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16 Jul’18

One Step Closer to Economic Justice: Commentary on WesternGeco LLC v. ION GeoPhysical

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The United States Supreme Court issued a 7-2 decision in WesternGeco LLC v. ION Geophysical Corp., regarding a patent owner’s ability to recover lost foreign profits for US patent infringement damages.  This ruling is a major blow to Parties seeking to evade US patent. It reinforces the strength of the US patent system by aligning foreign lost profit damages with the definition of infringement, which includes the act of supplying components of patented invention that were intended to be incorporated into a device in a manner than would trigger liability as an infringer, had the acts been committed in the US.  As stated by the Court: “The damages themselves are merely the means by which the statute achieves its end of remedying infringements, and the overseas events giving rise to the lost-profit damages here were merely incidental to the infringement.”

The Court’s opinion that the overseas events were merely incidental to the infringement is a common-sense approach that will prevent future bad-faith actors from leveraging the US patent system to their benefit, while at the same time seeking to shield themselves from its reach through the intentional act of exporting the infringement. When infringement can be proven, there necessarily must be infringement within the territorial reach of the US patent laws. The damaged party is allowed to recover damages, including lost profits, that are adequate to compensate for infringement and the Court has determined that the recovery of lost profits is not limited to domestic lost profits. The expansion of lost profits to include foreign lost profits enhances the ability of a patent owner to recover the appropriate amount damages that would make them whole, without artificially excluding foreign lost profit damages from the pool of available damages.  It’s economic justice.

** Foresight’s commentary to WesternGeco LLC v. ION Geophysical, along with the commentary of other industry leaders, was published by  IPWatchdog.

Full article here
05 Jun’18

Geoffrey the $500M Giraffe

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The Toys “R“ Us bankruptcy has been in the news over the last year. The company’s downfall has been well documented, and the unfortunate fate of the brand that has been ubiquitous in the toy world for several generations of kids and parents was emotional for many. Although a variety of shortcomings of the company’s long-term strategy and operations have come to light, it seems that a solid intellectual property strategy may be offering the toy retailer a small “saving grace” as its story comes to a close – or at least some hope for the company’s creditors.

As part of the bankruptcy proceedings, Toys “R” Us is auctioning off much of its intellectual property (IP) to help cover its debt and legal fees. The IP in the sale includes the Toys “R” Us name, the Babies “R” Us brand, a collection of domain names, and the beloved Geoffrey the Giraffe mascot and logo.  More specifically, according to an article on Entrepreneur.com, the sale of the IP is expected to cover $200 million in debt and anticipated legal fees of up to $348 million (fees which they keep accruing at an astounding rate of $1,745/hour, according to one NY Times article)– for a total of nearly $550 million. Important to note is that the IP value proxy for Toys “R” Us was determined based on a likely value to be realized at an auction. Historically, intangible assets have sold at steep discounts through the auction process, and the true value of the IP assets is presumably much greater in the hands of the buyer.

According to US generally accepted accounting principles (GAAP) as well as the international financial reporting standards (IFRS) a company’s internally-generated intangible assets, including brands and related trademarks, are not reported as an asset on the company’s balance sheet.  As a result of this reporting gap, investors, as well as the general public, never gain a full understanding of the fair value of such intangible assets. In this case, although an official valuation of the Toys “R” Us brand has not been disclosed in the company’s financial statements, we get a glimpse at just how valuable a solid IP portfolio can be, as we see its potential to cover millions in debt and legal fees. For purposes of this post only, we compared the anticipated IP value of $548 million against Toys “R” Us’ last available balance sheet as of October 28, 2017, as seen below:

We specifically highlight the comparison of IP value to the Total Asset Value of Toys “R” Us. We see that the assumed IP value represents 8% of the total reported assets for the company – a significant proportion for an asset that goes unreported. Naturally, one would classify any asset representing 8% of the total book value as a fairly significant asset. However, when we look at some of the world’s most valuable consumer brands, we see that brands can actually have the potential to account for a far more significant portion of Total Asset Value, as reported on the balance sheet. Every year, Interbrand (a UK-based marketing consulting firm) publishes its “Best Global Brand Rankings” in which it ranks companies by the value of their respective brands. To better understand the hidden, off balance sheet value of IP assets, we applied the same IP Value-to-Total Asset Value ratio that we examined with Toys “R” Us to 3 of the top-ranked consumer brands in the study. According to Interbrand’s 2017 brand ranking study, Apple, Coke, and Nike boast brand values of $184 billion, $70 billion, and $27 billion respectively. Taken alone, these values are significant; however, when compared to the Total Asset  Value on each company’s balance sheet, we begin to see the true magnitude of these unreported assets. Below is a table showing the brand value as a percentage of the most recently reported Total Asset Value for each of these 3 companies:

It is eye opening, to say the least, seeing the relative value of these “hidden” assets for some of the world’s largest companies. Nike, for example, owns a brand that is worth over 100% of the total value of its publicly disclosed assets. Apple’s brand is reportedly worth 50% of its total asset value – and it is important to remember that the Interbrand values do not include other forms of IP, such as patents, technology, know-how, etc. which are highly valuable intangible assets for Apple.

Since internally generated intangible assets are not reported in financial statements, in many cases, the public does not gain an understanding of the assets’ fair value until these assets are sold independently or as part of an M&A deal.  When a company experiences financial distress and is forced to liquidate its assets to pay back creditors (see the Nortel IP auction for one of the most famous instances), often IP assets are the only assets which have value, since they can be monetized at the hands of a new buyer. Such is the case with Toys “R” Us; we did not see the true value of Geoffrey the Giraffe until it was too late.

Full article here
29 May’18

Lessons learned from 2 years of startup surveys: Key observations about founders and the companies that they build

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In 2016, we launched a startup assessment survey, aimed at analyzing startups that approach us for services and scoring them on the Product/Execution Quadrant map.  This analytical tool provides a useful framework for early stage startup assessment (Pre-Series-A) and for identifying areas of weakness on either the Product or Execution side that should be addressed in order to take the company to the next level.

More on the Product/Execution Quadrant map can be found in this article.

 With over 2 years of data, we have seen some interesting trends in the responses we get to our 20-Question assessment survey.  Below are a few observations that can shed light on early stage founders’ motivations, products, competitive advantages and other factors critical to success:

  1. Founders who are experts in their industries are often targeting problems based on personal pain

There is strong evidence in the market that in instances where entrepreneurs are addressing a personal pain in an industry they know well, they are more likely to succeed.  Our survey results show a high concentration of founders who fit this profile, and we believe that the two are actually correlated: the more experience you have in an industry, the more likely you are to stumble upon a problem that is rampant in that industry.  When asked about the problem they are trying to solve, 50% of respondents indicated that the ‘Idea came from personal frustration’, and 53% further responded that it is a ‘Problem in an industry where I know the customer needs’.  These answers bode well with the responses to another question about relevant industry experience, where 58% of respondents indicated that they have ‘Significant experience (over 5 years)’, and another 18% indicated ‘Some experience (under 5 years)’.

  1. Most founders in the software industry have self-funded a product to minimum viable product (MVP) and beyond

Software products are easier to self-fund to a relatively advanced stage of product development, as opposed to products in hardware, materials or life sciences which require large amounts of R&D and depend on grants or other type of early stage funding. This correlation is clearly supported by our survey results:

  • 76% of the respondents identified their product as ‘Software’ related, while close to 50% specifically identified a Software-related industry (Mobile, Social media, Enterprise software or FinTech).
  • 65% of the respondents characterized their stage of product development as MVP and beyond (31% at the ‘MVP/Proof of Concept built’ stage, 24% at the ‘Initial Release’ stage, and 10% have already released a product to the market).
  • Finally, 88% of respondents have self-funded their venture to-date (29% each also indicated Friends & Family or Angel Funding), and only 2% took in VC funding.
  1. While many founders have some form of patent protection, an overwhelming majority mention ‘Superior product features’ as their competitive advantage

While approaches to patent protection vary in our survey, there is almost a unanimous consensus about ‘Superior product features’ being the most important competitive advantage. This finding makes sense in light of the large concentration of software companies in our survey.  Software companies grow in valuation by gaining user traction, and user metrics are often the most important metrics analyzed by investors.  It is therefore no surprise that 92% of respondents indicated a user-facing metric such as ‘Superior product features’ as their competitive advantage (some of these may be overlapping since there was more than one possible answer to this question).  The next popular answer, at 50% of respondents, was ‘Intellectual property’.  When specifically asked about methods of protecting their idea, founders’ answers seem to be all over the place: about a third of respondents (34%) indicated having a pending patent, 27% of respondents indicated they have not protected their idea at all, 15% had a granted patent and 12% had a portfolio (more than one) patent (some of these may be overlapping since there was more than one possible answer to this question).

  1. First time entrepreneurs seem to overestimate their addressable market and/or underestimate the competition

As we have learned throughout our work with hundreds of startups around the world, many founders (especially if it is their first venture) are overly optimistic in that they overestimate the addressable market, and/or underestimate the competition.  Both of these biases are present in our survey results: when asked about the size of their addressable market, 67% of respondents indicated the market was larger than $2 billion, and another 17% indicated the market was between $500 million – $2 billion.  When asked about the state of competition, 68% responded that there was only ‘a handful of competing products’, and only 12% felt like they were entering a ‘crowded market’.  We expect these biases to be correlated with lack of experience, and indeed, when looking at the makeup of our survey respondents: 38% of respondents are first time entrepreneurs, only 19% have raised money before, and only 10% have had a previous exit.

  1. While most founders operate as a team, the definition of a ‘team’ is subject to interpretation

A strong team is a critical factor in our Execution score, and we collect a lot of information about the startup’s team and its makeup.  59% of our respondents reported having a full-time team working on this project, and 35% of them also reported that they have worked with key members of the team before.  This combination is highly sought after by investors, as past work experience is a factor likely to reduce personal frictions in the team, a problem that is considered one of the top growing pains of early stage ventures.  Having said that, perceptions of what constitutes a team varies among founders, and could be subject to interpretation: while 7% of our survey respondents reported that they have no team, 29% of them indicated in a different question that they are ‘Sole entrepreneurs’.  This seemingly conflicting answer is actually typical of startup founders, especially those with little experience, who sometimes include in the team people who are contractors (17% indicated their team is comprised of independent service providers) or advisors (38% reported that they have an advisory board).  While these two groups can fill in the gap in the early stage, they are often only a temporary substitute to a real, dedicated team.  Finally, while 43% of respondents indicated that they were looking to build their team, only 19% indicated ‘Access to talent’ as a major challenge to scaling the business in a different question.  We attribute this pattern to lack of experience, as seasoned entrepreneurs fully understand the challenges involved in putting a team together.

Conclusion

We will keep monitoring the trends as more startups take our survey.  As previously mentioned, our sample of survey respondents over the last 2 years constitutes primarily of early stage ventures developing software products.  We use this survey to map each company on a Product/Execution quadrant map to figure out their readiness for Series A funding. Founders in our survey often fall into the ‘Rookie’ quadrant (scoring low on both Product and Execution) or ‘Visionary’ quadrant (scoring high on Product and low on Execution). This seems consistent with both the industry they are in (Software) and their stage of funding (seed, pre-Series A).  Our goal is to move them to the ‘All Star’ quadrant (high on both Product and Execution) and get them ready for Series A funding.

Full article here
03 May’18

IP Monetization: Realizing Hidden Value in Time of Decline

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Management teams of high-tech companies often overlook the additional shareholder value to be realized by developing strong IP portfolios, and are therefore ill-equipped to extract that value in times of decline in their companies’ life cycle.

The Business Life Cycle of high-tech companies has been a path well-traveled, and the management teams of most high-tech companies are guilty of missing an important fork in the road off that beaten path. Traditionally, the “Business Life Cycle” consists of 4 stages; Startup, Growth, Maturity, & Decline. Many companies fall under one of these broad categories, and furthermore, many management teams make key business decisions based on what the definition of their current stage tells them. The narrow focus of management seeking to move their company along the traditional Business Life Cycle results all-too-often in their untimely arrival to the Decline stage. We at Foresight believe that by implementing the right Intellectual Property (IP) strategies early in the Life Cycle, companies can extend their life cycle and generate additional shareholder value while managing to stave-off heading into a stage of Decline.

Management teams of a business in the Startup stage are focused on product development, developing sales strategies, and doing everything they can to stay afloat. Those fortunate enough to cross the chasm into the Growth phase begin solidifying their internal operations, investing heavily in client relations and new business development, and establishing their position in the market. After several years, the Maturity stage sets in, growth slows, and the business becomes far more predictable. It is at this point that many companies see themselves down one of two paths. The first is the path of reinvestment, under which the company essentially restarts its life cycle with a new product line or new target market or a new acquisition. The second path is one on which a company simply accepts its imminent decline and grinds to a halt. For companies on this path of Decline, management must recognize that there is another fork in the road.

Specifically, in the high-tech industries, it may be time to introduce a stage of the life cycle in between Maturity & Decline. That stage is IP Monetization. Too many high-tech firms live out their days in the Decline stage, winding down the business, losing key customers, and ultimately watching their remaining shareholder value dissipate. At the end, the company’s IP assets – which were once the foundation for years of cashflow –  are liquidated at an auction or through an asset “fire sale”, often at a steep discount. In these cases, the company’s shareholders are missing out on a potential return on investment on the assets that they financed, a return that could have been achieved through the execution of an IP monetization strategy.

Two notable examples of IP Monetization execution are companies such as BlackBerry and TiVo. These companies have successfully extended their life cycles, post-Maturity stage, and have found success in the IP Monetization stage of their corporate life cycle. Shareholder value has been retained as these companies pursue an IP licensing strategy for the technology that once made their operating business a success. For competitors that outlasted the company, or emerging players who are introducing next generation embodiments that leverage the technical innovations of Mature company offerings, the IP assets of post-Maturity stage companies are of extreme value. IP Monetization allows companies such as BlackBerry and TiVo to do 2 things: 1) extract value from their IP portfolio from competitors who may have been infringing during the peak of their competition, or 2) share in the profits of the next iteration of the company’s core technology as next generation companies seek to innovate on the platform of the existing technology. Look no further than TiVo’s recent financial performance for the huge potential to be realized in the IP Monetization stage of business. The company’s revenue grew 57% from 2015-2017, with over 95% of 2017 revenue attributed to “licensing, services and software.”

The key to introducing this new stage of the Business Life Cycle is educating entrepreneurs and managers on the importance of a solid IP strategy early on. Having an understanding of the value of intellectual property outside of a company’s current operating business will ensure that the shareholders who funded the creation of the IP portfolio are able to realize returns on its full value. However, to achieve the full value potential, management must develop a strategy early in the life of the company and endeavor to develop a forward-looking IP portfolio rather than taking the easy road of constructing a portfolio to narrowly protect its product (known as a “defensive” approach). Following a narrow defensive approach to IP management reinforces the traditional Business Life Cycle. It’s time for high-tech companies and their shareholders to take the fork towards IP Monetization and plan for it when they create their IP portfolio and strategy.

Full article here
 
 

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