Category Archives: Valuation

IP as a Catalytic Asset

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I’ve recently been reading and thinking a great deal about Intellectual Property and its value to society, you could say that I’m a little obsessed with the concept. But hey, that’s my passion.

So forget about approaches to value and technical methodologies, let’s ask ourselves the question: If I have something that can multiply the value of my other assets, what’s that worth? I think it’s way more than what you or I could imagine, but since I’m the guy writing this post and who has the actual credentials and smarts to figure it out, I guess I’ll explore these thoughts with you.

As I said in my recent LInkedIn post entitled “Intellectual Property Valuation: The Final Frontier?”  I spent my mental energy setting up the discussion.  Today, I hope to advance it forward a little bit.

How is IP Catalytic?

The term Catalytic is a derivative of the word Catalysis which Wiki describes as “Catalysis is the increase in the rate of a chemical reaction of two or more reactants due to the participation of an additional substance called a catalyst.”  

So if a substance can modify the output of a reaction or combination of several factors then it is a catalyst.  In my time working with private and public companies, I’ve found that with the right mix of physical, human and financial assets, most businesses can grow at around 2x the long term rate of inflation.  However those organizations experiencing sustained hyper growth in their key metrics (subscribers, users, revenue, RevPAR, whatever) are most likely doing so because the combination of their physical, financial and human assets are multiplied by their IP.

Some authors describe these hyper growth companies as being disruptive.  I characterize them as having IP that is so unique that it (the IP) makes the entire entity disruptive.  Think about it, why is Yelp in hyper growth?  It’s not because they’ve done anything special with HTML code or outbound advertising sales processes.  Yelp is in hyper growth because they were first to market with a process that allows consumers to easily find, rate, review and connect with local businesses.  Yelp’s IP is the combination of source code, people and content that connect local businesses to consumers in a meaningful way.  After it’s web interface was completed in early 2007, Yelp’s was one of the first creators of native applications for smartphones,  and I would argue that one of its core IP assets are the agreements it has with phone makers to pre-load its app on their phones (kudos to Jeremy Stoppelman and the Yelp Biz Dev team).  The Yelp native Apps on smart phones created hyper-local business directories in the palm of the consumers hand.

Didn’t Yellowpages do this?  Nope…  Yellow Pages tried to combat the move to hyper-local directories by further segmenting its core products into smaller “neighborhood” books before it even got into the web game, but who wants to carry around a smaller version of the Yellow pages?  Ask any small business owner about how often a Yellow Pages ad salesman came to them in the mid 2000s trying to sell them more product, rather than better product.

Measuring a Catalytic Event
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So if you follow my argument that IP is a catalyst then we need to understand the process of Catalysis.  I go back to high school chemistry to understand the process, so bear with me. Here’s a picture of the Catalytic cycle:

Catalytic Cycle

Catalytic Cycle

Once a catalyst has been entered into a combination of reactants (stuff) the result is something that neither reactant could produce without the reactant.  So it’s not 1+1=2, its more like (1+1) x 2=10.

There are two types of catalysts: Regenerating and Sacrificing.  Most catalysts are Regenerating, but those that are sacrificial not only aid in the output from the reaction but also assist regeneration of the main catalyst.   Despite that most “good” catalysts are regenerating and allow the reactants to continue to grow and react over time, they can only continue to affect a reaction if there are reactants.  Eventually the reactants exhaust themselves and new ones need to be put into the mix.  How do we measure this?  Simple, measure the energy or output of the combination produced by the reactants without and with the catalyst.  It’s easier to visualize if you have this diagram;

Before and After Energy Output Involving a Catalyst

Before and After Energy Output Involving a Catalyst

Now that we have an idea as to how to a catalyst affects two reactants we can find a way to measure the impact that the catalyst has on the reaction.  In its simplest terms, the impact of the catalyst is the difference between the two reactions under the same circumstances.  Translating this measurement into an economic framework is a little harder than high school chemistry and instead of boring you for another 800 words, I’ll talk about this over the next few posts.

Do you believe that Intellectual Property (IP) has catalytic properties?  Why or Why Not? I’d love to hear your thoughts.  Please write them in the comment section below, all “normal’ comment will be posted.

 

Trademark your Domain Name?

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Until recently your website’s Top Level Domain or TLD was unable to be given a trademark or copyright by the US Patent and Trademark Office (USPTO) for very technical reasons.  This meant that if you had a TLD that ended with .com, .org, .net or other prominent TLDs from ICANN that you couldn’t protect your domain name from duplication using other TLDs.

With the introduction of potentially hundreds of new TLDs called generic TLDs (or gTLDs) in the ensuing months, the USPTO has recently issued guidance as to when your TLD could be eligible for a copyright or trademark.  While you can read the entire document here, our summary might be easier on your time.

In order for you to be able to register your existing or new gTLD or TLD, you’ll need to provide the USPTO with evidence of the following:

1, Your gTLD will be a “Source Identifier”

What’s that? According to Digimind a source identifier is an agent that keeps you updated on the new sources that need to be tracked.  Meaning that so long as your gTLD can be considered something that can be tracked or found as a source of information you’ve met this criteria.

2. Prior Registration of your Business Name as a Trademark or Copyright

You should have already registered your operating business name under that is extended by the .com, .org or .net etc. with the USPTO for a potential trademark or copyright.  If you haven’t yet registered your company name with the USPTO for a trademark or copyright, then it’s unlikely you’ll be able to register you domain name for a trademark or copyright before then.

3. Provide Proof that your gTLD will be perceived as a Trademark

According to the USPTO “Because consumers are so highly conditioned and may be predisposed to view gTLDs as non-source indicating, the applicant must show that consumers already will be so familiar with the wording as a mark that they will transfer the source recognition even to the domain-name registry operator and registrar services. ”

Marketing or advertising material that specifically advertises the gTLD address should be submitted as should data relating to the amount of time and money you spent on such advertising campaigns.

4. Have a Registry Agreement with ICANN

Just because you’ve registered a domain through your names provider (like godaddy.com or netfirms.com) doesn’t necessarily mean that you have an agreement with ICANN.  Moreover, as the trademark/copyright applicant you need to be the person/entity that is named as the registrant of the domain name.  So if you operate a site, then you can only the be person who, by ICANN, is registered as the domain owner, if your company is the operator, then it must be the registrant.  This “chain of title” issue will become more difficult if you have purchased sites and the registration has not been properly transferred to you by ICANN or if you have used a registration agent in the past.

5. Provide a Legitimate Service for the Benefit of Others

According to the US Trademark Act in order for a service to be considered legitimate, it must primarily benefit someone other than the applicant (owner).  So this means that as the registered domain operator you’ll need to provide evidence that the use of the domain is for the benefit of others including:

  • that you intend to use the gTLD as a trademark
  • describe how the gTLD will target industries or consumers
  • describe if other gTLD’s will be registered and used under the same trademark (i.e. .bus, .fin, .xxx, .info, etc.)

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So what wouldn’t quality for a Trademark or Copyright?

Domain names that were used for internal purposes would not qualify.  So a company intranet domain name could not receive a trademark or copyright.   But a domain name used as portal for external suppliers or affiliates could receive a trademark or copyright.

Our final thoughts…

With the creation of ICANN’s hundreds of new gTLDs, securing your main domain personification and brand development will become even more important for all sorts of entities.  This does not necessarily mean that you should go out and buy all the potential domain names available (a common parking strategy), but instead could choose, in the US at least, to trademark or copyright your main brand name and its associated gTLDs.  Before engaging in such a strategy you should, of course, check with your local patent and trademark agent to ensure that you meet all the criteria mentioned above (don’t know one… send me a note and I’ll make an intro).

Allowing you to create trademarks and copyrights of your TLDs will strengthen your Intellectual Property Assets and increase their overall value as the rights enured from these marks allow their owners to provide for broad enforcement actions.  We think that the USPTO is on the right track with this process and believe that the benefits far outweigh the costs for both online and offline companies.

 

What’s that Worth?

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As I’ve been making the rounds to various connections discussing the new direction that we’ve taken with our business, I get asked the question, why would I pay for a valuation analysis or report when I can do one myself or my investment consultant/bank will do one for me?  So here’s the short answer: because you won’t know what it’s really worth.

I’m not making a self-ingratiating pitch for my services when I say this, I really mean it.  If you or your investment consultant/banker try to pitch the value of your business to a potential purchaser or investor, they’re going to most likely ignore the work and create their own estimate of value.  I know.. I’ve been that Investor.

While on the buy-side, I recall a case where a family had hired a credible independent consultant to assist them with their extraction of the division that they started from their troubled parent.  Not only did this consultant put together a proper financial package (including a proper DCF model), he completed a valuation and transaction structure that made sense.  My colleague who worked on the deal with me felt that it was the best transaction we had seen all year (and we had seen hundreds by this time).  We didn’t have to go digging for all the problems or challenges with the transaction because they were described to us in the consultant’s valuation report (we of course verified the details).   Our investment committee passed on this deal (arrgghh!), but I ran into the CEO a few years ago and he told me that he got his deal done, the way he wanted and was extremely happy with the transaction and the performance of this consultant.

While it’s true that you and your team have a better sense as to what your business is really worth than anyone, this is not the true fair market value, it’s what we call value-to-owner.   

As for your investment banker, well what can I say, they’re certainly in a better position to expose the fair market value but in most cases, they are paid on the successful completion of a transaction and could be considered biased by whomever you’re seeking funds from.  And frankly, the work I have found from most sell-side investment firms is lacking in depth and clarity.

Here’s something else that I learned from my 109 year old grandfather… you get what you pay for.  So if you’re doing your valuation internally, the output is only as good as your team (which I’m sure is awesome) and if you’re relying on an Ibanker or consultant, who is paid on contingency, then the numbers are harder for skeptical investors to believe.

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A lot of the VCs and PE Investors with whom I keep in touch routinely talk about how their primary criteria for their initial investment are 1) Quality/Credibility of the Management Team and 2) Quality of Assets.  The quality of the market opportunity is a distant third; most of these successful and sophisticated investors know that it takes the Intellectual Property and the smarts of a good team to create long term value.  That’s what they’re really betting on, not a specific product or market opportunity.

So why not have someone take a look at this?  I know, you don’t want to spend any dough.  I get it, I’ve been there.  But you know what? If you’re serious about that transaction or capital raise, you’ll have a lot more credibility to have a proper calculation or opinion of value completed by a competent, independent, third-party.  The actual cost is significantly less than the amount of the capital raise or transaction and can be used for multiple purposes (if you request such).  Oh unless you’re a large multi-national conglomerate, then the cost is certainly less than those success or placement fees you’ll be soon paying.

If you’re dead serious about growing your business with smart money or getting out altogether… the value of an independent assessment of business’ value is worth way more than the actual cost, it gives you a basis to begin negotiations and shows investors that you’re serious about completing this deal.

Don’t believe me?  Go raise your capital or complete your buy-out without an independent valuation and then next time call me, I’ll do the valuation and when you get better terms as result we can talk about how you’ll pay.