26 Sep’14

The Impact of the Alice Decision on Corporate Patent Assets

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The Impact of the Alice Decision on Corporate Patent AssetsThe Supreme Court’s Alice decision has introduced a dimension of uncertainty associated with the validity of many of the software patents held by operating companies today. There seems to be a consensus among some of the leading academic and judiciary experts supporting that conclusion, as seen in recent comments made by Stanford Law School’s Prof. Mark Lemley, as well as in recent comments by former Federal Circuit Chief Judge Michel. From a valuation and financial reporting perspective, there needs to be a serious examination of the post-Alice landscape implications on the value of patents as corporate assets. The results of such examination may lead to further action – which could range anywhere from additional disclosure requirements by regulators, all the way to actual corporate asset write-offs. This article highlights some of the key issues that need to be addressed by companies and regulators.

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16 Sep’14

Crowdfunding Update: IP Protection and Startup Valuation Considerations

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Mary Juetten, CEO of Traklight and Efrat Kasznik, Foresight Valuation

Crowdfunding is expected to become a leading source of financing in the early stage, on both rewards and equity platforms. It is likely to add more transparency to startup valuations and, at the same time, contribute to an upward trend in valuations. However, the lack of attention to IP protection or infringement during the campaign can have negative implications on the valuation of your startup. The topic of IP protection should therefore be top of mind for entrepreneurs engaged in crowdfunding, as it is critical to their survival and success long after the campaign has ended.

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08 Sep’14

Business Model Innovation: Why Building a Better Mousetrap is Not Enough

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What do solar energy and personal communications have in common? While energy and communications seem unrelated industries, they have significant similarities if one considers the role of business model innovation as a precursor to success in bringing new intellectual property to market. Take, for example, two companies:

•SolarCity Corporation (Nasdaq: SCTY), a solar panel installation company, which is publicly traded with a market cap of over $7 billion; and
•WhatsApp, the text messaging company which was purchased in February 2014 by Facebook for $19 billion. Continue reading

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17 Jul’14

Living in a Bubble? Demystifying Startup Valuations

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Just when it seemed as though start-up valuations had peaked in 2013, the year 2014 has started with an opening shot in the form of the reported $3.2 billion acquisition of Nest Labs by Google, followed with Facebook’s $19 billion acquisition of WhatsApp. It now looks as if this year continues the perfect-storm conditions, which will sustain the trend of high valuations for exits (M&A and IPOs) and transactions in coveted markets such as the Internet of Things, where Nest has a strong foothold.

From my vantage point in Silicon Valley, I am frequently asked whether we are in the midst of a ‘valuation bubble’. The answer to that goes back to the definition of a ‘bubble‘, which inherently involves some irrational behavior driving otherwise rational participants in the marketplace to stray from reasonable prices that could have been anticipated under similar circumstances. Understanding the factors driving business valuations hinges on understanding the valuation framework, access to capital, liquidity conditions and the overall technology landscape. With that in mind, let’s look at some of the major trends that are shaping startup valuations in order to establish whether current valuation levels actually represent irrational, bubble-like conditions.

1. Demise of Financial Fundamentals: Rise of KPI-Driven Valuations

Valuations in certain high-growth industries are undergoing a paradigm shift, with financial fundamentals making room for valuations based on key performance indicators (KPIs) such as user stickiness, churn and conversion rates. A common pitfall involves trying to benchmark valuations of pre-revenue companies against traditional financial valuation fundamentals, such as revenues and profit multiples. This might give people a false sense of irrationality when they try to justify the valuation. This may sound like a radical idea, but it is the only way to explain the price parity between Instagram and Ducati, two companies purchased on the same week in April 2012 for around $1 billon. Instagram, a high-flying social media start-up with no revenues and 50 million users, commanded the same price as Ducati, a century-old Italian motorcycle manufacturer with €500 million in revenues. Last year saw a proliferation of KPI-driven valuations, with pre-revenue start-ups such as SnapChat and Pinterest valued at billions of dollars.

2. JOBS Act and Crowdfunding: New Platforms for Funding Innovation

Reward-based and equity-based crowdfunding platforms are emerging as prominent means for funding innovation, with over $2.7 billion raised in more than 1 million campaigns across all types of crowdfunding platform in 2012. Equity-based crowdfunding was made possible by the Jumpstart Our Business Startups (JOBS) Act, which lifted the 80-year ban on public solicitation in the United States. The long-awaited equity crowdfunding Title III Securities and Exchange Commission regulations are expected to be released later this year, marking the full launch of equity crowdfunding in the United States (which is currently limited to accredited investors only). At the same time, reward-based crowdfunding is becoming increasingly popular, with major platforms such as Indiegogo and Kickstarter helping start-ups to raise millions of dollars and bring new products to market.

3. Supply and Demand: Cash is Abundant

The consensus in US investment circles is that there is a lot of cash on the sidelines waiting to be deployed. Several factors are at play here: corporate cash levels are at an all-time high, creating shareholder pressure; high liquidity is fueling private equity investors, which are moving into growth equity; and venture capital investors are increasing their funds, resulting in higher investment rounds. The abundance of cash for investment is pushing up valuations to higher levels across the board – a trend that is expected to continue in the near future.

4. Multiple Paths to Liquidity: Intense M&A and IPO activity

In 2013 the NYSE reported a total of 230 IPOs with a combined value of over US$55 billion across all major US stock exchanges. Companies going public in the United States are generally more mature and are staying private longer. Subsequently, pre-IPO liquidity in secondary markets is very important, especially to early shareholders and investors. M&A activity saw some decline in 2013, with slightly over 10,000 deals reported overall, including about 2,200 technology deals with a combined value in excess of $100 billion. IPOs and M&A deals represent alternative paths to liquidity, which drive valuations up as companies have several options. These pricing pressures are expected to continue through 2014.

5. Hot Technology Sectors: Major Disruption Ahead

Some technology sectors represent particularly high-growth opportunities, and are expected to rise above the tide and generate M&A activity and higher valuations in 2014. One such sector is the Internet of Things (IoT). The IoT represents the vision of a connected universe where objects, devices and people will all share a common network of communication. IDC estimates that the number of connected devices will grow to 212 billion by 2020, with about 30 billion devices smart enough to operate without human control. A study by GE concluded that the IoT market over the next 20 years could add as much as $15 trillion to global gross domestic product, which is roughly the size of the current US economy. The Internet of Things is gaining momentum with industry leaders such as GE and Cisco, which adopted it as a key element of their corporate vision in 2014 and beyond.

So, are we living in a valuation bubble? The answer is probably somewhere in the middle, and perhaps we could characterize current valuation levels as “somewhat inflated, but mostly expected” under existing market conditions. These are exciting times, when disruptive technologies finally meet the right market conditions and capital infrastructure that allow for the kind of unprecedented valuations witnessed in recent years.

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