The Relevance of IP for

Acquiring/Securing Financing:
Making Intangibles More
Tangible

Dr. Guriqbal Singh Jaiya

Director
Small and Medium-Sized Enterprises Division
World Intellectual Property Organization
www.wipo.int/sme
Managing IP Assets -Denise Raybould,
Associate, BDO Kendalls
 Stages of Technology Transfer:
From Research Support to Economic Growth

More in Tax
Federal State Startups Revenues

Research Inventions New Products Economic

Patents
Support Disclosure Higher Standard of living Growth

Corporate Endowment Licenses New Jobs

 IS A COMPANY READY?
• Business plan?
• Stage of development of the company
• Type of investment?
• Valuation?
• Management team ready?

• Has the management team enough time and energy

to raise funds?
• Is the team shaped to talk to investors?
• Does the company know where to go?
Positioning for a Capital Injection

PEOPLE

Strategy
•Business model
•Resourcing
•Target investors
MARKET TECHNOLOGY

Valuation / Building value

Capital Injection
Add value before raising capital

►Documentation and Presentation

►Government grants
►Intellectual Property Protection
►R&D Partners
►In principle agreements
►Licences
►Customers
 The “Ask and Offer”
►FinancialProjections
►Business and IP valuation

►Criticalnegotiating tools
►Justifies assumptions
►Forces in depth research
►Forces decision making
►Makes you strong and confident
SOURCES OF START-UP CAPITAL (USA)

OTHERS (3,9%)

GOVERNMENT LOANS (1,1%)

MORTGAGED PROPERTY (4,0%)

VENTURE CAPITALISTS (6,3%)

FRIENDS (9,0%)

EMPLOYEES / PARTNERS (12,45)

FAMILY MEMBERS (12,9%)

BANK LOANS (14,4%)

PERSONAL SAVINGS (78,5%)

Other ways of raising money
through IP
►Licensing
►Sale
►Auctions
►Donation
►Grants
 Methods of Valuing

►Market Approach
►Cost Approach
►Income Approach
 Market Approach
►What are others paying for a
similar IP? What is the market
value?
►Extensive knowledge of
comparable data required
 Cost Approach
►Economic principle of
substitution
►Reproduction cost (Exact
replica)
►Replacement cost (Different
form or appearance)
 Income Approach
 Present value of future income
stream
►Future Income Stream (Economic
Income)
►Duration (Life: Legal, contractual,
judicial, physical, technological,
functional, analytical, economic)
►Risk (Uncertainty of receiving expected
income; interest rates and investment
climate)
 IP Due Diligence
► In order to obtain financing whether
debt or equity those who are providing
the financing will need to be satisfied
as to whether the company is worthy
of it.
► Important to be “investor ready”.
That is show that you have taken all
possible steps to identify, protect and
manage your IP assets.
 START-UP CAPITAL

►25% start with less than $5,000

►50% start with less than $25,000

►75% start with less than $75,000

►Lessthan 5 % with $ 1,000,000 or

more
 The Paradox of Access to Finance

►Banks
►Venture Capitalists have money
►Stock Exchange

But argue that there aren’t enough good

projects

What is a good project?

 A Good Project!
A good project is a project presenting in the
eyes of an investor:
► acceptable risk profile
► a good perspective of return

this means:
► access to market = innovation
► profits
Source of High Risks Money
Which are today these sources ? we may regroup these in 3 major
groups:
 Business Angels: we are basically talking here about rich private individuals who are
ready to invest much needed “seed capital” at a very early stage of development of a
company, i.e. for new and speculative projects. Their role is extremely important, when
we talk about raising money between USD 0.5 and 2 million.
 Venture capital investors: these are usually private equity funds managed by
professionals. They seek to identify and finance the rapid growth of high potential young
firms that embrace innovative products, processes or technologies. This way, they
generate substantial rewards from successfully overtaking existing business paradigms.
Note that very often, traditional finance institutions do invest a small part of their funds into
alternative investments such as these V.C. funds.
 Last but not least, Governments: The first computers, the first commercial jet planes
were built in the U.S.A. as funded by DoD contracts. The U.S.A and Europe have set up
specific programs to promote new science and technology businesses. These are key
tools in helping scientists to engage into new business ventures.
N.B: A business environment – laws, taxes, etc… – which encourages private and
commercial investors to invest into risk taking ventures is an absolute prerequisite.
 Government First: U.S.A.
The U.S. example – the Small Business Innovation Research program
 SBIR awards take the form of contracts for the development of technologies required
by agencies of the US Government. They provide 100% of the funding needed plus a
small profit element. The “norm” is USD 850 K for each project. Small business can win
and run multiple projects in parallel. The SBIR analysis below is done for the UK
Government in an attempt to copy and adapt it:
 Government First: U.S.A.
The U.S. example – the Small Business Innovation Research program
 Established in 1982, it is the World’s largest seed capital program for science and
technology business.
The law stipulates that 2.5% of all federal agencies’ external R&D research must be done
through SBIR. Furthermore, the US has established a very large set of policies to favor
small US businesses in government procurement.
 Government First: The European Union
The first program in Europe: COST – an international framework for
European Co-operation in the field of Basic Scientific and Technical
Research ( www.cost.esf.org )
 Established in 1971, COST allows the co-ordination of nationally funded research by
maximising European synergy and raising the level of scientific interaction at the scale of
Europe. Its budget for the period of 2002-2006 was of 1.5 Billion Euro.

 COST Actions cover

basic and pre-
competitive research.
Ukraine as a Non-
COST country took
part in 15 actions.
 From March 2006,
Ukraine initiated
consultation to discuss
potential full
membership.
 Government First: The European Union
EUREKA – an international framework for European Co-
operation in the field of Marketable Scientific and
Technical Research ( www.eureka.be )
 The primary goal of EUREKA has always been to raise the productivity and
competitiveness of European industry and national economies through its ‘bottom-up’
approach to technological innovation. Since its inception in 1985, substantial public and
private funding has been mobilized to support the research and development carried out
within the EUREKA framework.
 Through its flexible and decentralized Network, EUREKA offers project partners rapid
access to a wealth of knowledge, skills and expertise across Europe and facilitates access
to national public and private funding schemes.
 The internationally recognized EUREKA label adds value to a project and gives
participants a competitive edge in their dealings with financial, technical and commercial
partners.
 Through a EUREKA project, partners develop new technologies for which they agree the
Intellectual Property Rights and build partnerships to penetrate new markets.
 Ukraine was granted full membership on 9 June 2006. Currently a total of 15 projects
have been developed with Ukrainian participants for a total of 1.1 M. Euro.
Public Interventions
Mix of non-financial and
financial support services

This means that intermediaries have to

(1) provide value-added services; and
(2) become more professional
Finding Innovation Funding Innovation
25 April 2007

Access to finance for West

Midlands SMEs

Patrick Palmer – Head of Access to

Finance at Advantage West
Midlands
What sort of initiatives are there?
►Demand side initiatives
Provision of better information of what is available;
Investment Readiness programmes.
►Supply side initiatives
Grants to support Research and Development and
certain “Proof of Concept” activity;
The Research and Development Tax Credit;
Grants for capital investment in certain areas;
A range of venture capital funds;
Encouragement of Business Angel activity;
Small Firms Loan Guarantee Scheme;
Community Development Finance Institutions.
Demand Side Actions
►Better information
www.westmidlandsfinance.com;
►Investment Readiness
programmes
Route to Investment (R2i);
CONNECT / InvoRed.
 R2i
►Provided through the Business Link network and
funded by Advantage West Midlands and the ERDF
►Comprising four stages:
Increasing Awareness of funding sources;
Education of businesses in funders’ requirements;
Developing applications and businesses to ensure
they are “investment ready” (Complex
Development);
Post Investment Support.
►Access through Business Link West Midlands
Telephone 0845 113 1234
website www.businesslinkwm.co.uk
 InvoRed
A tailored programme delivered across the West
Midlands that helps technology based businesses
from pre-incorporation to 2nd or 3rd stage funding:
•Get ‘Investor-ready’;
•Understand finance options ;
•Make the pitch;
•Find investment
•Flexible programme with 2 streams

Amber Stream – for early stage companies

Green Stream - Fast-track grooming for later stage companies
Supply Side Actions - Grants
►DTI Grants operated by AWM –
Selective Finance for Investment in
England and Grant for Research and
Development
►Grants available through Business Link
– Diversification, Accelerate
►Mercia Spinner, Technology Transfer
Fund
Grant for Research and Development
►Grant is available under four categories:
Micro projects;
Research projects;
Development projects;
Exceptional development projects.
• Grant is only available to SMEs;
• Available throughout the West Midlands;
• AWM have secured ERDF money to
support this grant scheme.
Grant for Research and Development
Type of grant Employee Grant as % Grant
numbers of eligible range
expenditure

Micro (small < 10 50% £2,500 -

development £20,000
projects)
Research < 50 60% - 65% £20,000 -
£75,000
Development < 250 35% - 40% £20,000 -
£200,000
Exceptional < 250 Up to 35% £200,000 -
development £500,000
Grant for Research and Development
Key criteria are:
►Technologically innovative;
►Technical risks and R & D challenge;
►Commercial potential and market need;
►Exploitation prospects;
►Management and project team abilities;
►Commercial and financial viability;
►Intellectual property secure;
►Additionality;
►Wider aspects – sustainability and design
considerations.
 Technology Transfer Fund
►Available in the Central Technology Belt, but
extending its area of activity;
►Provides proof of concept funding (ranging
from £5k - £25k) for new start-ups and
existing SMEs;
►Currently confined to medical technologies
and advanced materials technologies;
►Delivered by Birmingham Research and
Development Ltd with AWM and ERDF
funding
 Supply side actions
Small Firms Loan Guarantee Scheme
►Provides Government guarantees on loans from
private sector providers to small firms under 5
years old with viable business proposals but
insufficient security for conventional finance;
►Loans may range from £5,000 to £250,000 and for
periods from 2 to 10 years;
►Guarantee is for 75% of the loan;
►Operated through commercial banks and
administered by the Small Business Service;
►“Small” = less than 200 employees, turnover less
than £5 million (non-manufacturing £3 million)
 Supply side actions - Loan Funds/
Community Development Finance Institutions (CDFIs)
Source Range Location
Princes Trust -18-30yrs £250-£5k Region
Halal Fund –non interest based £7.5k - Region
£35k
Arrow Fund £1k -7.5k B’ham & Solihull
Aston Reinvestment Trust £2k-50k B’ham&NSolihull
3b Up to £20k B’ham & Black
Country
Black Country Enterprise Loan Fund Up to 5k Black Country
Black Country Reinvestment Society Up to £50k Black Country
Impetus – Marches Rural Reinvestment Up to £50k Rural Marches
Trust
North Staffordshire Risk Capital Fund £10-50k North Staffs
Michelin Development Fund £5k+ Stoke-on-Trent
Coventry&Warwickshire Reinvestment Up to 50k Coventry& Warks
Trust
 Regional Financial and Equity Value Chain
Public - Grants - Loans
funding - Micro-credits - Loans on trust
- Guarantees - Reimbursable advance
- Proof of concept

Entrepreneur’s FFF
own resources Pre-seed Corporate Mezzanine VC IPO
Equity Business
and University spin off Venturing,
Angels
reinvestment Seed
capacities capital

- Banks - Factoring
Private - Guarantees - Micro-credits
funding - Leasing - Export credits

Prerequisites

Human capital:
Risk taking investors: Infrastructure: Intermediaries:
professional fund
private, public business angels advice, investment
managers, state
networks, incubators, etc. readiness, tutorship
aids experts

FFF : Family, Friends, Founders; BA : Business angels; VC : Venture capital; IPO : Initial Public Offering
 Regions and Access to Finance
Case Study of the Rhône-Alpes (France)
L
TRAINING – ADVICE- SUPPORT FINANCING O
C
A
« Venture Capital » (National or International) L
Incubators CREALYS (Sudinnova, Siparex Venture, Banexi, Partech)
GRENOBLE F
PROJECTS €300,000 U
INNOEXPERT High-tech + N
(CCI Lyon) « Seed capital » - National (thematic) D
(strong potential) (I Source, Emertec, BioAm,…) I
- Regional N
BUSINESS ANVAR
(Amorçage Rhône Alpes) G
CENTRE BUSINESS INDUSTRY AND
(EM Lyon) INCUBATORS INDUSTRIAL SERVICES €300,000 R
Business E
Sup. de Co. Grenoble (NOVACITES (product- or process-based Angels to Q
FRAC CREATION) innovation) « Business development venture capital » U
Rhône-Alpes Création €45,000 I
Banque Pop., Crédit Agricole R
Rhône-Dauphiné Développement E
M
Business
€45,000 E
development and SMALL INDUSTRIES « Réseau Entreprendre »
N
reception service (CAPACITY SUBCONTRACTING) (Loans on trust + Sponsorship)
to T
(CCI)
« ARJE » (Regional repayable short-term S
SERVICES AND TRADE
€15,000
loans for new businesses—1-5 years)
S
(traditional, moderately innovative activities)
C
Sponsorship « Local platforms » A
Local platforms (Loans on trust) €15,000 L
Local initiative platform E
Entreprendre en France ADIE to
Banks + Comité Sofaris MICRO BUSINESSES TRADE
CCI + professionals CRAFTS « P.C.E. »
Chartered accountants (BDPME loans) €7,500
(ATEN)
« Mille et Un Talents »
(Regional grants)

« 3 hours – 3 days »

DEVELOPMENT TYPES Source: RHONE-ALPES CREATION
Case Study Wales (United Kingdom)

The region of Wales (UK) re-organised all its financial services around
a single organisation called Finance Wales (www.financewales.co.uk
( )
to provide the following financial services and products:

► Community loans amounting to US$ 10.000 to US$ 100.000 for

the social economy
► Xenos: its business angels network
► Spinout: unsecured loans without interest of up to US$ 50.000 for
university spinouts
► Venture capital: up to US$ 1.500.000 per financial pool and US$
3.000.000 in total
► Mezzanine: US$ 20.000 to US$ 800.000
► Loans: from micro-credit of US$ 2000 to US$ 20.000 to loans of
up to US$ 1.200.000
Roadmap to Financing Options

Founders

Sweat equity On Spec

Licensing
Federal Partnerships
Science for Hire IP sale
Corporations

Debt Family, friends

Personal credit
Business angels
banks
Equity
Fed,State loans Venture Capital

Profit Corporations
Referral network
Accountants Investment banker
Attorneys
Successful entrepreneurs, etc
Financing Options as a Function of
Application & Resources Required

A lot
•Spin-off •Joint R&D
•Jointventure •Licensing
•Equity investment •Strategic alliance
•Equity investment $
REQUIRED
•Bootstrap •Partnerships
•Angel investment •Licensing
•Debt financing •Angel investment
A little
Few Many
APPLICATIONS
THE ENTERPRISE FINANCING PROCESS

Grow th
Financing High
needs Risk
MARKET
GAP

MARKET
GAP

Low
Risk

SEED STAR T-UP PH ASE E ARLY GROWTH EXPANSION

Financing stage
THE ENTERPRISE FINANCING PROCESS
Efforts made Cash flow
by financiers
Risk

Time

Innovation Commercial and Savings Banks

Seed Capital
Funds and Private
Public Investors
funding and
Business
Angels Corporate Fund
and
Venture Capital

Idea Start-Up Market introduction Growth Maturity Transfer

 THE ENTERPRISE FINANCING PROCESS

Stage in Early Accelerating Sustaining Maturity

Cycle R&D Start-up
growth growth growth growth

Replacement
Proof of Capital
Seed First Second Development
Type of Concept MBO / MBI
Funding Corn Round Round Capital
Funding Development
Capital

Public Sector

Founders, family and friends

Source of Business angels

Funding
Venture capital funds

Corporate venturing

Public listing / IPO

 Investment Continuum
High Founder, friends
and family
Business Angels
Level of
Investment Venture Capitalists
Risk
Assumed by Corporate VC
Investor
Equity Markets

Low Commercial banks

Seed Start-Up Early Growth Established

* “Angel Investing”
Angel market addresses the $500K
Osnabrugge & Robinson investment gap between love money
and serious money
VENTURE CAPITAL (Formal & Informal)

► Institutional operators (formal venture capital)

► Private subjects
► Banks
► Insurance
► Corporate venture capital

► Non-institutional operators
(informal venture capital)
► Business Angels
FORMAL AND INFORMAL EQUITY PROVIDERS
Business Angels Formal venture
capital

Personnel Entrepreneurs Investors

Firms funded Small, early stage Large, mature

Due diligence Minimal Extensive

Investment's Of concern Not important

location

Contracts used Simple Comprehensive

Monitoring ex-post Active 'hands-on' Strategic

Exiting the firm Of lesser concern Highly important

Rates of return Of lesser concern Highly important

* Source: van Osnabrugge, 1998, p.2

FORMAL AND INFORMAL EQUITY PROVIDERS

VC BA
– Easy to find via directories – Difficult to find

– Your request is only one among – Request often strong personal

many hundred a VC receives involvement

– Can often via syndication – Limited amount to invest

provide large investment
– Investment decisions often
– Thorough and formal due quick and less formal
diligence and investment process
– Syndication more and more
– Exit route very important usual

– Exit route less in focus

BUSINESS ANGEL (BA) - Definition

“A Business Angel is a middle aged male with

reasonable net income, personal net worth, previous
start up experience, who makes one investment a
year, usually close to home or office, prefers to invest
in high technology and manufacturing ventures with
an expectation to sell out in three to five years time”.
(Kelly and Hay, 1996)

”Business angels (informal investors, independent

investors) are investors who provide risk capital
directly to new and growing businesses in which they
have no prior connection”.
(Harrison and Mason, 1996)
 BUSINESS ANGEL (BA)
Attitudes, behaviour and characteristics:
• male, rarely female
• successful experience as an entrepreneur or manager
• high net worth individual and / or sophisticated investor
• have a declared propensity to invest and to risk in a start-up
firm
• invest their own money (around 50K – 250K euro) (part of their
cash capital: 20 - 30 %)
• Seeking profit, but also fun (seeking minimum 20% return)
• are willing to share their managerial skills and their enterprise
background
• often invest in their region of residence
• make one investment a year
• prefer high-technology and manufacturing
• take a minor participation – medium term investment
• are willing to wait for an exit for 3-5 years
ANGEL’S – Success Stories
Company name Angel Investor Business Investment Value at Exit
Apple Computer (Name Witheld) Computer $91.000 $154 million
hardware
Amazon.com Thomas Alberg Online $100.000 $26 million
bookshop
Blue Rhino Andrew Propane $500.000 $24 million
Filipowski cylinder
replacements
Lifeminders.com Frans Kok Internet e-mail $100.000 $3 million
reminder
service
Body Shop Ian McGlinn Body care £4.000 £42 million
products

ML Laboratories Kevin Leech Kidney £50.000 £71 million

medical
treatment
Matcon Ivan Semenenko Bulk £15.000 £2.5 million
containers
Source: partially adapted from unpublished data provided by Amis Ventures in 1999
 ANGEL STRATEGY
High-growth start-ups: new businesses that are likely
to see sales grow to around € 1M and employment to
between 10 and 20 people in early years and export
oriented.
Key selection criteria of risk capital investors (generally):
• New products or technological improved products in an
existing market
• A product or service that can be taken to market without
further development (i.e., past the initial concept stage)
• Creation of new markets
• Company’s growth should be expected to be higher than
market growth
• Increase of market share against competitors
• Superiority regarding competitors
 ANGEL DUE DILIGENCE PROCESS

Technology Market
Technology development Marketing
Product development Sales
Process development PR
Product supply Competitors
Deliveries IPR
Organization Economy / Finance
Recruitment Cash forecast
Board Finance activities
Network of service suppliers Cost estimate
Office Budget
 Angel Motivations
► Altruistic - willing to provide:
 Advice - financial and management
 Contacts - broad range to assist in development of venture
 Hands-on Involvement - at basic level, if required
 Governance - Board of Directors / Advisors
 Credibility - sends good signals to customers, partners & investors
► Pragmatic
 Will hand off involvement to next level of investors …
 Therefore will use same criteria as VC to evaluate opportunity
 57% of companies with angel investment achieve VC
funding
 10% of companies with no angels achieve VC funding
Dr. Allan Riding, Carleton University research on Ottawa angels
 Types of Business Angels
► Professional
 Doctors, lawyers, accountants
► Micromanagement
 Very hands on with lots of
experience, but may be toxic
► Enthusiast
 Usually retired, investing is a
hobby, little value add
► Corporate
 Retired senior managers
looking to support their
investments or create a new
senior job for themselves
“Millions of years of evolution, and ► Entrepreneurial
that’s the latest model?!?”  Most active, successful
entrepreneurs looking to
diversify portfolio or expand
current business
 Investing Approaches
Sprinkle and Sprout Heavy Lifting
Approach Approach

- Investors make many - Investors make fewer,

smaller investments larger investments
- Bet on management - Understand market
- Follow-on investment in - Active involvement,
successful sprouts Advisory Board
- Fewer than 25% of the - 75% of investees
“sprinkled seeds” sprout succeed *
successfully *
* ONSET Ventures
research
 THE U.S. ENTREPRENEURSHIP
SUCCESS STORIES
► FIRST COMPANY WHICH ACHIEVED $ 100 MILLION SALES IN THE FIRST
YEAR:
COMPAQ INC.
► PRODUCT: PORTABLE PC’S
► HEADQUARTERS: HOUSTON, TEXAS

► FIRST COMPANY WHICH ACHIEVED $1 BILLION SALES IN THREE YEARS:

SUN MICROSYSTEMS INC.
► PRODUCT: WORKSTATIONS + SOFTWARE
► HEADQUARTERS: MOUNTAIN VIEW, CALIFORNIA

► FIRST COMPANY WHICH ACHIEVED $4 BILLION SALES AT INITIAL PUBLIC

OFFERING
NETSCAPE COMM. CORP. (BOUGHT BY AOL IN 1999)
► HEADQUARTERS: MOUNTAIN VIEW, CA www.home.netscape.com
 A Financial Chronology of Google.com
Price/share
(in US $)
1995 Larry Page & Sergey Brin@Stanford University

1997 15 000 US $ creditcards

100 000 US $ B.A. Andy Bechtolstein (Sun Microsystems)
Patent OTL

0.06 fin 1998 960 000 US $ 3 B.A.

OTL receives2 % of the shares

0.50 mai 1999 25 000 000 US $ 2 V.C.

Kleiner Perkins (Sequoia)

2.34 2001 15 000 000 US $ of which Yahoo

85 août 2004 2 718 281 828 US $ I.P.O.

295 2005 4 000 000 000 US $ Capital increase

NB: turnover. 200 000 US $ 1999

8 000 000 000 US $ 2006 Source: Hervé Lebert
 Amgen: A Capital Venture
►World’slargest biotech company
►Founded 1980
 $19 million venture capital
investment
►2007 Financial Year
 $14.8 billion revenues
 $4.8 billion profit (before tax)
►Market capitalisation: $51 billion
58
 Venture Capital
► Invest in:
 Private companies with high growth potential
 Launch, early development, or expansion
 Management buy-outs and buy-ins
► Raise funds for investment from:
 Private and public pension funds
 Endowment funds
 Foundations, corporations, wealthy individuals
►Looking for >5-fold return on
investment within 5 years
59
 Venture Capital
► Profit and risk sharing (high risk – high
return)
► 10 to 15% of portfolio will give very high
returns
► Detailed due diligence
► High level of hand holding
► Ownership and control of business shared
► Patient, flexible financing (5-7 years to exit)
► Highly selective financing – importance of
deal flow
60
 Exit Strategy
►Exit through the stock exchanges
(“IPO”)
►Sell to another VC
company/strategic investor
►Strategic mergers and acquisitions
►Issues in Exit :-
 Minimum return expected by VC
fund.
 Minimum equity size for public
issue
61
Venture Capital Drivers
Fund Providers Venture Capital Firms Portfolio Companies
Money Money

Limited Partners 2.5% Annual Fee

Pension Funds General Partners
Individuals 20% capital gains
Corporations
Ins Companies Entrepreneurs
Foreign Sources
Endowments
IPOs and Mergers

80% of capital Equity

gains + principal
Customer Management Supplier
(Revenue to VC firms) (SG&A) (Cost of Goods Sold)

Venture Capital is a money distribution business where

entrepreneurs compete for “shelf space” and where only 1 in 100
companies get funded!
 What VCs are Looking for
Products
► A novel biological or chemical hypothesis
► A well understood mechanism of action
► Proof of principle
► Significant unmet need
► A strong IP position (both freedom to operate and
power to exclude)
► A strategy for partnering so that the risks
associated with the timing of FDA approval can be
passed on to someone else (although clear clinical
endpoints are a plus)