Episode 33: How do you know what your I.P. is worth?

Lisa Desjardins (Lisa): You're listening to Canadian I.P. Voices, a podcast where we talk intellectual property with a range of professionals and stakeholders across Canada and abroad. Whether you are an entrepreneur, artist, inventor or just curious, you will learn about some of the real problems and get real solutions for how trademarks, patents, copyrights and industrial designs and trade secrets work in real life.

I'm Lisa Desjardins and I'm your host.

The views and opinions expressed in this podcast are those of the individual podcasters and do not necessarily reflect the official policy or position of the Canadian Intellectual Property Office.

Today we're going to talk about the value of intellectual property and what you need to think about if you're trying to put a number on your I.P. to impress on the next round of investors.

Putting a value on I.P. is a complex task. Patents, industrial designs, trademarks and copyrights are original and unique, they're not commodities, so you can't easily compare I.P. rights to something already out there. And the value also changes over time since I.P. rights often have a finite lifetime, both technologies and brands evolve over time. When the next big thing has been invented, other inventions can become obsolete literally overnight. And, of course, the value also depends on some practical things; is it just a piece of paper or do you already have a product or service on the market?

In a way, I.P. is like a song or a film script, a secret recipe or a P.h.D. in the next big thing; the value depends on what you do with it and this is what the investors want to know. So how do you value I.P.? I'll ask Sylvain Roy, a lawyer and I.P. valuation specialist in Montreal. Sylvain, I'm so happy to have this conversation with you. Welcome to the podcast!

Sylvain Roy (Sylvain): Thanks, Lisa. It's a pleasure meeting you there.

Lisa: I have a whole list of questions about I.P. valuations for you, but first I want to know a little bit more about yourself and the kind of work that you do in relation to I.P. valuation.

Sylvain: Absolutely. So I'm an attorney as you said, I'm based in Montreal. The law firm I run is called S.R.A. My background is diversified and that's something that you will I think, see often in the valuation fields that people need at least the background in science, finance and law and I.P. So my background, I started my practice as a lawyer in '94 the same year I started a software company doing robotics. That was an interactive robotic control system at that time. So got me going a few years and gave me the opportunity to let's say, know a little bit more about science development, entertainment technology field, venture capital raising. So, at the time it was raising capital, managing the legal aspects, sales, marketing for the firm.

After that I became more involved in I.P. I've been involved in Asia a number of years. Also as a consultant on I.P. strategy. That was the time where Singapore was opening up to I.P. and didn't have patent law before, and now it's one of the excellence centres in the world of I.P.

After that I was involved in very long technology transfer dealing with Siemens out of Denmark and the entertainment technology and there was a loop that bring me to start the first I.P. or patent brokering firm in Switzerland. That was 2006, 2007. There was a peak of people wanting to raise capital with their patents, trying to monetize them. And there was a frenzy that really calmed down after the financial crisis of 2009 and 2011. And that brings me to develop this expertise and trying to make sense of the technology very early, developing tools also for valuation and after a pivot that became the main services that I was proposing instead of finding clients trying to a sale that will be for me to help research centres, universities and ventures and just little groups develop valuation tools for their own technologies in Montreal.

And this is 1 branch of what we're doing in the firm. The other branches, mostly business law, technology law, advisory as well for mostly technology companies.

Lisa: I thought before we go into the more detailed questions about I.P. valuation, there's a difference between valuing a technology versus valuing granted patents of a technology and I was wondering if you could talk a little bit about the differences between these 2.

Sylvain: It depends on the context. Whenever you have a granted patent and we'll make a distinction from the start between the patent application and a granted patent. But implication it's a lottery ticket; you haven't been winning anything. Whenever your patent is granted, it proves that at least for an examiner, there was likely evidence of novelty, usefulness and so forth. So you get a granted patent that crystallizes your right and from which you can obviously execute licensing agreement and so forth. But you need to keep in mind as well that a patent can be nullified whenever there's evidence of the patent not being novel or infringing on prior art, for example, or another patent. There's always a chance that this granted patent be found and invalid.

So usually the proof being in the pudding, the patent is very solid after it's been challenged in court. But that's another topic. But keep in mind that a granted patent, and that's what we're talking about, is as valuable as if it is infringed. So sometimes people come to me and say, "we have a granted patent, we're in so much trouble because people are infringing on us" and I said, "well, that's the start of your life," because if no one infringes your patent it's a proof that it's maybe, it doesn't have any, or much, value as much as you'd like it to have.

So, what you want to have is infringement by large companies, an infringement that can be documented and that gives you an opportunity for a challenge that in court order asking for royalty payment. So, infringement is not so much of a problem as long as the infringer is willing to discuss and pay a license. So this is where it's very different.

Technology valuation we'll look at: Is the technology useful in the marketplace? Is there a need? How can you spell out the needs? Is it an improvement in performance? Is that an improvement in pricing? Is this a process that can be kept secret, licensed to others? The main difference between the 2 branches are that technology valuation we need to look at is it useful? When? To whom? In which context? So we're basically building the case for what's the market and business and service for the technology.

Besides that, the patent valuation is, it opens up more, more different methodology. For example, if there's infringement, what kind of revenues could be extracted? What's the damage? Also, we can do comparison more easily with comparable transaction in the same field, but that's sometimes problematic. But I will say that usually a patent application has very, very little value. The value will be probably limited to the cost incurred in developing the patent application itself, so that will be the prosecution cost, the cost of running the prior art search, your internal cost as a company so typically a

patent application value is between anything 25,000 to 50,000 dollars, I will say… that's the market.

Lisa: What are the things that inventors and entrepreneurs need to ask themselves when they embark on a valuation?

Sylvain: So first thing first, you need to understand why is the technology useful in relationship to which product to which component which service? In other words, you first need to determine what's the bigger picture? What's the larger market I'm addressing? And oftentimes the inventor will look at incremental improvement into a component or into something that is very niche. It's great if you find clients. If you know your industry, you can find clients. And maybe you can have a strategy that is orientated to towards 1 or 2 customers, and that's absolutely fine and that should be encouraged. And that's what venture capitalist firm will look at. Is your entry market big enough to justify the development expenses to bring up a product to market. We keep in mind also that you have a technology that will cost you maybe 100,000 to let's say a unit. The cost of transforming it to a product that can get into the marketplace will be probably 10 times larger than that. And then promoting this this product into a success, there's another maybe 10 times the expenses.

So, back to your technology, what you do with it? Well, you start with evaluating the market. Then you start to assessing the risk and benefit of what's the value proposition that you have and what's the hurdle that you will be facing down the line? So you need to understand that, and that's not always natural for an inventor. You need to understand who makes money in the industry I want to be in.

Is it is it vertically oriented? Is it an industry with lots of dealership? Is relationship with client important? Is there a lot of services connected to a product that sometimes are larger in terms of industry than the product itself? So, you need to understand that, and you need to understand what's the business case? Who will be my client? So these are the most important questions inventors should be facing before even thinking about what's the value of my invention. Because value of the invention or technology is absolutely related to what's the value proposition.

Another element is, for especially start-ups and early stage technology companies, is... What's difficult is the implementation is the operation. How good will you be in transforming yourself or your small research organization into a product company and a sale organization. And there is a lot of operational factors involved. There's a change of culture involved, and sometimes start-ups have it. They are very sell-oriented from the start. Sometimes they kind of dwell into their development process and sometimes are reluctant to speak with clients. There's always something missing.

What you need to keep in mind is every technology has a window of opportunity. And you need to be able to jump into it. Sometimes you're too early because the market is not advancing so much. Sometimes you're completely into the window and then you need to really get to the client as soon as possible. So these are questions that I'll say, an inventor should be looking at. So a valuation in itself, having a pricing on the technology that might or might not impress anyone.

If you have a black box approach for example that a firm will say, "oh, you're 1 of the 10 companies addressing this 2 billion dollar annual problem, let's find a formula" and that's what I do. That's not helping anyone. What you need to develop is a good documentation. Good understanding of: What can I bring, the value proposition? What's the risk I will be facing? Who will be my client? What kind of pricing should I sell my technologies? Under which business model? Once you determine, and you there is some kind of maturity to these elements, then you can derive a valuation. Let's say, that will be first of all, more realistic and that will make sense and that'll be more serious, and that might tend to be taken as more serious by venture capitalist and clients.

Lisa: So what are some of the scenarios when a valuation is useful? At what point in time do you typically do a valuation?

Sylvain: Typically, some companies come to me and they say, "oh we have this invention disclosure that we've been discussing with our patent agent, we're going to file a patent. We'd like to know the value of what we have." And sometimes it's good, I think that there's a desire to know the value of what you just developed. But again, a valuation is an exercise that is sometimes lengthy in time, capital and budget and effort. It's not something you will be doing just for the sake of securing yourself or feeling more, let's say secure about your technology or your little baby. Valuation is something you will be doing when there's a, let's say, a need to discuss elements that are critical for the future of a project meaning you have interested venture capitalist, for example. You might have a business plan, there's discussion going on about, is this realistic or not? Venture capitals, they love the market, they love the team. They think they understand the technology to a certain point but there is an element missing.

Quite often the element that is missing is: What's the critical pros and cons, risk and benefit about this technology? Are we missing something? And I think this is where a valuation or at least valuation of the kind I'm experienced to provide, maybe I'm not, I cannot talk on behalf of my colleagues and other firms that might have different methodologies, but what I like to be doing is more of a storytelling, storytelling about what's going to happen with this technology. Who has the most benefit to gain from using this technology and it's developing the business case and quite often the valuation opinion will replace partially the business plan because we'll be discussing, okay, here's the typical clients that will be using this technology. They think it will bring this value to them in this context, and therefore we can derive some profits, some revenues and we apply a formula.

The rest is mechanical, but what's important is: What can happen wrong? How can the I.P. help us secure a unique position in the marketplace? How this unique position in market base translates into revenues, either license or sales for the company? So these type of questions, the timing I'll say is when you raise capital, maybe not the seed round, or sometimes the seed round if there's venture capitalists involved. That can be at the time also when you have partnering happening with larger companies, for example. You have a research contract, you can have a license agreement in place for a proof of concept and then there comes a time when you say, "okay it works." What will be the terms, the business terms between the licensor and the licensee, licensee being a larger company with more resources. And then you have to have your pricing review, the sales projection reviews and it's good to have at least a technology valuation done at that time because it will give you the tool to negotiate properly.

A turn moment arrives whenever there's discussion about sales of the company. Sometimes it we have acquire well, well, there's value is as directed to the team in itself. The capability of research and development, but oftentimes it's an asset value that the acquirer will be looking at how this particular asset can bring value to my operations. And this is where representing either the, most of the time, the start-up or the acquisition target will develop specific business case as to what's the incremental value that the technology and I.P. will bring to the buyer. And that brings us to discussing not necessarily the pricing in itself, but the process, the formula, the element about what's the product definition what's the market? What's the geographical implementation of the this market and product? Is there a lot of patent stacking involved, meaning that is the product, the combination of a lot of different technologies each having royalty payment involved? That's the kind of thing you see a lot of in electronics.

Then we have the business case. So the process of valuation will fuel the business discussion between a buyer and vendor, licensee-licensor and oftentimes the technology companies and their investors.

Lisa: If you are proceeding with a valuation, from what you just explained, it sounds like there's a lot of skills that you need to have to be able to do that. So can you explain the process and in particular the skills and a valuation exercise? What kind of information and skills do you need?

Sylvain: Obviously it's great if you have 30 years of operational experience and in tech and deep tech, in law, in I.P. and finance. That's my background. If you don't have that, where do you start? What can you do? But the thing is a valuation is more an art than a science and you need to have a bit of experience about what can go wrong when you perform any project. And this experience of knowing what can go wrong that fuels the risk benefit analysis that you're doing. So, it's difficult to learn valuation. A typical valuator will have industry experience, will be having R and D experience. You need a legal background that's helpful, that's not compulsory, but that's very helpful. You need to have I.P. knowledge, the more the better, maybe not on par to patent agent, but not far, and you need to have also experience in dealing with investors, knowing what happens when you negotiate because any pricing is the result of the negotiation. Pricing, value, pricing for a company or licensing or royalty rate.

It's not necessarily the first objective of company to have this pricing, it's the result of that negotiation with another party. So you need to have experience being in this kind of context that gives you, let's say, a better ability to determine what can be achievable by parties and discussion. Another aspect, and maybe that's something that goes beyond your question, but, the value in I.P., the value is subjective, so the value I have for my technology in my context of use, in my little context of use if I'm a small company, the value of the I.P. is completely different when we use this I.P. with a larger organization.

And so for a valuator, you need to understand to be very comfortable to determining which is the best context this technology can be used in, so you need experience with dealing with inside large corporation, large international group, or experience dealing with them. That's also a prerequisite and good thing for a good valuator.

Lisa: Very good points. If you hear somebody, let's say you overheard a conversation with an entrepreneur who said that they wanted to do a valuation their technology. What kind of question should let person ask themselves?

Sylvain: I will say that maybe 10% of the cases really that I've been that I discuss ends up with "oh, there's a real need for a valuation!" The question I'll be asking people will be, "really? What's missing in your operation? You said you were missing maybe a client, you're missing capital, and so forth. And is there another element preventing you from getting this financing or client besides having a valuation?" And oftentimes we end up spending a few hours reviewing the case and determining that maybe a valuation is not the tool for you at that point. Maybe it's you need to document your technology better, maybe you need to expand your team to the expertise and industrialization. For example, you need process engineers, maybe you need a financial C.F.O. on board that will secure your third parties?

So the pricing is not always the pill that the inventor wants his counterpart to swallow. There's something other missing. Now, we can absolutely help people finding it. And if and when the timing is good for performing a valuation, then we have a head start. We've been doing some work with the client and we were more mature into what kind of methodology we'll be using for which purpose, because keep in that performing valuation, for example, internally we do that all the time for companies. Let's say we have 10 projects, we want to invest in the 2 or 3 projects that are more value, "help us out." So we develop something that is more simple that can be used in-house by companies then that's fine but whenever you want to use an opinion that is a stand-alone document that in some cases will replace the business plan, but that's something else! And this opinion will have a shelf life of maybe a few months. So whenever you want to order an opinion, you want to be sure that you can execute on the opinion and that you have meetings lined up interested expressed by venture capitalist about your technology, so you need to be able to execute. That's critical to your success as a company and using the valuation that you just obtained.

Lisa: Sylvain, it's been really, really useful to have this conversation with you, and I'm sure a lot of inventors and creators out there have got a lot of food for thoughts. Thank you so much for sharing your expertise with us today.

Sylvain: My pleasure.

Lisa: You've listened to Canadian I.P. voices where we talk about intellectual property. In this episode, Sylvain Roy, a legal and I.P. expert, explained the important things to know about valuing I.P. Understanding these details is crucial to making sure the whole process of valuing your I.P. is worthwhile. If you're straightforward about what your I.P. can really do, its limits, and how to overcome challenges, the valuation can become a key part of your business plan. It's the basis for important talks about getting money, teaming up with others or selling your I.P. Open the description to this episode for links to more information about I.P. valuation.