2016: The Year of Intangibles - The Clubhouse London

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2016: The Year of Intangibles

Dr. Chris Donegan, CEO of Everedge IP EuropeChris Donegan is the CEO Europe of EverEdge Global IP (www.everedgeip.com). EverEdgeIP provides strategic advice, due diligence and transactional support to IP owners and investors. Here he talks to The Clubhouse about the difference between patents and IP, and the future of the industry.

Finding the Hockey Stick

For many SME’s the initial barrier to monetising their intellectual property (“IP”) begins with the understanding that they actually have some. Given that more than 70% of SME’s are in service businesses this is often not intuitive to business founders. CEO’s are also concerned about protecting their ideas and sceptical about paying advisors for reports that will have little immediate commercial relevance. This is why at EverEdge we focus our work on business goals and outcomes from the very beginning. The simple fact is that by productising your service or clearly defining your IP you can build alternative distribution channels that reduce your cost of sales dramatically. Monetising IP can provide SME’s “hockey stick economics” without significant CAPEX and that is something worth talking about.

Patents and IP are not synonymous

Ironically, the most common statement we hear when engaging with SME’s is “we don’t have any IP”. That is incorrect 90% of the time and the reason is the mistaken belief that patents and IP are the same. As we work with clients we invariably uncover significant value in the form of “soft” IP such as data, business process, supplier relationships, pricing models, trade secrets know how by the bucket load. This is a revelation for most clients – who view this stuff as “business as usual”.

IP is a fundamental due diligence item for investors

For investors, Intellectual Property if properly defined can change IRR expectations and provide some form of value floor. This reduces their risk in financing or investing in a growing business. To define IP as an asset class is however tricky, I prefer to think of IP as a value driver and risk reducer that generates competitive advantage for SME’s. At its best IP provides an effective monopoly for creators but even weak IP can deter competitors and increase margins by differentiating you from the rest of the market. This supports pricing and helps win profitable market share. IP is the biggest driver of what Warren Buffet calls “intrinsic value” and as such it should underpin every investment case.

IP underpins Goodwill

The UK has a rich ecosystem of IP generation. The fact is that 99.9% of all businesses in the UK are SME’s. They employ 15.6 million people and turnover £1.8 trillion. SME’s are amongst our most creative businesses generating at least 50% of all new intellectual property and driving progress in advanced manufacturing, materials, 3D printing, medicine, software, publishing, music, film, finance and professional services. For investors understanding the IP base for each of these opportunities is critical to determining value and can be a major driver of pre-money valuations on inward investments and goodwill in buyouts.

A sword not a shield

IP is a sword not a shield and its value is directly linked to who is holding the sword. This is worth remembering. When engaging in joint ventures in R&D, contract manufacturing, sales collaborations or indeed any type of corporate transaction particularly with a larger counterparty or in a new market the risk of your IP (or ownership) becoming challenged, as it becomes more visible increases. Larger partners make bigger targets and they may balk at engaging with SME’s who don’t have their house in order.

It’s about risk analysis and making informed business decisions

Our approach to working with companies in these situations is to work with the management to create situation specific risk analyses that highlight the areas of weakness or opportunity and are inputs into business decisions. The answer is rarely “spend money on lawyers”. Which is the comfort blanket that many boards retreat to. Understanding business risk and how IP impacts it is the key. The resolution may be legal or it may be commercial, it’s highly contextual.

There are many industries today where it is thought that IP is less important. For example Generic drug consolidators buying end-of-life drugs or Mobile developers with very short product lifecycles. But whilst patents may be less valuable for these players, IP remains crucial. In the media space in particular the ability to build products that can be monetised through different media (books, comics, TV, film, games, music) is key to monetising the core value of the original creation. This is easier said than done and needs to be “pre-baked” into the business strategy.

The growth in the UK’s intangible economy is incredibly exciting right now and will underpin our competitiveness as a nation for the rest of this century. SMEs are at the forefront of this revolution and at EverEdge we are thrilled to be part of that journey.

Dr. Chris Donegan
CEO Europe
London February 10th 2016