Valuation and pricing of IP

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Valuation and pricing of IP

• Martin Grönberg
• Technology Commercialization Manager
• March 2010
• gronberg_at_parc.com

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PARC Background

• For-profit research center
• Established 1970 to develop technology for the
  office of the future. Spun off from Xerox in
  2002
• Research, innovation and IP is the product
• Partners with a range of corporations and
  startups across multiple industries
• Key company resources
• 170 researchers in 4 research divisions
• Intellectual Capital Management
• Business Development
• Track record of transformative research
• Ethernet
• Graphical User Interface
• Laser Printing
• Ubiquitous Computing
• Object-oriented Programming
• Postscript

3
PARC Business Model
Portfolios
Funding
Extraction
IP Assignment IP Assertion IP Licensing
Client Funded Research

• Intellectual Assets
• 2,300 US patents
• Software
• Trade secrets

Pure IP
Govt Research Tech Transfer
Extraction
Govt Research
Creation
Spin-offs Client Services JVs

• Competencies
• Clean Tech
• ICT
• Document systems
• Electronic devices
• Social sciences
• Biomedical

Competencies
Internally Funded Research

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Organization
Business functions
Research Organization
Business Administration
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Breadth of expertise

• Social Sciences

Discovering Unmet Customer Needs User-centered Design Services-centric Ethnography

• Information and Communication Technologies

Content-centric Networking High-performance Wireless Human Information Interaction Image Analysis Intelligent, Modular Systems Natural Language Processing Security And Privacy Ubiquitous Computing Web 2.0

• Electronic Materials and Devices

Flexible electronics Large-area Electronics Microelectromechanical Systems (MEMS) Microfluidics Optoelectronics Organic Device Design Semiconductor Materials Solid-state Electronics Thin-film Technologies

• Biomedical Systems (Launched 2002)

Cancer Diagnostics Prenatal Diagnostics Drug Discovery Tools Continuous Glucose Monitoring Flow Cytometry Biodevice Prototyping

• CleanTech (Launched 2005)

Water Purification Industrial Biomedical filtration Energy Efficiency Data Center Optimization Renewable Liquid Fuels Solar Electricity Generation
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Establishing value of IP

• Market approach
• Requires access to comparable exchanges
• Cost approach
• No relation to utility
• Income approach (DCF)
• Managing massive risk premiums
• Discrete nature of potential financial yields
• One-dimensional representation of financial
  outcomes

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Valuation and pricingMeaning

• Valuation
• Techniques
• Different answers
• Opinion

• Pricing
• Negotiation
• Outcome
• Commitment

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Valuation, pricing, negotiationContext

• Terms Structure
• Compensation
• Fixed payments
• Royalty
• Rate
• Minimum
• Equity
• Grantback
• Opportunity benefits
• Grant
• Scope
• Field of Use
• Exclusivity
• Territory
• IP

Value added to partner
1
3

• Pricing Negotiation room
• Optimize
• Navigate

Cost to PARC
2
9

• Assess Value to Partner

1
10
Income approachScenario Based analysis

• Design multiple feasible scenarios
• Assign a probability for each scenario
• Use standard techniques to model cash flow for
  each scenario
• Discount each of these cash flows by using cost
  of capital as discount rate and sum the NPV for
  each scenario.
• Compute weighted NPV using these probabilities.

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Scenario based analysisExample
Success Medium Failure
Probability (post Series A) 15 20 65
PARC equity at Exit 7 5 -
Exit Size 75,000,000 12,000,000 -
Year of Exit 2015 2016 2012 (year of liquidation)
EV/EBIT Multiple _at_ Exit 9.88 9.75 -
Royalty rate 10 10 10
Royalty Cap 5,000,000 5,000,000 5,000,000
PARC Scenario NPV 6.4M 2.3M 96k
PARC Weighted NPV 1.6M 1.6M 1.6M
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75M Exit 2015 PARC 8M (7 Common royalty
buyout)
NPV 1.6M
12M Exit 2016 PARC 2 M (5 common royalty
buyout)
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Scenario Based analysisFinancial model
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Scenario Based analysisBenefits

• Captures risk in scenarios
• Ease of use
• Precision
• Reflect real deal terms
• Transparency and communicability
• Ensures thorough research and consideration by
  user
• Richer output

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Risk and investment

• Value added to partner Risk adjusted Earnings
  Investments

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• Assess Cost to PARC

2
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Cost

• Applicable cost is the greater of
• Direct costs
• Transaction costs
• Services, products, or materials
• Taxes
• etc
• Opportunity cost
• The sum of parallel/future opportunities that
  have to passed on

Value added to partner
1
Compensation
Compensation
Cost to PARC
2
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Context for opportunity cost
Commercialization Roadmap Return

Application1

Application 2


Application n

Project IP
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• Optimize and Navigate Negotiation Room

3
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Negotiation roomOptimize

• Terms Structure
• Compensation
• Fixed payments
• Royalty
• Rate
• Minimum
• Equity
• Grantback
• Opportunity benefits
• Grant
• Scope
• Exclusivity
• Fields of Use
• Territories
• IP

Maximize value to client

PARC earnings potential
Terms Structure
Compensation
Compensation
Minimize PARC opportunity cost
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Negotiation RoomNavigate

• Ask for the most you can do with a straight
  face
• Relative contribution
• Leverage
• Use a coherent mesh of facts, models, and
  standard practices that supports your position
• Use Scenario Based Model to optimize between
  compensation types, risk allocation, etc
• Manage incentives

Price
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ConclusionIP Valuation, Pricing, Negotiation

• More than the right number, valuation provides
• Means for communicating, discussing, and
  researching the opportunity
• Tools for negotiation
• Understanding for the uncertainty and risk
• Valuation principles are key
• Models, frameworks, techniques, etc means of
  honing the principles
• Principles supports good negotiation

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Project Valuation and Investment Decisions
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Project Investment

• Return on Investment
• Return
• Quantitative
• Qualitative
• Investment
• Stage/gate
• Decision tree
• Risk
• Qualitative
• Time

Risk
Value creation
Value capture
X
ROI
Investment
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Valuation in light of assertion
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Valuation in light of assertionPlaintiff
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Valuation in light of assertionDefendant
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Financial assessment and forecasting
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Revenue forecast framework

Contracted revenue
In discussion/negotiation
Modeled future revenue
Time
2008
2009
2010
2011
2012
2013
2014

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Distribution of potential outcomes
75 Percentile

Contracted revenue
In discussion/negotiation
Modeled future revenue
Median Revenue
25 Percentile
10 Percentile
Time
2008
2009
2010
2011
2012
2013
2014

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Input for forecast PARC Lines of Business

• Startups
• Reviewed Projects
• Modeled New Startups
• Client Services
• Active, forecasted, and modeled
• Government Funding
• Active, forecasted, and modeled
• Licensing
• Active, forecasted, and modeled

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Portfolio Revenue Monte Carlo