Season South Incubation

Mr. MD, listen up. Take note of Open Innovation

Published in Innovate! magazine, June 2008.

If you could get all the American people to line up from the most to least intelligent, and add up the most intelligent 15%, that would give you a total which is about the same as the top 4% in India, or top 3.5% in China. However, that same number of people would be more than the total South African population! Or if you think you’re one in a million, it implies in India alone there are 1100 people just like you.

“So what” you may ask. The fact is, if we think that we have sufficient expertise in our companies to keep up globally competitive over the next ten years, we may be entirely wrong. There are more people outside our company probably better skilled at what we’re doing than within our company. This has lead to a new research and development (R&D) practice where external technology is used along with internal R&D, and has been coined Open Innovation by Prof. Henry Chesbrough, a professor and executive director at the Center for Open Innovation at Berkeley Haas School of Business. Globally this trend has been embraced by more than 50% of the Fortune 500 companies already, and actively used to either create or sustain a competitive advantage.

Robert Cooper in his book “Winning at New Products” indicated that 46% of resources spent on R&D is wasted on failed projects. Only one in seven product concepts and one in four development projects succeed. Experience has also shown that most projects exceed their budgets and delivery dates by 1.5 to 3 times. In essence this means that you can start an R&D project that will take you twice as long as you anticipated, cost twice as much, only have a 25% chance of success, and will then take another two years before you start earning an income from it – if it makes a profit!

The difference between Closed and Open Innovation
To date South African companies followed a Closed Innovation approach which basically believes:
• All the smart people in our field work for us
• To profit from R&D, we must discover it, develop it and sell it ourselves
• The company that gets an innovation to market first will benefit the most
• If we create the most and the best ideas in the industry, we will be the industry leader
• We should control our innovation process, so that our competitors don’t profit from our ideas
If we retain such a mindset, we will find ourselves falling further and further behind the rest of the world.

Open Innovation acknowledges the vast amount of expertise available outside the company, and believes:
• Not all the smart people work for us. We need to work with smart people inside and outside our company
• External R&D can create significant value; internal R&D is needed to further unlock and plug the holes offered by external technology
• We don’t have to originate the research to profit from it
• Building a better business model is better than getting to market first
• If we make the best use of internal and external ideas, we will benefit the most
• We should profit from others’ use of our innovation process, and we should buy others’ intellectual property (IP) whenever it advances our own business model

Initially Open Innovation emerged when companies started promoting their intellectual property (IP) to one another for licensing. Companies found that they could actually make money by licensing their competitors, or to companies in other geographic areas, or outside of their core industry.

Once this happened, it was a natural progression to start promoting specific technology needs in the hope that someone else might have the applicable technology to solve the need. The benefit of this was that the company seeking the technology can evaluate various potential solutions, and only license those that appear to offer the best solution. Often this technology was already patent protected, which limited their risk, was close to market, and cost them much less to license than to develop them.

Proctor & Gamble leading the way
One multinational company that embraced Open Innovation pro-actively, is Proctor & Gamble. They have made a strategic decision that 50% of the company’s new products must come from outside P&G’s labs. This forced them to tap into the brains and creativity of millions of inventors and smaller companies around the world. It required them to restructure their existing R&D department in taking outside concepts, and develop these into new products. They created new jobs called “technology scouts“ and appointed 70 people in these positions to actively seek new suitable products and technology. They also created a new role of vice-president for innovation and knowledge to drive the Open Innovation initiative through the company. In addition to the technology scouts, they also make use of outside innovation networks like Innocentive, NineSigma and Yet2.com to source suitable technologies.

Most importantly, P&G became known as a reliable company, a company that can be trusted with the new concepts of inventors and smaller firms. This trust encourages inventors to return to P&G with more, better, and more suitable innovations. The Open Innovation program was so successful for P&G that Unilever had to follow the same route to remain competitive.

Impact to South African companies
Open Innovation could save large amounts on R&D expenses, but will not replace the R&D department. It will however change the role of R&D in large companies where focus will be on finding suitable technologies, and supplementing these with internal developments. We will also see a shift in R&D from large to smaller companies, and increased trade in IP. Large companies need to be careful not to steal ideas and IP from inventors and smaller firms, since they will develop a reputation of not being trustworthy. Rather be willing to pay for new concepts and patents that are sourced from outside, and make your needs known to external inventors. This will ensure a continual technologies being presented to you from outside sources.

Open Innovation intermediaries like Yet2.com makes it possible to remain anonymous while promoting your technology needs. This removes any danger that your competitors will discover your weaknesses, or new product development direction.

Just like new technologies can be sources from external sources, so can internal technology also be licensed to solve the technology needs of other companies. I have recently seen how a natural antibacterial product attracted interest from paper and linen producers, vacuum cleaning as well as agricultural companies. These are markets that was never considered as possible markets.

In summary
However we look at it, Open Innovation is here to stay, and the sooner we embrace it, the more profitable. It allows us to source market-ready technologies with little risk and at a fraction of the cost of developing it. At the same time, it allows us to find markets for our internal IP in other industry sectors, other countries and sometimes even amongst our competitors. Its time to become innovative in the way we innovate.

If you have specific questions how your company can benefit from Open Innovation, feel contact me at NICOLAS@LTN.CO.ZA

About the author
Nicolas Lategan is founder of Licensing Technology Network. A company focused on marketing South African technology to facilitate license deals with international and multi-national companies. He is the South African agent for Yet2.com, the world’s largest Open Innovation technology transfer company. He is also a Registered Affiliate for NineSigma, and a member of Licensing Executive Society. For more information, visit WWW.LTN.CO.ZA.

2009: 08/17
POSTED BY: Nicolas
CATEGORY: Uncategorized
TAGS: open innovation
patents
profits
R&D
24 comments

The Perfect License Deal – A case study

Published in Innovate! Magazine, September 2008.

Making a living from licensing technology is a bit like playing the Lotto. The odds of striking rich are few and far apart, but at least it gives you a frequent thrill of anticipating a win. Also, anyone who has travelled internationally would know that it becomes crowded even travelling with the most accommodating and polite partner. Dealing with inventors is like choosing your mother-in-law as travel companion on a two month international business trip.

Every inventor thinks his invention should attract the attention of Bill Gates or at least Richard Branson. They want a few hundred million upfront and 40% royalties until the time the ANCYL host a tea and koeksister party for the Dutch Reformed women’s league. Add to this the fact that they are extremely hard-headed, distrust you, are always close to bankruptcy and have a closer relation with their patent attorney than their spouses, and you should have a better picture of what its like to license technology for a living.

With this back drop, I had the pleasure of experiencing an almost perfect licence deal recently. Perhaps it inspires some other inventors.

The lead came to me from a patent attorney who saw the desperation in the inventor’s eyes. The inventor was a young black entrepreneur, and his invention was a kitchen utensil that allows mom to make fun-food for the kids. To me it looked like a gimmick that will be deposited in the drawer forth from the top within two months of purchase. However, I immediately knew this product would work in the USA, and contacted our affiliate partners there. There is always a market for new kitchen, car, DIY, garden, outdoors, or home appliance products in the US.

Our US affiliate confirmed our gut feel, and set about exhibiting the product on some homeware trade shows. Within four months we secured strong interest from a direct selling company, but lost out when they selected the other product on their shortlist. Soon thereafter another company showed interest, and the negotiation started.

At this stage, its important to point out why the process progressed so smoothly, and I need to compliment the inventor here. He has done his homework, showed commitment and faith in this invention, and proved his faith by investing in it.

1. First we had well-designed graphics of the product to work with. This is essential when you only work with a concept and no physical product.

2. In order to stretch the selling cycle of the product we brainstormed a series of re-seller products and the inventor had these concepts converted to professional graphics by a graphic designer. These graphics helped a great deal transfer the selling and reselling values of the product to the potential licensee.

3. At this stage the potential licensee wanted to see a prototype of the product. Once again the inventor was proactive and could supply a “grown” prototype that was neatly painted to look like the final product. Having a physical product in your hand, has great persuasive power. Suddenly it was not a concept anymore, but a physical and tangible product.

4. It was evident the product required some modification to suit the US market and manufacturing costings were also required. Once again the inventor was proactive, and had costing available which provided an immediate indication that mark-up margin would be possible to the potential licensee. Cost indications from China were also obtained to increase mark-up margins for the licensee.

5. Now that the product also made financial sense to the potential licensee, we commenced with negotiation. The licensee needed to incur substantial upfront expenses to get the product to market, and was unwilling to pay any upfront licensee fees. Despite already investing R240 000 into the concept, inclusive of patenting fees, graphic designs, prototype and industrial design and growing the prototype, the inventor was willing to follow our advise and rather opt for higher royalty percentages and no upfront fee. Most inventors would have insisted on an upfront fee due to cash flow strains, but this would have scared the licensee away.

6. Negotiations took about one month to conclude, and the inventor was very open for advice and understanding, and did not try to impose unrealistic expectations on the licensee. We also conducted a due diligence on potential licensee, and were satisfied that they have the right relationships with retail buyers in place to get the product into major retail stores like K-Mart and Wallmarts.

7. The deal was signed exactly eight months after the opportunity appeared on my laptop screen. A royalty payment structure was put in place with a US bank that will repatriate royalties and commissions to the various parties. Since US retailers work in 18 month cycles, we can only get the product on the shelves in 2010, or perhaps last quarter 2009 if some other products in that category perform below expectations.

The US market for household impulse purchases operate on two price levels, $9,99 and $19,99. If it retails at $9,99, the product need to wholesale at R4,99, and be produced below $3,50. We negotiated an above average royalty rate on the wholesale price which would likely result in about R400 000 royalty income for the inventor if only minimum sales are achieved. However, if the product is a winner, the inventor’s income is likely to be closer to R2 million or perhaps even more.

I only met the inventor face to face after the license deal was already signed. At that stage, like most inventors, he was without a job, low on cash but high in spirit. His first words after we met was; “I feel like I have won the Lotto, but can only cash the ticket in 2010!”

If you have specific questions how your company can benefit from Open Innovation, feel contact me at NICOLAS@LTN.CO.ZA

2009: 08/17
POSTED BY: Nicolas
CATEGORY: Uncategorized
TAGS: licensing
patent
technology
93 comments

Patents don’t drive profits – selling does!

Published in Innovate! magazine, March 2008.

You purchase a property even though you have not had the opportunity to visit the site. One day you decide to drive out and have a biltong-and-beer on your piece of land, while watching the sun set. However, when you arrive at the spot indicated on your title deed, you discover the property doesn’t exist. A call to the real estate agent is met with the excuse that you should have determined the existence of the property before you bought it….

There are many inventors that approach me with products they invented and sunken large sums of money to protect it with a patent. After a five minute evaluation, it becomes clear the patent is worth less than a Zim Dollar on the Harare black market. This always comes as a surprise to the client, especially considering the thousands of Rands paid for the patent. In South Africa a patent search is not required in order to file a patent. A search is only done during PCT stage. This means you could theoretically obtain a SA patent for a wheelbarrow, but chances are slim Gardena or Black & Decker will license it.

Some patent attorneys will tell a client they don’t think the patent will be a strong one, and if you find such patent attorney, keep him! Other patent attorneys view such inventors like jewellers view engagement and wedding rings – bread-and-butter clients that pay the rent and month-end cocktails. I increasingly find clients being disillusioned from such experiences, loosing respect for patents as well as patent attorneys. Perhaps this contributes to why South Africa is lacking far behind other developing countries regarding the number of patents filed.

This leads me to my next question:

Is number of patents filed a good barometer for innovation growth?

A US consultancy, Booz Allen Hamilton conducts an annual study amongst the top 1000 largest corporate R&D spenders – the Global Innovation 1000 Report. This is the most comprehensive study in the world to assess the influence of R&D on corporate performance.
Their latest results might cause a few facial nerve pinches.

• There are no significant statistical relationships between R&D spending and the corporate financial success when measured against:
o Sales and earnings growth
o Gross and operating profitability
o Market capitalization growth, and
o Total shareholder returns
o The only performance variable with a statistical relationship with R&D spending is gross profits as percentage of sales.

What are the reasons for this? Many companies, like inventors, like governments, like students, like universities try to re-invent the wheelbarrow. They waste money on un-focused R&D, get stuck in poor project management, don’t fully understand customers’ needs, or simply have poor marketing and investment planning. Or they still believe you just have to decant more money into an R&D pot and the gold coins will bubble over.

• Only about 15% of corporate R&D spending goes to research
The rest is spent on development and commercialisation. Now this is a lesson we can learn in South Africa! There is lots of money available for R&D, new scientific studies, doctorate degrees – you name it, but try to get funds to commercialise a technology, and you have to sacrifice a large chunk of your company’s equity. In a previous edition we discussed the importance of matching R&D investment with investment in marketing of new technology. The principle appears to be 15% research, 35% development, 50% commercialisation. Isn’t it time we structure R&D investment in publicly funded research institutions this way as well?

• To be the best, you also have to be the smartest. The top 10% of the top 1000 are not the biggest R&D spenders, but have demonstrated competence in all of the following:
o Idea generation – basic research and conception
o Project selection – the decision to invest. More time needs to be spent in this area to ensure those patents that are going to be filed will be relevant, novel and fulfil a commercial or social need. This means a fair measure of market research early on in the innovation process.
o Product development – project managing this process through the organisation
o Commercialisation – bringing the product to the market

The speed, level of seamlessness and competence during the above four phases, distinguish the top 100 from the bottom 900 corporations. Interesting to note, some of the top companies require their researchers to spend a significant portion of their time working with customers. This is where needs are identified.

• There is no statistical relationship between financial performance and patent counts or patent quality. R&D spending does relate statistically to the number of patents granted, but the findings indicate that more R&D spending does not necessary create more valuable innovations. Counting the number of patents filed is a misleading measure for corporate or national innovativeness. The reasons found were that very few patents are really significant. Also, many innovations don’t involve new patents. Value is often created by adjusting existing patents in such a way that it fulfils new customer needs.

Counting number of patents filed only leads to two things:

o Sustaining bread-and-butter type patent attorneys
o Making patents the focus, in stead of value creation from innovation

• Finally, Open Innovation as means to leverage innovation. Many companies are scaling down their own R&D, simply because someone else probably already invented or developed what they are seeking. It is less risky, more profitable, quicker to market and more sensible to license in the applicable technology. This might not result in another patent certificate on your wall, but you still become the rightful IP holder for that specific application – and that’s all you need.

In summary
The Global Innovation 1000 report indicates that it is not always the biggest R&D spenders that reap the biggest profits, but that competency across all innovation levels is required. R&D investment must be spread between research, development and commercialisation, and the focus of innovation should not be patents, but the likeliness that value can be extracted from a patent. Sometimes it is also better to license a technology rather to invest in your own research.

And heartfelt sympathy to all those inventors who, tonight, only have bread and butter to eat.

If you have specific questions you would like us to discuss in this column, feel free to direct these to Nicolas@ltn.co.za

About the author
Nicolas Lategan is founder of Licensing Technology Network. A company focused on marketing South African technology to facilitate license deals with international and multi-national companies. He is the South African agent for Yet2.com, the world’s largest online technology transfer company. He is also a Registered Affiliate for NineSigma, and a member of Licensing Executive Society. For more information, visit WWW.LTN.CO.ZA.

2009: 08/17
POSTED BY: Nicolas
CATEGORY: Uncategorized
TAGS: patents
profits
R&D
29 comments

For you Ms. CEO

Published in Innovate! magazine, December 2007.

I was recently approached by a desperate IP manager of a local research institution. He is under pressure to commercialise their IP portfolio, but struggles to achieve results. Initially it sounded easy – surf the net, look for companies in similar industries, send them an email with the patent spec attached, draft the license agreement, and wait to celebrate.

One year down the line, nothing is licensed, sold or signed. The CEO becomes anxious and applies more pressure.

In my discussion with the IP manager, it turned out that some IP is licensed out, but no proceeds are coming in. The remaining IP is irrelevant to most markets, but patents are faithfully being renewed each year. There were some gems still available, so we did a proposal to him, which he presented to his CEO.

Apparently the proposal was slashed from the table without him even being able to motivate what the costs are for. The reason given – “No budget.”

Where is the problem?
My view is that leaders of companies very often come from the technical or financial back ground. To them marketing is an expense. However, ask money for R&D on new technology, and the cheque is signed. Ask money for patents, and the electronic transfer is made.

Let’s take for example the average research project at a national research institution. It would not be uncommon to invest R3 million in the developing of a new technology. Thereafter a patent is filed, PCT searches paid and national filings done. To obtain proper protection in key international markets could easily cost R300,000. Now we have sunken R3.3 million in a technology we hope has market potential. At this stage stakeholders want to know what return is forthcoming from this “investment”, and pressure is applied to the technology transfer (TT) manager.

When the TT manager applies for funds or assistance, he is told “There’s no money, we already invested R3.3m into this.”

How foolish is this!

The same happens on national level. There are great incentives for R&D like the 150% SARS refund but any marketing expense is excluded. What is a R3.3m patent worth if it’s not licensed or sold?

A change in mindset
What is needed is that executives and decision makers should start to match “investment” in R&D with “investment” in marketing. In consumer products the investment in commercialising a new product by far exceeds the investment in developing it. Why is it that with high-tech products, which are even more difficult to commercialise, we display such lack of judgement by thinking the technology should sell itself? Let us start to budget at least as much for commercialising IP as we budget for developing it.

From a national level, this means that research grants and subsidies, should also cover the cost of commercialising that IP. Failure to do so will just lead to greater losses on IP investments. Rather invest larger amounts in fewer projects, and succeed in unlocking the value of those investments. We seem to pride ourselves with the amount of money we spend on R&D, but fail to also mention the losses we made due to poor commercial success. This can only change if we begin connecting research and marketing budgets and treating them as a unit.

Local versus international

With Open Innovation here to stay, it will become more and more important to respond to international technology needs that we can fulfil from South Africa. This is good news for South Africa, since we do have good technology to offer, and will benefit greatly from strong currency deals. However, it also means that we be willing to compete in strong currency when promoting our technology. It means where an hourly fee for a local expert will cost R750, it may cost $350 overseas. It means budgeting to attend international conferences, technology transfer meetings, travel, accommodation and potential client visits.

I applaud a client of mine who recently paid $5,000 for a one day consultation with a US industry expert. The end result was that the expert joined his board, and is busy opening doors in the US market that would have been very difficult to open from here. He claims it was the best R35,000 he ever invested in his company.

The mental groove
As marketer, I am well aware that after working with a product for a long time, you struggle to remain creative in marketing it. It is then when its good to consult an outsider to point out new ways of approaching a challenge. Too many executives fail to understand this and just apply more pressure on marketers to perform. The same applies to TT officers responsible for IP licensing. You need to benefit from the networks of others, and you need external inputs to help you achieve more success.

So please Ms.CEO, next time you’re faced with a budget challenge, please display greater vision and create a budget. That’s why you’re the CEO.

If you have specific questions you would like us to discuss in this column, feel free to direct these to Nicolas@ltn.co.za

About the author
Nicolas Lategan is founder of Licensing Technology Network. A company focused on marketing South African technology to facilitate license deals with international and multi-national companies. He is agent and accredited as independent technology broker by Yet2.com, the world’s largest online technology transfer company. He is also a Registered Affiliate for NineSigma, and member of Licensing Executive Society. For more information, visit WWW.LTN.CO.ZA.

2009: 08/17
POSTED BY: Nicolas
CATEGORY: Uncategorized
13 comments

How do I value my patent?

Published in Innovate! magazine, September 2007

In the last edition we discussed the importance of ‘packaging and promoting’ a technology for licensing. Lets suppose you received a few mails expressing interest, and the question is posed to you, “How much do you want for your patent?”

The normal answer from most inventors range from a “few million to more than a billion.” Unrealistic expectations cause many potential deals to fail.

Agreeing on an acceptable value by both parties is a tricky thing to accomplish, especially when dealing with early stage IP. Venture capital (VC) companies often engage in difficult calculation models, and if you employ the services of a professional accounting firm, you might find their account exceed the value of your patent.

“Rule of thumb” valuation
Excell Partners, a VC in the United States adopted a quick and easy assessment process. Even though it’s not totally scientific, it provides a base from which to negotiate.
1. If you have a well protected technology, international patents in place, and working prototype, it’s probably worth $1 million.
2. If you can prove it has great market potential, and have a well validated business plan how to unlock that potential, it’s worth another $1 million.
3. Add to that a beta test of the technology in the market, then you can add another $1 million.
4. Get together a strong commercial team to make this happen, and that can earn you $1 million more.
5. And finally, if you can prove you’ve got actual customers and sales, then claim another $1 million.

Most inventors are likely to stop prior to the first step. Having a provisional South African patent in place, is worth little unless you can prove that you will also be able secure strong international patents. That’s why most companies interested in licensing, would want to license a technology once international patents are in place, or at least when the PCT search report is available.

Standard approaches
Globally there are three approaches that are generally followed when valuing IP. The choice of method is determined by the purpose of the valuation, and the availability of relevant information. Most inventors would want to determine the value of their IP in order to sell it at a fair market value. One of the following approaches should provide some guidance to determine a selling price.

1. Cost based approach
The rationale behind this approach, is to ask the question, “How much will the seller have to spend to develop a similar technology?” A typical area where this approach is used is in software development. The seller can always get a team of software developers together, and write their own program. However, that might take another 12 months to complete. If they license the technology now, they can start generating a profit from it straight away. Other factors to take into consideration are:
• Determine the current cost of replacing or developing a similar technology, not the historical costs
• Typical cost elements would include material used, man hours and a pro-rata portion of overhead expenses.
• Should the buyer develop their own solution there is always the possibility that they might experience technical problems – therefore running a risk not to succeed. By eliminating this risk for the buyer, the seller may add a small premium to his price.
• Also consider what the opportunity cost would be to the buyer – how much income they will loose out on until they have a product if they do not license the technology.

Since this approach is based on available data and logical calculations, it could results in fairly similar figures when calculated by both buyer and seller. Therefore it may result in a fairly simple negotiation process.

2. Comparison or Market approach
When selling your house, you’re likely to obtain quotations from estate agents. They compare what your house offers, with other recently sold houses in the same neighbourhood that offered similar features. In so doing they arrive at a comparative price for your house.

The same principle applies to patents if suitable comparative data is available. Care must be taken to consider what was included in comparative transactions. Issues that could influence the price include:
• Is the type of IP of similar nature
• Was prices inflated to accommodate trade mark values
• Are the IP applicable to similar industries
• What geographic constraints were part of the transaction
• Did the buyer obtain exclusivity, or part-exclusivity
• What were the payment time frame and requirements
• Was it a voluntary sale or forced sale
• Did market conditions change

This approach, if reliable data is available, provides a good benchmark, but is often not sufficient as only valuation method, and can be combined with other methods.

3. The Income approach
This is the approach most often used, and quite understandably as well. It values a patent based on the potential income the patent may bring a licensee or buyer of the patent. Generally there are five factors to take into consideration.
• Income that can be generated by commercialising the patent. This requires proper research of the target market, and indicators why the market will adopt the new technology or patented product.
• By understanding the way the market will respond to the new technology, it becomes possible to predict the expected growth rate of the revenue that results from utilising the patent.
• It is also important to determine the duration of that growth rate and revenue stream. Even though a patent is valid for 20 years, it may be that the expected competitive life span of the patent is only two or three years. A good example of this is developments in the computer industry where new improved products reach the market every six months.
• Inventors often forget the risks associated with commercialising the IP. They focus on the potential income that can be generated, but fail to understand that capital and human resources are often required to commercialise IP. Considering the large number of high-tech companies that fail, this is a very real risk, and failure to understand this, will result in frustrating IP negotiations. Buyers and licensees of IP, will often build in an IP value discount factor to accommodate the risk they take. This merely means that even if they agree a technology to be worth R100, they are only prepared to value it as R80 in order to cover for the additional risk they bear.
• Finally the IP owner should recognise that only a proportion of income can be ascribed as being directly related to the patent. Take cell phones for example – an inventor may develop a new unique feature to incorporate in the handset, but the bulk of revenues are generated from airtime. Laying claim to large royalties on total turnover of the cell phone company would be unrealistic.

While there are more techniques to determine the value of a patent, the above three are widely used. Good practice would be to apply all three methods and compare the resulting values. Formulas are then used to integrate the respective values, market growth figures discount rates and life span of the IP to arrive at a final figure.

It is essential for the inventor to be able to explain how he determined the IP value. However, after many hours of calculations, many IP professionals will tell you, the IP is worth as much as a buyer is willing to pay for it. Sometimes that means finding another buyer!

If you have specific questions you would like us to discuss in this column, feel free to direct these to Nicolas@ltn.co.za

About the author
Nicolas Lategan is founder of Licensing Technology Network. A company focused on marketing South African technology to facilitate license deals with international and multi-national companies. He is accredited as independent technology broker for South African technology by Yet2.com, the world’s largest online technology transfer company. He is also a Registered Affiliate for NineSigma, and member of Licensing Executive Society. For more information, visit WWW.LTN.CO.ZA.

2009: 08/17
POSTED BY: Nicolas
CATEGORY: Uncategorized
TAGS: patent
valuation
410 comments

Licensing Technology. What does it offer me?

Published in Innovate! magazine, March 2007.

Many people talk about licensing out technology as if it is something they do on a daily basis. However, when you start asking a few questions, it becomes evident that very few of them have successfully managed to secure a profitable and sizable license deal.

I recently spoke to a business development manager of a biomedical company who assured me that they have “signed up the world.” He went on to explain a complex set of high profile deals that were signed with different parts of the world. However, when I asked him how much have they earned from those deals, the question was swiftly side stepped.

What is licensing?
It is granting another company the right, sole, exclusive or non-exclusive, to either manufacture, distribute, or sell products of the intellectual property owner. It preferably goes along with an upfront fee as payment for the privilege of obtaining exclusivity. There are often also the much spoken about ‘royalties’ that are added to the deal. Every IP holder wants royalties. The rationale behind this is that it generates perpetual income so that the IP holder can sip cocktails on the beach while the licensee does the work and pay the dues.

While in principle it can work this way, there are many more aspects to consider when structuring a license deal. In this column we will consider some of the important aspects of licensing technology. We will discuss topics like:

• How do I determine the upfront fee
• Pros and cons of royalties
• How should one structure the royalties (there are more than 14 different ways)
• What if I don’t get paid?
• How do I prepare for negotiating a license agreement
• When can I license
• How do I find a suitable license partner
• What are the mistakes to avoid

We will also try to address some of your questions regarding licensing in this column.

Why licensing?
Licensing is a very clever way of commercialising new technology without incurring expenses related to traditional commercialisation models. Very few start-up companies make it through the commercialisation phase. Yes we want to create jobs and be “Proudly South African,” hang the president’s photo in the board room, and celebrate the first VC investment with champagne and Woolies cheese.

What happens next is the appointment of highly paid engineers and scientists on the team, business class overseas trips, patent and overpriced legal related fees, and appointment of the odd “specialist consultant” who managed to secure a lucrative retainer deal. Before long the accountant becomes more vocal during management meetings since the current cash burn rate only allows for six more months of operation. Filter coffee is replaced with Ricoffee (except for directors), expense accounts are tightened, and before long the accountant find a position at another company “…he simply cannot refuse”. This is the beginning of the end. The MD heads off to the VC again for second round funding and discovers VC fund managers only seek their own interests. Eventually he has to relinquish control of the company. The motivation to succeed is gone since only the VC will benefit from success, and focus is more on survival than prosperity. This doesn’t suit the VC’s agenda, and before long the company is closed and the IP expires.

Licensing should be done as early as possible during the commercial cycle. Clever licensing often only requires the IP to be well protected and proof of concept completed. By this one would ideally want to have a PCT search report already, and preferably proof of commercial production. A trial site where the technology is used would also help a great deal.

By identifying suitable license partners early on, specific countries can be “sacrificed” by requiring a larger upfront license, and smaller or no royalties. This cash injection prevents the expensive second round VC funding. Focus is then on finding suitable license partners where more lucrative royalty deals can be negotiated for continuous income. Finally when cash flow is well established, local production can commence for the remaining markets.

License trends
Globally large corporations are increasingly licensing-in new technology. The chances are good that the IP a corporation seeks already exists within another company. By simply licensing that technology, the corporation does not have to incur expensive R&D costs hoping that they will be granted an international patent. Focus is now on finding the most suitable IP, and simply to license or acquire it.

The challenge for the inventor, start-up company or university is therefore to promote their technology in such a way that it attracts the attention of the serious players in the market. Being in South Africa, we are in the position to say to a global licensee that one would like to retain the IP rights for the African market. They are often more than willing to relinquish the rights for Africa. This can then be licensed to a local firm to generate job opportunities.

Why licensing is good

• Licensing is just a different form of export. One can export products or services, or you can export IP. The important part is that the license fee and royalties find their way back to South Africa, and not to Guernsey or Isle of Man!

• A licensing model requires less cash during the initial start-up stages of a company.

• Most inventors are poor business people, but by making use of a professional license broker, they can improve their chances to benefit from their invention significantly.

• There are various ways to license an invention, which renders the negotiation process more flexible. It’s not like a physical product where you have to haggle over the price compared to what’s being offered from China.

In the next few editions, we will discuss certain license related issues in greater detail. If you have specific questions you would like us to discuss, feel free to direct these to Nicolas@ltn.co.za

About the author
Nicolas Lategan is founder of Licensing Technology Network. A company focused on marketing South African technology to facilitate license deals with international and multi-national companies. He is accredited as independent technology broker for South African technology by Yet2.com, the world’s largest online technology transfer company. He is also a Registered Affiliate for NineSigma, and member of Licensing Executive Society. For more information, visit WWW.LTN.CO.ZA.

2009: 08/17
POSTED BY: Nicolas
CATEGORY: Uncategorized
TAGS: licensing
technology
40 comments

How can I promote my technology?

Published in Innovate! magazine, June 2007

In the last edition we discussed the importance of ‘packaging’ a technology for licensing. Where to now when you have your box of “superglued” prototypes or Petri dish of strange crawling organisms ready?

The R&D and Marketing paradox
It always amazes me how much money is invested into research and development (R&D), millions and millions of Rands. However, all that intellectual property that result from such research, is virtual worthless if it is not commercialised. When try to get money from a VC to commercialise a technology, then you receive sympa-pathetic emails declining your application “…because it is too early stage.” Don’t even bother going to a bank, they want your house and car, and you get to keep your wife and cat.

Perhaps it is time for our government to ensure, that for every Rand spent on R&D, a Rand is also spent on commercialisation and marketing of the end product. Money spent on R&D is called an investment, but money spent on marketing is seen as an expense. I think it should be the other way round. R&D does not bring in any money, it only spends it. Money spent on marketing, could at least result in sales. Isn’t that a better return on investment?

Most start-up technology companies fail because they do not understand the challenge when having to market a new technology. Let every technology owner at least read Geoffrey Moore’s book, Crossing the Chasm. It explains the unique difference between selling a tin of Coke, and selling a new tin opening patent for Coke.

Marketing options
Exhibiting at International Trade Fairs is a bit like being the local wall flower at the high school dance – you hope that the right person from the right company will pass your booth, enter, and engage in a discussion with you. Its also expensive and could easily cost you R60,000 or more, but at least you also get to taste a real New York bagel, or have gluwein and some strange würst in Dusseldorf.

As alternative consider the following options of promoting your technology:

• A few IP trade fairs have recently been active in the USA. It normally requires conference attendance, and exhibit attendance, but at least you know people attending are seeking new technology to licence. There are also often technology scouts from prominent multi-national companies. Some of these technology scouts abuse their position and might require of you to entertain them (and the Brazilian beauties at their side) without seriously considering your technology offering.

• Overseas license agents will promote your product on their expense, find a license partner, and take 30% – 50% of the royalty income. It’s a low risk approach for you since you incur very little expense, but often limited to consumer related products. Some of them will also require exclusivity for a few months, which ties your hands during that period.

• International IP auctions are gaining popularity. There are often up to 500 attendees, and they are there because they want to buy technology. This is the quickest way of extracting the value of a patent currently since the whole process can be as short as six months. You will be required to sign an IP transfer agreement prior to the auction. You can also set a reserve price, and will have to budget about R40,000 per patent on auction.

• Online patent auctions are gaining prominence, but are mostly suitable for level one to three technologies. There is no active promotion of the technology, and you might feel a bit like a wall flower at a dance – sit and wait until some asks you for a dance.

• Open Innovation technology seekers has become a very popular way of sourcing new IP. There is a global Open Innovation community of about 120,000 people currently taking part in technology challenges. This trend will become more and more prominent. Research institutions will benefit by knowing what technology on their books are ready or close to commercialisation, and reacting on Requests for Proposals from technology seekers. Often a three week response time is required, with one year development period.

• There are also a number of technology transfer companies that specialise in promoting and sourcing technology to and for prominent international and multi-national firms. They offer a combination between online promotion with search tag facilities, and direct introduction of promising technology to decision makers in target companies. They operate on a combination of upfront fees, combined with success commissions.

• Some companies also offer dedicated and focused promotion that requires long hours on the internet searching and analysing potential clients, writing introductory letters, getting passed gate keepers, legal departments and companies that simply don’t respond, finding out who is the “Right” person to speak to, engaging in a discussion, addressing their questions and managing the licensing process. Its time consuming, requires focus and a lot of people skills and telephone calls.

The average license deal takes 6 – 24 months to conclude from the date a prospective client shows interest in your technology. With long sales cycles like this, it requires tenacity and patience, but could result in a very rewarding ski holiday for yourself!

If you have specific questions you would like us to discuss, feel free to direct these to Nicolas@ltn.co.za

About the author
Nicolas Lategan is founder of Licensing Technology Network. A company focused on marketing South African technology to facilitate license deals with international and multi-national companies. He is accredited as independent technology broker for South African technology by Yet2.com, the world’s largest online technology transfer company. He is also a Registered Affiliate for NineSigma, and member of Licensing Executive Society. For more information, visit WWW.LTN.CO.ZA.

2009: 08/17
POSTED BY: Nicolas
CATEGORY: Uncategorized
TAGS: license
patent
promote
162 comments

I have a patent, what do I do now?

Published in Innovate! magazine, Issue 05 2007

<br /> I have a patent. What now?</p> <p><Body text><br /> In the previous edition we discussed why licensing technology is a good commercialisation strategy, and where it fits into the commercial cycle. Let’s assume you’ve paid the patent attorney to fund his upcoming ski holiday and now have a provisional patent in place. (As a side note, it is possible to write and file your own patent for a mere R65,00 through www.cipro.co.za, but if it is good technology, then its better to work through a good patent attorney, see www.saiipl.org.za for a comprehensive list of patent attorneys).</p> <p>First it’s important to note that in South Africa, it is not required by the patent registrar to do a competing patent search prior to granting a provisional patent. This means, you might think you have a patent, but somewhere else in the world, some one has beaten you to the patent attorney’s door. So start by doing your own patent search on the internet, and spend a few days searching for competing patents. Also note that patent attorneys will only do a patent search if you ask them to and you’d have to pay for the time they spend doing so. </p> <p>If, after your patent search, you are confident that your patent is novel, includes an inventive step and has commercial application, then another question needs to be asked: Is the technology really licensable? Innovations are normally divided into three classifications. </p> <p>A level one innovation has a specific application for a niche market, is difficult to distinguish from competing products, and has little license potential. </p> <p>Level two and three inventions have stronger patents, clearer commercial potential but often limited to a specific industry, and a limited life span.</p> <p>A level five innovation is regarded as disruptive technology – meaning the utilisation of your technology will bring to an end the existing technology that is currently in the market. A good example will be CD’s which pushed tape decks out of the market. Disruptive technology might sound impressive, but is often more difficult to commercialise than level four technology.</p> <p>Level four technology has a strong patent, wide commercial application across various industries, and can be “policed”. This simply means, you can determine from the end product whether someone is using your technology without the right to do so. This is the ideal technology to license.</p> <p>The R&D dilemma<br /> Often governments and private companies invest vast amounts in research and development (R&D), but fail to invest in commercialising the technology. It is a good rule of thumb to set aside as much funds for commercialisation as is invested in R&D. To turn a patent into profits, you need to package the technology, and you have to promote it.</p> <p>Packaging technology<br /> The following are guidelines to assist you in preparing your technology for promotion to potential clients.<br /> • All international licensees will want to see the strength of the patent. The PCT search reports helps to indicate the level of international patentability of the technology. So the sooner you have a PCT search report available, the better. </p> <p>• Draw up one page comparison of competing patents, and outline why yours are better. This provides confidence to the prospective licensee that you have done your homework, and can clearly identify the unique benefits of your technology.</p> <p>• Have generic copies of legal agreements available to send it immediately when it is required. Typical agreements that might be needed include a Non Disclosure Agreement, Non-Circumvention Agreement, Non-Analysis Agreements, Material Transfer for Testing and Analysis Agreement, Heads of Agreement template, Negotiation structure for Licensing Template, and License agreement drafts.</p> <p>• Something tangible is much more convincing than paper. Most licensees will want to see proof that your technology works, so have samples available to courier if possible. Alternatively, have a trial reference site or reference client and make a video recording to prove why it is working. If possible, obtain an independent third party to verify the results.</p> <p>• If it’s an electronic device, get a commercial person to identify and specify commercially available components, and build a commercial scale model. There’s nothing more limiting than having an academic researcher who removed bits and pieces from old stoves and TV sets to build a new technology proof-of-concept, but cannot take it one step further towards having a commercial prototype available.</p> <p>• Get commercial indication quotations. This might be difficult to obtain, but try to put a figure on the table of what it will cost to produce your technology on a commercial scale. Help the potential licensee to move from uncertainty towards greater clarity.</p> <p>• Develop some promotional material – Video, brochure, mock-ups, trial reference sites, photos, etc. Remember the person you have to impress is often the CEO of a prospective company who does not have a technical back ground. So make the benefits of your technology visual and interesting.</p> <p>• Do your market research to determine the size of your potential market. Be realistic and remember the licensee could make more money than you as licensor, because they invest the funds and take the risk of commercialising it. Use a good valuation model to determine a realistic value of your patent, and be prepared to explain how you got to your value.</p> <p>Once you have your technology well “packaged” for license, its time to promote it. This could be an expensive and frustrating exercise, but there are some new methods that will enable you to land your box of prototypes on the desk of the right person in the right company. We will discuss this in the next edition.</p> <p>About the author<br /> Nicolas Lategan is founder of Licensing Technology Network. A company focused on marketing South African technology to facilitate license deals with international and multi-national companies. He is accredited as independent technology broker for South African technology by Yet2.com, the world’s largest online technology transfer company. He is also a Registered Affiliate for NineSigma, and member of Licensing Executive Society. For more information, visit WWW.LTN.CO.ZA.</p> </div> </div> <dl class="post_meta"> <dt class="meta_date">2009</dt> <dd class="post_date">08<span>/17</span></dd> <dt>POSTED BY</dt> <dd><a href="http://www.seasonsouth.com/?author=2" title="Posts by Nicolas">Nicolas</a></dd> <dt>CATEGORY</dt> <dd><a href="http://www.seasonsouth.com/?cat=1" title="View all posts in Uncategorized" rel="category">Uncategorized</a></dd> <dt>TAGS</dt><dd><a href="http://www.seasonsouth.com/?tag=patent" rel="tag">patent</a></dd> <dt class="meta_comment"><a href="http://www.seasonsouth.com/?p=14#comments" title="Comment on I have a patent, what do I do now?">1,239 comments</a></dt> </dl> </div> </div> <div class="content_noside"> <div class="page_navi clearfix"> </div> </div> </div> <div id="right_col"> <div id="information_area" class="clearfix"> <div class="side_box" id="information"> <h3>Information</h3> <div id="information_contents">Our team includes technology experts with their own companies, ex-professors from leading universities and meticulous financial managers who has learned how easily a start-up technology company can spend investor funds.</div> </div> <div id="entries_rss"> <a href="http://www.seasonsouth.com/?feed=rss2" title="Entries RSS" >RSS FEED</a> </div> </div> <div class="side_box" id="search_area_top"> <div id="search_area" class="clearfix"> <form method="get" id="searchform" action="http://www.seasonsouth.com/"> <div><input type="text" value="Search" name="s" id="search_input" onfocus="this.value=''; changefc('white');" /></div> <div><input type="image" src="http://www.seasonsouth.com/wp-content/themes/monochrome/img/search_button_n.gif" alt="Search from this blog." title="Search from this blog." id="search_button" /></div> </form> </div> <div id="tag_list" class="clearfix"> <a href="javascript:void(0);" class="search_tag">TAG LIST</a> <ul class='wp-tag-cloud'> <li><a href='http://www.seasonsouth.com/?tag=promote' class='tag-link-4' title='1 topic' style='font-size: 11px;'>promote</a></li> <li><a href='http://www.seasonsouth.com/?tag=license' class='tag-link-5' title='1 topic' style='font-size: 11px;'>license</a></li> <li><a href='http://www.seasonsouth.com/?tag=valuation' class='tag-link-8' title='1 topic' style='font-size: 11px;'>valuation</a></li> <li><a href='http://www.seasonsouth.com/?tag=open-innovation' class='tag-link-12' title='1 topic' style='font-size: 11px;'>open innovation</a></li> <li><a href='http://www.seasonsouth.com/?tag=rd' class='tag-link-11' title='2 topics' style='font-size: 11px;'>R&D</a></li> <li><a href='http://www.seasonsouth.com/?tag=profits' class='tag-link-10' title='2 topics' style='font-size: 11px;'>profits</a></li> <li><a href='http://www.seasonsouth.com/?tag=licensing' class='tag-link-6' title='2 topics' style='font-size: 11px;'>licensing</a></li> <li><a href='http://www.seasonsouth.com/?tag=technology' class='tag-link-7' title='2 topics' style='font-size: 11px;'>technology</a></li> <li><a href='http://www.seasonsouth.com/?tag=patents' class='tag-link-9' title='2 topics' style='font-size: 11px;'>patents</a></li> <li><a href='http://www.seasonsouth.com/?tag=patent' class='tag-link-3' title='4 topics' style='font-size: 11px;'>patent</a></li> </ul> </div> </div> <div class="side_box"> <h3>Recent entry</h3> <ul> <li class="side_date">2009-08-17</li> <li><a href="http://www.seasonsouth.com/?p=21">Mr. MD, listen up. Take note of Open Innovation</a></li> <li class="side_date">2009-08-17</li> <li><a href="http://www.seasonsouth.com/?p=20">The Perfect License Deal – A case study</a></li> <li class="side_date">2009-08-17</li> <li><a href="http://www.seasonsouth.com/?p=19">Patents don’t drive profits – selling does!</a></li> <li class="side_date">2009-08-17</li> <li><a href="http://www.seasonsouth.com/?p=18">For you Ms. CEO</a></li> <li class="side_date">2009-08-17</li> <li><a href="http://www.seasonsouth.com/?p=17">How do I value my patent?</a></li> </ul> </div> <div class="side_box"> <h3>Archive</h3> <ul> <li><a href='http://www.seasonsouth.com/?m=200908' title='August 2009'>August 2009</a></li> </ul> </div> <div class="side_box"> <h3>Category</h3> <ul> <li class="cat-item cat-item-1"><a href="http://www.seasonsouth.com/?cat=1" title="View all posts filed under Uncategorized">Uncategorized</a> </li> </ul> </div> </div> </div> <div id="footer"> <ul id="copyright"> <li style="background:none;">Copyright © 2009 <a href="http://www.seasonsouth.com/">Season South Incubation</a></li> <li><a href="http://www.mono-lab.net/">Theme designed by mono-lab</a></li> <li><a href="http://wordpress.org/">Powerd by WordPress</a></li> </ul> </div> </div> <div id="return_top"> <a href="#wrapper"></a> </div> <script type="text/javascript"> var menu=new menu.dd("menu"); menu.init("menu","menuhover"); </script> </body> </html>

Technology Development