30. January 2008 by Martin Suter.

If I had to impart any words of advice to a company that is seriously looking at licensing as a go-to-market model, it would be the following three things:

1.       Understand all of the implications of a licensing strategy, including its impact on valuation and potential liquidity events for the shareholders;

2.       Develop guiding principles outside of the deal;

3.       Assess every deal through a strategic filter.

The first of these is critically important and requires the full buy-in from the Board and investors. Don’t assume that they automatically appreciate what these are. Licensing has implications for valuation and exit potential, and while the benefits are many (focuses scarce resources on core technology development, time to market, leverages existing channels to market, non-dilutative cash inflow, etc.), the risks are also real. But many of these risks can be partially or wholly mitigated by a rational approach to the deal, and it is incumbent on you to show them how.

Which leads us to the second imperative: Develop guiding principles outside of the deal. Get the Board to sign off on these and empower you to negotiate the deal within the deal framework that’s been discussed. The last thing you want is the Board “helping” you to negotiate a deal in real-time or proffering opinions at the eleventh hour. Given the implications of a bad deal, there are certain things that will not be negotiable. These may be dealbreakers, but it’s far better to know going in where you have the support of the Board and often, this makes for easier negotiations. At worst, you can cut bait.

Lastly, every deal should be looked at in a strategic context. Does it make sense to grant any rights, even non-exclusive, in the Field of Use that is likely going to be the driver for a liquidity event? Granting rights in niche markets is very different than granting rights in a core market.

In future blogs, I’ll discuss some of the issues that are worth losing sleep over.

That’s my .02!

Martin

(martin.suter@iplicensing.net)

Posted in Strategy, Licensing | Print | No Comments »

29. January 2008 by Martin Suter.

The corporate DNA in most large companies is such that getting to signed paper can often be a lengthy business development process. Early stage companies have agility built into their DNA. Reconciling these two extremes can be extremely challenging. The pay-off can be significant, and as I previously blogged, may help to bring in money to the company at key inflection points in a company’s development.

Two deals that I have been involved with highlight both ends of this spectrum. In 2000, I negotiated a deal with Microsoft for Netware to Active Directory migration tools. Notwithstanding the 2+ years building relationships, creating mindshare and credibility internally, once the decision was made to ship “their own” tools, it took a matter of weeks to get to signature. Obviously, this deal didn’t come out of the blue, as the groundwork we had been laying was critical, but the deal itself was virtually frictionless.

The second is probably more representative of what it takes to get a deal done. While at MeshNetworks  I began the dance with Motorola in Feb. 2003. Mesh had done a good job of building visibility and mindshare as a company with an emerging, potentially disruptive technology. Motorola Ventures, its internal VC group, identified Mesh as “interesting” from an investment and potentially from a strategic perspective. What began as a nominal equity investment with an optional second tranche in the mid-seven figure range, slowly began heating up.

In March, we began a technical due diligence and validation process with Motorola’s emerging technology group, which was a great thing, as they floated above the product groups that are nose down trying to get existing products out the door. Supporting this effort consumed hundreds of person hours, in addition to travel costs. Throughout this process, we needed to continually justify to ourselves, to our Board and investors that this was worth doing.

By summer, we had come through most of the technical evaluations and began to push for a commercial discussion. Some posturing around deal terms began, which required a real gut-check to convince ourselves that this remained worth doing. In late September, we got down to more substantive discussions and by late November, had a non-binding MOU. Getting from there to signature took a further 4 ½ months of page turns in rooms full of Motorola Legal and business folks, but finally on April 9, 2004 we had a deal.

This process brought us much closer to Motorola, during which time they had an in-depth look at us. It also gave us the chance to better understand how Motorola was structured, and more importantly, where there was strategic alignment across the portfolio. On December 21, 2004, 750 days after we began to dance and nine months after the licensing deal, we closed an M&A deal with Motorola.

Was it worth it? Absolutely.

That’s my .02!

Martin

(martin.suter@iplicensing.net)

Posted in Licensing, Start-ups | Print | No Comments »

27. January 2008 by Martin Suter.

In my last blog, I described some of the real challenges facing start-ups that need to get a technology to market. Of course, there are categories of companies for which the front-end load of R&D costs to productise is lower (e.g. software vs. hardware), however the challenges of funding the commercialization of a product are relatively common across all categories.

Frequently, a start-up may attract seed funding on the basis of the team, an idea, and a vague view of some massive, future market opportunity. For this, the founders give up a big chunk of the company, and embark on delivering a proof-of-concept. This critical milestone is typically the trigger mechanism for another round of funding designed to get the company closer to product and customer traction. Ideally, this proof-of-concept is leveraged into customer/partner/market interest, with sufficient “buzz” to secure enough money at a reasonable valuation, so the founders and the seed guys aren’t crushed.

The problem, is the disconnect between where the company’s really at in the eyes of new investors (“So you’ve got no product, no customers, limited market proof points…but we DO like you”), and the eyes of the company and the seed guys (“Hey, this stuff really works. You should be blown away by the technical accomplishment”).

So, therein lays a challenge. Facing massive dilution from new investors, likely alongside liquidation prefs, other onerous terms and a promise to hold additional funds in reserve to ensure later financing is available, the early stage guys and the founders face a difficult decision. Lose control of the company to later stage investors in order to get to revenues or…What other options do they have?

An important option that remains, IMO, largely misunderstood, is the licensing of technology to an 800 lb gorilla as a non-dilutative means of generating revenues and helping you to monetize your technology. Frequently, their strengths are your weaknesses: money, customers, sales coverage (direct and channel), manufacturing/supply chain relationships, global support, brand, etc. Trying to displace an 800 lb gorilla that is intent on maintaining market share on your own, is like me trying to budge a sumo wrestler. It ain’t gonna happen.

However, if you think about what you bring to the table when viewed thru the eyes of the big guys: innovation, agility, de-risking of technology development, competitive advantage and time-to-market, all of which are worth something to the right partner. Their motives may be offensive (moving into a new market with a disruptive technology to displace an incumbent), or defensive (preserving dominant status in beachhead markets with next generation technology). In either case, knowing where the hot buttons are will be key to getting to the negotiating table.

Structured correctly and presented with conviction, technology licensing can be a means to generate early revenues, get market traction and acceptance without requiring a massive shareholder dilution post-proof-of-concept.

What do these deals look like? What are the issues? Stay tuned…I’ll get to that soon.

That’s my .02!

Martin Suter

(martin.suter@iplicensing.net)

Posted in Licensing, Start-ups, IP | Print | No Comments »

24. January 2008 by Martin Suter.

A very real dilemma facing the majority of early stage, pre-critical mass companies is how best to commercialise their technology. Most companies grossly underestimate the time and expense to first productise and then again to commercialise their IP. Depending on the physical form factor of the “product” to be commercialized (i.e. software vs. hardware vs. semiconductors), the cost of productisation may be in the tens of millions of dollars.

But this is what engineers do, they build. Damn the torpedos, full speed ahead. But taking an “If we can build it, they will come” view of the opportunity is dangerous and naive. Getting product to market is exceedingly difficult; often more so than building the product in the first place. Companies present rosy market forecasts to their potential investors, but building up a sales force and a channel that is adequate for coverage and sales capacity to get anywhere near most projections is very expensive and time-consuming.

How much quota are the reps going to carry? What’s a reasonable ramp? If it’s an evangelical sale, it’s unlikely that any rep will get anywhere near quota for at least 18 months. What is the per rep revenue number that you expect to bring in? What headcount do you need to support this…Marketing to create programs and demand generation, Finance to manage a growing payroll, along with accounts payable and receivable, Customer Service and Technical Support to scale to the projected number of customers required by the projections, etc.

What is the market window? If it takes 2-4 years to build a highly functioning sales channel, what percentage of the market opportunity has already passed?

Lastly, young companies almost always underestimate the stickiness of vendor/supplier relationships, especially if they’ve got a component that they’re trying to embed in someone else’s device. Imagine how difficult it is to sell into a risk adverse industry like the automotive industry, where their product roadmaps extend beyond 15 years, while yours are lucky to extend 15 months. Security of supply, financial stability, and corporate longevity are just three, of many, considerations that a start-up must contend with in order to close a sale of this type.

Next, I’ll talk about IP licensing as a go-to-market strategy.

That’s my .02!

Martin

(martin.suter@iplicensing.net)

Posted in Start-ups, IP | Print | No Comments »

22. January 2008 by Martin Suter.

The biggest problem that I have with the open source ecosystem is that it obfuscates its commercial motives behind this banner of altruism. The attempted distinction between commercial vs. open-source, with the implication that open source is somehow not commercial, is a red herring.

Open-source is also commercial. Look at the companies behind Linux - IBM, Google, Oracle, Sun, Novell, Red Hat. Does anyone really believe their support of Linux is altruistic or that they’re motivated by the distribution of “free” software? If profit is not their motive, someone better tell their shareholders!

In the mid-80’s, the Canadian government reduced the patent protection afforded to pharmaceutical companies from 20 years to 10. From this, tremendous wealth was created for the owners of two generic drug manufacturers, Apotex and Novopharm. Were these companies acting out of the interest of the general population or were they parasitic offspring from a flawed premise? Each of these companies chose to remain private, and therefore able to keep their financial records away from public scrutiny, while the “commercial” pharmaceutical companies opened their books to the market, and to criticism. The owners of the generics became billionaires, not because they were running charities, but because they were able to monetize others’ IP and risk capital.

Sure, Big Pharma is profitable, but it is not at the expense of society. Rather, it is frequently to the benefit of society. Look at how the invention of H2 receptor antagonists changed the treatment of ulcers and reflux esophagitis. Twenty five years ago, ulcers often required surgical intervention, but Tagamet changed the rules of the game. Did the profit that SKF made come at the expense of society or did the invention of a disruptive technology (if you were a GI surgeon!) warrant these profits?

Under what terms does Google license Linux? How much does it “give back”? I’m suggesting that it is highly selective as to what it “gives back” to the open source community, and makes these decisions based on its own self-interest, not out of some altruistic motive. Google search algorithms are deeply guarded secrets, and its vaunted server farm architecture is “proprietary”. Is there anything wrong with this? Of course not. Just don’t pretend that you’re somehow better than the “commercial” vendors because you promote open source development opportunistically.

“This is what [Summer of Code] is really about: infecting students with the free software spirit, giving them the opportunity to grow into a community like ours.”

There’s another more subtle benefit, as DiBona explains. Thanks to the Summer of Code, “Google now knows all the people working on all these software projects, on which it depends,” he says. “That’s incredibly useful to us. Every once in a while we’ll come out with a new API and there’ll be some projects in the open source world that might be useful in either using that API or being a customer. You can just call them up and say, ‘hey guys, it’s Google, we’re you’re pal,’ and let them just check it out.” (http://redmondmag.com/features/article.asp?editorialsid=2395)

I have never heard, nor do I ever expect to hear, any allusions from Microsoft that it is anything but a profit-driven, commercial software vendor. As a shareholder, I expect nothing less.That’s my .02!

Martin

Posted in Microsoft, Google, Linux, IP | Print | 2 Comments »

11. January 2008 by Martin Suter.

This past week, I decided to add blogging capabilities to this site and was surprised to find that my web hosting service (1and1.com) only has blogging options in its Linux Hosted Business offering. Coming from the commercial software business, I made a conscious choice 4 years ago to opt for the Windows Hosted service. But, I was now confronted with a choice that required some serious thinking about whether the move to open source was compromising my moral code.

“What’s he talking about?”, I can hear you asking.

As an Objectivist (by choice), a capitalist (by default), and an IP licensing executive (by profession), my quandary over open source software really sits at the intersection of these three areas.

My moral compass has largely been set by the influences of Ayn Rand in my formative years. Her views on individuals’ rights to their own work motivated me to gravitate towards IP licensing. Her view on capitalism (in its purest form), is that it’s the only moral economic and political ideology and is the manifestation of an individual’s right to their work as well as their ability to profit from it. As a consequence of the nobility of the profit motive, she profoundly mistrusted altruism.

Is Linux/open source, software for socialists? Are those involved in its development doing so out of an altruistic agenda? Does its use equate to theft of someone else’s IP?

I opted to start with the last question first, and printed off the GNU General Public License that I was required to enter into if I were to switch over to Linux. It’s highly readable, much more so than most commercial EULAs, and is eminently clear about the rights and obligations assumed by developers who choose to modify the code base. While everyone has the right to do so, any changes they make must also be made available, as source code, under the exact same terms as the original license - free of charge and without warranty.

Now as a named co-inventor on only 1 patent, I’m not smart enough to be called an inventor myself. I do know, however, that most inventors will say that their work builds on the work of others. “Prior art” is an important concept in intellectual property, requiring citation in academic publications and patent filings. Is the source code that one gets not the same as prior art? What about derivative works based on this prior art?

Two of my favourite words to help answer this are “but for”. In discussions about IP licensing, a key principle that arises regarding ownership of derivative IP can be summarised as follows: “But for the existence of the background IP, the derivative work could not have been created.” This gives the background work foundational status and means that the creator of the derivative works has a legal obligation to the owner of the background IP.

In this regard, I guess that I’m OK with the requirement to forgo any claims to derivative works. Developers decide, of their own free will, to build on top of open source knowing full well what the implications are for their IP.

Next time I’ll take a swing at the question: Is open source software for socialists?

Posted in Ayn Rand, Objectivism, GPL, Derivative Work, Linux, IP | Print | No Comments »