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MSC Malaysia R&D and

IP Conference 2010

Monetizing Intellectual
Property
A lifecycle perspective

by Keoy Soo Earn


Partner, Financial Advisory Services

31 March 2010, Malaysia


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Keoy Soo Earn, CFA, CPA Singapore, GCIP
Partner, Financial Advisory Services
Head, Transaction and Valuation Services – Singapore & Southeast Asia
DID: (65) 62163238 Mobile: (65) 9733 9828 Email: skeoy@deloitte.com

Soo Earn has more than 18 years of experience in the provision of business and financial advisory services. He has worked
with corporations, private equity investors and lenders providing a range of transaction services on cross border transactions.
He has considerable professional experience in due diligence, valuation, market study, strategic value consulting, corporate
governance advisory, franchising & licensing advisory and intellectual asset management advisory.
He has led in excess of 150 valuation engagements involving the valuation of businesses, intangibles and financial instruments
for the purposes of M&A, financial reporting, dispute settlement and tax structuring. He has also led in excess of 150 due
diligence projects involving the provision of financial, tax, commercial and/or IT due diligence, and SPA review for acquirers
and vendors.
Soo Earn also advises corporations on intellectual properties issues. He was the project director of the SCOPE IP (“Strategies
for Creation, Ownership, Protection and Exploitation of IP) project (www.surfip.gov.sg) commissioned by the Intellectual
Property Office of Singapore (“IPOS”). He acted as one of the two advisors to IPOS for their IP Starter “Punch up your
Business with IP” project (ipstarter.surfip.gov.sg).
He is a frequent speaker on topics related to due diligence, valuation and intellectual property management. He has been
involved in roundtable discussions and conducted seminars organised by many institutions including the World Intellectual
Property Office, Intellectual Property Office of Singapore, IP Academy, the Institute of Certified Public Accountant of Singapore
(“ICPAS”), CFA Singapore, Insead Singapore, Singapore Management University, the National University of Singapore and
Nanyang Technological University.
Soo Earn is a Certified Public Accountant and a Chartered Financial Analyst. He holds a Bachelor of Accountancy and a
Graduate Certificate in Intellectual Property Laws. He is a member of CFA Institute, the Singapore Institute of Directors
(“SID”), ICPAS and CPA Australia. He serves as a Board member of CFA Singapore, a Committee Member of the
Management Accounting Committee of ICPAS, a Committee Member on the Young Entrepreneurs Network of the Singapore
Chinese Chamber of Commerce and Industry, a Committee Member of the Regulatory Requirements Review Committee of
SID and a member on the Board of Advisors of AIESEC in Singapore, an international student organisation.
Monetization

IP OWNER

RIGHTS
CASH

CAPITAL
SOURCE

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IP – “Bundle of Rights”

• RIGHT TO USE IT
1

• RIGHT TO SELL IT
2

• RIGHT TO LEASE IT
3

• RIGHT TO GIVE IT AWAY


4

• RIGHT TO REFUSE TO EXERCISE ANY OF THESE RIGHTS


5

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Value of Your IP

Value of Your • “Present value of the


future economic benefits
IP of ownership”

Future • “Cash income from


Economic future exploitations of
Benefits the IP rights”

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Monetization Drivers

Probability
of realizing
the future
income

Pattern of
Quantum of
future
future
income
income
stream

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Price is what you pay.
Value is what you get.
Warren Buffett

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IP – Life Cycle

End of IP Life

Maturity • Assess
discontinuation of
product
• Product has
Commercialization widely gained
• Developing new-
version of IP
market
acceptance
• Mass production
• Leverage on
Preparation • Marketing
Licensing
structures
Activities

• Building a • Product Launch


Conceptualization prototype
• Tangible Revenue
• Seeking IP flow
• Idea is born Protection
• Explore
• Discovery • Preparing for alternative form of
commercialization revenue
•R&D

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Life Cycle Phase 1 : Conceptualization

Commonly used IP Valuation Methods :


• Cost approach

Monetization avenues :
• Internal / Self-funding mechanisms

IP Case Example :
Time Period : 0-7 T
Cost Incurred : S$102,620
Income : Nil

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Life Cycle Phase 2 :Preparation

Commonly used IP Valuation Methods :


• Real Options valuation method

Monetization avenues :
• Internal / Self-funding mechanisms
• Venture Capitalist fundings
• Joint ventures

IP Case Example :
Time Period : 8-18 T
Cost Incurred : S$396,000
Income : Nil

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Life Cycle Phase 2 : Preparation
Using Real Options Method to value IP

Monte Carlo Simulation


• Identifying key variables
affecting the forecast and
driving the value
• Defining the expected
probability distributions of
these variables
• Running multiple
simulations to obtain a
probability distribution of
the value.

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Life Cycle Phase 3 : Commercialization

Commonly used IP Valuation Methods :


• Probabilistic Discounted Cash Flow (DCF)
• Real Options Valuations

Monetization avenues :
• Venture Capitalist fundings
• Licensing

IP Case Example :
Time Period : 18-23 T
Transacted value at 18T : S$30mil

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Monetization Opportunities
Collateral
for loan
sale
Internal
Sale &
Leaseback

Licensing
• Territory
• Scope of use
• Time Period

Licensing
External • Territory
• Scope of use
• Time Period
Licensing
• Territory
• Scope of use
• Time Period

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Focus on the Licensees –
They are the source of the
relevant income streams

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Life Cycle Phase 3 : Commercialization
Using Probabilistic DCF to value IP
• Risks associated with future cash flows (e.g. external events such as market
acceptance) are dealt with using a probabilty approach

• Creates a more robust valuation, as multiple outcomes are considered at each


point in time
Fail
p=0.85
Cost = -10 Fail
p=0.15 p=0.25
Succeed
Low Post -launch NPV = 650
Phase II p=0. 75 p=0.70
Succeed
Phase III p=0.30
High
Post -launch NPV = 1020
Commercial outcome

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Life Cycle Phase 4 : Maturity

Commonly used IP Valuation Methods :


• Discounted Cash Flow

Monetization avenues :
• Securitization
• Divestment

IP Case Example :
Time Period : 18-24 T
Transacted value at 24T : S$192mil

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Securitization

IP OWNER

RIGHTS
CASH

CAPITAL Investors
SOURCE

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Life Cycle Phase 4 : Maturity
Using Discounted Cash Flow Method to value IP

No of Periods Periodic
Ahead (T) Cashflow
(CFt)
T
CF τ
VALUE = ∑
τ =1 (1 + rτ ) τ
Discount
Rate
(rt)

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Life Cycle Phase 5 : End of IP Life

Commonly used IP Valuation Methods :


• Cost-Benefit Analysis

Monetization avenues :
• Donation
• Divestment
• Licensing from alternative IP

IP Case Example :
Time Period : >35 T
Transacted value at 35T : Negligible

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Intellectual Property Life Cycle
Summary of Monetization Avenues
End of IP Life

Maturity

Donation
Commercialization
Securitization

Preparation Venture Capitalist Divestment


Fundings

Venture Capitalist
Conceptualization Fundings

Joint Ventures Divestment


Licensing Licensing from
Internal / Self- alternative IP
Funding Internal / Self-
Funding

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New Mexico, 1977 Singapore, 2001

Chairman and CEO of Microsoft.


Consistently rated by Forbes Magazine as one of the richest man in
the world.
Net worth at over $50 billion
Intellectual Property Life Cycle

Conceptualization Preparation Commercialization Maturity End of IP Life


Net cash outflow S$ Net cash outflow S$ Net cash inflow Net cash inflow
Natal costs 8,000 Salary Royalties
Consumables 79,200
Milk formula 5,760 Product endorsements
Education 33,000
Pampers 2,160 Awards
Kits 11,000 Royalties
Other consumables 24,000

Pre-school education 54,000 Youth training/clinic 52,800

Junior training/clinic 7,200 Overseas training stints 220,000


Kits ( Jersery, boots etc) 1,500
Total 396,000
Total 102,620
Cost per year 36,000
Cost per year 14,660

• Sale
• Securitization

8-18 18-23 24-35 > 35


0-7 years
(Age) years years years years
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What are the chances that the birth of a
concept can eventually develop into a
good monetization opportunity?

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Valuation...an exercise best
conducted in hindsight
Ashley Stevens, Boston University
Intellectual Asset Management

8
1 2 Phase VI
Pre-Project Stakeholders
Project Communications
Planning Kick Off
Phase V
3 Value
Extraction
Phase I 7
Identification
Intellectual Asset
Management
Phase IV
Intellectual Asset Process Policies,
4 Processes &
Management (IAM) Phase II Systems
Process refers to the Analysis &
Measurement
pro-active management
Phase III 6
of intellectual assets to
Strategy
create value and sustain Development
competitive advantage 5

Project Management, Communications and Quality Assurance

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Intellectual Asset Management
1 2 3
Pre-Project Planning Project Kick Off Identification

Estimated Time
3 weeks 1 week 2 weeks
(Pilot)
Mobilize engagement team and Identify intellectual assets critical
Objectives Secure management buy-in
kick start project to sustain and grow the business

 Approach government agencies  Kick off meeting between project • Discuss the existing and future
promoting IAM programs to working team and project business model(s), key value
businesses on government grant sponsor(s) to initiate the project propositions, products and
or assistance schemes and brief team members services, business expansion
 Secure senior management buy-  Identify and agree with client on plan and strategies with the
in on this initiative key client personnel who will be management
 Identify a business unit to members of the working • Conduct a high level value chain
undertake the Intellectual Assets committee and steering analysis to obtain an
Management (IAM) Program committee appreciation of client core
Key Activities competencies across its value
based on a set of agreed criteria  Agree project scope, approach,
(‘Pilot’) timelines, check points & chain and identify the key
 Secure business unit stakeholder communication plan intellectual assets (including
management buy-in on the IAM  Discuss deliverables format and intellectual properties) that are
program. timing and will be critical to sustain and
grow the business (please refer
to methodology)

 IAM pilot plan for management  Shared understanding of project  List of intellectual assets
Deliverables approval scope, timeline and deliverables required to sustain and grow the
business

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IAM - Identification (Value Chain Analysis)

Primary Activities:
 Inbound Logistics – Activities associated with
receiving, storing and disseminating inputs to the
product
 Operations – Activities associated with
transforming inputs into the final product
 Outbound Logistics – Activities associated with
collecting, storing and physically distributing the
product to buyers
 Marketing & Sales – Activities associated with
providing a means by which buyers can purchase
the product and inducing them to do so
 Service – Activities associated with providing
service to enhance or maintain the value of the
product.

Support Activities:
 Procurement – Purchasing of inputs used in the organisation’s value chain
 Technology Development – Technology component that is embodied in every value activity
 Human Resource Management – Activities involved in the recruiting, hiring, training, development and compensation of
personnel
 Enterprise Infrastructure – Activities including general management planning, finance, accounting, legal, government affairs
and quality management

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Intellectual Asset Management
4 5 6
Policies, Processes &
Analysis & Measurement Strategy Development
Systems
Estimated Time
2 weeks (6 weeks#) 2 weeks 3 weeks
(Pilot)
Identify gaps and proposed
Objectives Classification of Intangible Assets Develop IP Strategies improvement to the current IAM
systems

 Identify IAs of value using broad  Perform a high level external  Review existing IAM policies,
base estimation. review of the environment to processes and supporting
 Segregate IAs of value into core identify threats and systems to identify gaps and
and non-core. opportunities. recommend possible
 Identify IAs that support licenses,  Analyze IAs against two major improvements to facilitate the
products and strategy. criteria (value and intended use) creation, ownership, protection
to identify potential IP strategies and exploitation of intellectual
 Identify current and future use of property rights.
these IAs. (please refer to methodology)
 Development of strategic  Review and propose possible
Key Activities  Perform valuation of IAs, if corporate structures to facilitate
necessary to facilitate internal choices via brainstorming and
application of SWOT analysis. the execution of the IP strategies
transfer#. for management consideration
 Rank and selection of strategic
options based on an agreed set and evaluation.
of criteria.
# additional time needed to
perform valuation.

 List of IAs appropriately  Basis of deriving the list of  Gaps & recommendations,
Deliverables classified and valued (if strategic choices and selected suggested corporate structure
required) strategic options

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IAM - Strategy Development

High
Exploit Invest License
Value

Medium

Manage Develop Sell


Low

Protect Maintain Abandon

Current Future Never

30
Intended Use
MSC Malaysia R&D & IP Conference 2010: Monetizing Intellectual Property © 2010 Deloitte Touche Tohmatsu
Intellectual Asset Management
7 8
Stakeholders
Value Extraction
Communications
Estimated Time
6 weeks 4 weeks
(Pilot)
Develop capabilities and
Develop a holistic communication
Objectives framework to facilitate value
plan to the stakeholders
extraction

 Depending the IP exploitation  Identify stakeholder groups, their


strategies, relevant resources information needs, frequency
will need to be put in place to and their preference in
support the value extraction communications.
process.  Adopt the balanced scorecard
 Design the framework for methodology to gather
exploitation (eg. licensing, information required going
franchising, joint venture, spin- beyond financial performance
off, etc) indicators.
Key Activities
 Develop the systems (eg.  Design and develop a
franchise system, operations communication scheme.
manual, service level  Please refer methodology.
requirements, etc) necessary to
facilitate exploitation.

 Exploitation framework and  A well thought through


Deliverables systems necessary to facilitate stakeholders communication
exploitation plan.

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IAM – Stakeholders Communication

MARKET
VALUE
Environmental
Human & Social
Innovation & Intellectual
Sustainable
Brand & Reputation Business Value
Customer Equity
BOOK
VALUE
Traditional
Financial
Financial
Reporting

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Thank You!