000 Our Percentage: 10% What about Risk? Total Market Value: $2,000,000,000 Our Costs: $20,000,000 What are Their Effect on Valuation? Our Value: $1,980,000,000 48

46 Discount Rates Risk vs. Reward and expected rate of return Discount Rate: the % of value that future money looses annually Net Present Value of money: NPV=x/(1-k) n 49

47 Income-Based Valuation Rates of return sought by venture capital investors. 50

48 Risk-Modulated NPV Recognizes Value of: Time Risk Stewart et al., Nat. Biotech :813 51

49 Risk-Modulated NPV The Equation: rv: Risk modulated value P: The payoff R 0 : Current risk mitigated in development stage R i : Risk mitigated after i years have passed with success R 0 /R i is the risk adjustment factor: The likelihood that a cost, revenue, milestone, investment, etc. will actually materialize C i : associated cost n: number of stages i starts at year 0 Stewart et al., Nat. Biotech :813 52

50 Steps Know your competitive advantage, positioning and product market Know your market value for partner (amount, ramp time, %, etc.) Know the risks for each step of development Know the time for each step of development Know the estimated costs for each step of development Estimate program value, see the effect of next step development on value Determine net present value (NPV) and share of NPV due licensor 53

51 Valuation Example mab Biotech Co. example mab market rv calculation Deal strategy 54

52 Income-Based Valuation Should the office share this valuation information? 55

53 Income-Based Valuation After the total NPV for the technology is calculated, determine the proper split between licensee and licensor The 25% rule Not a rule but rather an estimated starting point Based upon common licensing averages and court awarded infringement payments 56

54 Income-Based Valuation The 25% rule Assuming a typical company has a 10-20% profit margin, this rule equates to a 2.5-5% royalty rate This % must be adjusted based upon the contribution of the licensed technology to the revenue generation 57

55 Deal Examples See Deal Valuation examples Trade amounts and time DO NOT trade VALUE. 58

56 Income-Based Valuation After the office share is determined, vary the timing of payments, milestones, minimum royalties, etc. The most common variation is to vary the amount of upfront payments and royalty rate If the spreadsheet is built, the team can quickly step through various options 59

57 Value Considerations Type Licensor Licensee Lump sum Running Royalty Technology failure risk borne by licensee Blockbuster success reaped by licensee Allows participation in blockbuster success No exchange of financial information Higher risk but higher reward Low cost until positive cash flow Reduced economic change risk Sponsored Research Equity Milestone payments Meets University research goals Develops relationship and further IP Opportunity to participate in blockbuster success Holding equity issues Provides some revenue guarantees while also allowing participation in blockbuster sales Develops relationship Provides access to future technologies Low upfront cash Ends up costing more in the long run Phases cash payments over a time until technology is further developed 60

58 New Venture Valuation The Basics Startup Economics Income-based valuation A real number Driven from facts Only as good as your facts and strategy Comparable valuation Contextual value What is comparable? Use both methods to support your value 61

59 Critical Variables for Start Ups Frei and Leleux, Nat. Biotech :

60 Ballpark Valuation Method Management Strength: up to $1M Board Strength: up to $1M Product Potential: up to $1M Intellectual Property: up to $1M Business Strategy: up to $1M 63

61 Discount Rates for Company Valuation Frei and Leleux, Nat. Biotech :

62 Discounted Cash Flow Valuation Example Coatings Company Platform technology, multiple product integration and multiple royalty sources Aggregated valuation strategy What is strong about this example? What is weak about this example? 65

63 Comparable Strategy Frei and Leleux, Nat. Biotech :

64 Method Advantages Disadvantages When Market -Credible technique -Assured to be in the right range -Fairly simple to calculate -Quicker if market data exists -Sometimes difficult to gain enough data -Assumes current industry norms apply -May undervalue technology When technology is comparable to others and good market data exists Cost -Quicker than Income method -Definable -Not related to revenue -May undervalue technology When licensee could easily engineer around IP; e.g. software Income -Most precise valuation method -Considers revenue impact -Can be adjusted for risk -More complex mathematically -Requires input from licensee -Depends upon assumptions -Difficult for very early stage technologies When there is enough information to determine potential revenue Unique higher value technologies Monte Carlo -Very precise method -Variability analysis -Computationally very complex For highest value technologies Real Option -Advanced method good for early stage technologies -Not well accepted -Complicated mathematically -May over value technology For very early stage technologies Auction -No calculation -Direct market valuation -Lack of efficient market for early stage technologies -May not get commercialized Many potential licensees Less resources Older technologies 67

65 Closing Understand how the technology fits into the business of the licensee Explore various valuation scenarios before negotiations and know what information could potentially be shared with the licensee Be prepared to run new valuation scenarios as new information is learned 68

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