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Unlocking the Potential of Intellectual Capital

Family Office Partnership December 2009

Jackie Maguire explains that there’s more to intellectual property than patents and that investors must make sure of the status of the IP underpinning an investment.

 

Choice is generally considered a good thing. Yet it can be bewildering to contemplate a wide range of investment opportunities with little certainty about which will provide a good return on investment.

 

Family Offices looking to put family funds into the right companies will usually undertake quite a lot of research, and often take advice from specialist organisations. But one aspect of investment that is often overlooked – or at least not given sufficient weight – is the intellectual capital of a company, and this can be crucial when trying to predict how well your investment will succeed.

A recent survey we undertook showed that there is an overreliance on the ability of an organisation’s management team to make the investment a success, at the expense of undertaking due diligence of the quality of that team, and of commercial issues and intellectual property. This is leading to unpredictability
in assessing returns on investment. It is vital to understand all the factors that have a bearing on an organisation’s future success.

When intellectual capital – or intellectual property – is first mentioned, people usually think of filing patents, and registering trademarks and designs. But it is not just about patents and other formal IP.

 

A company’s value is contained in its wider intellectual capital, where know-how, branding, skills, policies and processes all have a part to play. Ideas and inventions are the lifeblood of a company but it is the wider intellectual capital that drives growth and sustainability.

For example, does the company you are thinking of investing in have employment contracts that prevent their employees taking ideas to a competitor? Will their ideas and processes be core to your business proposition? If their suppliers are developing novel material for them, do they own the arising intellectual property?

 

Once an ex-employee has transferred important information to a competitor it is very difficult to repair the consequent damage to a small business if the information has not been protected in some way. Confidentiality and IP clauses within employment contracts that are properly communicated, go a long way to alerting employees about the important intellectual capital within the business and who owns it. They also provide a deterrent against IP theft and espionage.
In the case of a supplier or contractor, any rights to the IP created during the delivery of the goods or services in the UK, legally belongs to those that provided them unless your terms of contract specify otherwise. Busy executives often overlook small print clauses and are in danger of giving away any future rights to inventions, design or copyright unless contracts specify that any arising IP belongs to their company.

In good practice companies, the CEO and CFO take a strong lead to understand how their IP protects their products and how its value can be built and optimised to increase company performance and shareholder value and how changes in business direction need to be reflected in their IC portfolios. IC is recognised to be too important to leave to the company technologists or legal advisors.

They also take specific action to understand where their IP fits in the ‘IP landscape’ – the IP held by other players in their market – as it is not unusual to find a competitor with an alternative IP strategy hiding around the corner. Those planning to invest in organisations need to satisfy themselves that the IP of
the company is being fully protected.

One way of doing this is to appoint an outside specialist who can provide clear and definite opinions, both commercial and legal as to the status of the IP that underpins a potential investment. Such opinions can take the form of informal and brief headline summary of the key issues right the way through to a
formal legal opinion.

 

It is important not to look just at the intellectual property, but to also consider the wider intellectual capital contained in the people, the market attractiveness and competitive differentiation. You should look for an organisation that will provide valuations and evaluations of IP as required to underpin the deal and to provide you with additional reassurance on the potential returns on your investment. This should take the form of both valuation and evaluation of IP at all levels from initial assessment through to full due diligence so that you have a firm view as the basis for your business decisions.

An example of this is the work Coller IP Management undertook for Icos Capital, an Amsterdam-based fund manager of closed end venture capital funds, with a focus on technologies that promote sustainability of human beings and the environment (cleantech).

 

The investment team has extensive experience of successfully investing in the next generation of global businesses. As part of its due diligence process, Icos Capital commissioned Coller IP Management to undertake an IP-based review of a technology business that was seeking development funds.

 

The work involved assessing the IP landscape close to the technology developed by the business and the activities of competitors; reviewing the robustness of the business’s patent applications and providing a valuation on the basis of market
benchmarking, to assess the royalty rate in a proposed IP assignment agreement.

Our work uncovered substantial information about the market place and technology developments on a worldwide basis, previously unknown to Icos Capital, together with third-party patents relevant to the business. Our valuation took account of the various factors identified from our technology and market
analysis and from other licensing deals identified as comparable to that being evaluated. We were then able to provide a royalty benchmark appropriate for finalising the assignment agreement.

In another example, The National Physical Laboratory (NPL), one of the UK’s leading public sector research establishments had identified many different activities that might offer commercialisation opportunities, each of which was at a different point in the exploitation process.

For some technologies there was a need to develop a better understanding of the associated IP landscape, both to inform the direction of the research and to develop a clearer understanding of NPL’s competitive position. We were commissioned to undertake an IP landscape analysis by NPL in order to
understand better the position of its novel diagnostic imaging technology relative to existing or potential competitors, while at the same time identifying possible opportunities for: IP protection; Collaborative development; Licensing and Further
development of ideas or technologies.

In carrying out the work for NPL we developed an understanding of the in-house technology that is being developed and the relevant market drivers, and analysed the competitive landscape, to understand the impact that IP held by others in their marketplace could have on NPL’s R&D plans. We then identified the threats facing NPL and the opportunities for collaboration with organisations with similar interests to NPL.

 

As a result, NPL has since developed a more informed insight, both into the opportunities for further development and commercialisation of its IP and also the organisations that are active in the field, but were previously unknown to them.
Any investment contains an element of risk. But it need not be difficult or expensive to ensure the risk is kept to a minimum and to feel reassured that you have done everything possible to maximise your family’s wealth.

• Coller’s report Management, Management, Management – or What? An Investigation into the Due Diligence Processes of Early Stage Technology Investors was launched on November 4th and is available from their website at http://www.colleripmanagement.com/news/reportrelease.html