1. What is your IP worth? University of Kentucky
Commercialization Pathways Workshop Part II, March 11, 2014
What is your IP worth?
David W. Blackwell
Professor of Finance and Dean
Gatton College of Business and Economics

2. Commercialization Pathways
Sponsored Research
License to Industry
Startup Company
How do you decide?
What’s best for the inventor?
What’s best for UK?
Source: Von Allmen Center for Entrepreneurship

3. Commercialization Pathways
MARKET
Commercialization Pathways
Sponsored research
License to industry
License to product startup
License to development startup 1 2 3 4 UK 1
Industry
Partner 2
Startup 4 3
Source: Von Allmen Center for Entrepreneurship

4. Commercialization Pathways
MARKET
Commercialization Pathways
Sponsored research
License to industry
License to product startup
License to development startup 1 2 3 4
lab funding
1st rights to license UK 1
Industry
Partner
patent expenses
progress payments
royalties 2
progress payments
royalties
patent expenses
progress payments
royalties
equity
Startup 4 3
product/service sales
Source: Von Allmen Center for Entrepreneurship

5. UK Royalty Distribution
Client Stories (UK)
UK Royalty Distribution UK
patent expenses
royalties
equity
progress payments
licensee
after repayment of patent expenses
40% inventors
20% inventors’ department(s)
20% inventors’ college(s)
20% UKRF
Source: Von Allmen Center for Entrepreneurship

6. UK Royalty Distribution
Client Stories (UK)
UK Royalty Distribution
Simplified Example
after payment of patent expenses $5
$100 sales
5% royalty UK
patent expenses
royalties
equity
progress payments
licensee $5 $2 $1
after repayment of patent expenses
40% inventors
20% inventors’ department(s)
20% inventors’ college(s)
20% UKRF
Source: Von Allmen Center for Entrepreneurship

7. Client Stories (UK) Sponsored Research 1 Benefits Challenges
Provides funding for UK research
Creates early industry partnership
In many cases, hard to find company willing to do
Potential conflicts on IP ownership
Company usually has first rights to license, potentially limiting commercialization options
Example where it is the preferred approach
Energy opportunity where…
industry partner does not have internal research expertise
commercialization can only be done by industry
funding required is very large and time to market is long
heavy regulatory requirements

8. Client Stories (UK) License to Industry 2 Benefits Challenges
Creates ongoing royalties for life of patent
Minimizes UK & inventor resources in commercialization process
Many companies want further along in development before licensing
Need to monitor licensee keeps focus on commercialization
Doesn’t contribute to local/state economic development
Example where it is the preferred approach
Agriculture opportunity where…
UK IP has large market opportunity and first office action is positive
commercialization can only be done by industry
funding required is very large and time to market is long
regulatory requirements
Source: Von Allmen Center for Entrepreneurship

9. License to Product Startup
Client Stories (UK)
License to Product Startup 3
Benefits
Challenges
Offers inventor opportunity to participate in bringing product to market, and to own equity
Startup controls priorities
Contributes to job creation and economic development in Kentucky
Inventor must carefully manage potential conflict of interest with UK responsibilities
Finding the right management team is hard
Raising money is a continual challenge
Example where it is the preferred approach
Engineering opportunity where…
UK IP has large market opportunity
SBIR/STTRs and angel funding can bring to market or to next funding stage
Time to market is relatively short
Strong management team is available with both technical and business experience
No regulatory requirements
Source: Von Allmen Center for Entrepreneurship

10. License to Development Startup
Client Stories (UK)
License to Development Startup 4
Benefits
Challenges
Offers inventor opportunity to participate in bringing product to market, and to own equity
Increases license value by being further along in commercialization stage
Contributes to job creation and economic development in Kentucky
Inventor must carefully manage potential conflict of interest with UK responsibilities
Finding the right management team is hard
Raising money is a continual challenge
Example where it is the preferred approach
Medical device opportunity where…
UK IP has large market opportunity
SBIR/STTRs and angel funding can bring to prototype and hopefully early clinical results
Time to license to industry player is a few years, and target licensee(s) have been identified
Strong management team is available with both technical and business experience
Minimal/moderate regulatory requirements

11. Client Stories (UK) Startup Distribution Simplified Example UK Startup$5 UK
patent expenses
royalties
equity
progress payments
Startup
$100 sales
equity
? share of profits $5 $2 $1
after repayment of patent expenses
40% inventors
20% inventors’ department(s)
20% inventors’ college(s)
20% UKRF
Source: Von Allmen Center for Entrepreneurship

12. Commercialization Pathways
Guidelines
Time to market
Funding required
Regulatory requirements
Proposed product
Inventor involvement
Startup
< 3 years
<$10 million
Low
Complete solution
High
License
>7 years
>$50 million
High
Add-on to market leader
Low
never this clear cut, right solution depends on individual circumstances
Source: Von Allmen Center for Entrepreneurship

13. $1 billion in sales since the late 1980s!

14. (Former nuclear engineer for the Strategic Air Command)
Source:
Lonnie Johnson
“Rocket Scientist”
(Former nuclear engineer for the Strategic Air Command)

15. Super Soaker Inventor Invents New Thermoelectric Generator
Lonnie Johnson has moved on from high-powered squirt guns to a chip that converts heat from the sun--or anything else--into electricity
Among the potential applications are at utility-scale solar thermal farms and for plug-in hybrid vehicles, in which the device would use waste heat from the car’s internal combustion engine to help power the car’s electric motor. Johnson even envisions a day when miniaturized versions will power consumer electronics. Imagine your laptop producing power from its own waste heat, your cellphone being charged as you hold the handset against your face, or an implantable medical device exploiting the difference in temperature between, say, your chest cavity and the skin on your arm.
Source:

16. Is it in your personality to do a start-up?
“Unstoppable skill at selling!”
Ron Popeil: Veg-o-Matic; Pocket Fisherman
Are you a business innovator?
Lonnie Johnson: Super Soaker; thin battery technology (Excellatron); miniature “heat pump;” process that converts thermal energy to electrical energy using a non-steam process which works by pushing hydrogen ions through two membranes, with significant advantages over alternative systems
Are you a talented manager?
Are you a risk taker?
Do you have access to capital?
Source: Forbes, Should You License or Produce Your Invention?,

17. Source: Gene Quinn, http://www. ipwatchdog

18. Determination of Royalty Rates
Profitability of the IP and how the profit is shared between licensor and licensee (income approach)
25% of profits rule (heuristic starting point)
Impact of uncertainty
IP typically used with other assets; thus, how to apportion?
Market based approach (comparables)
Royalty rates in arm’s length transactions on similar IP
Difficult to find “comps”
Structure of the license agreement
Duration
Exclusivity
Lump sum payments
Source: Tim Heberden, Intellectual Property Valuation and Royalty Determination, Chapter 4 of International Licensing and Technology Transfer: Practice and the Law

19. Source: Profitability and royalty rates across industries: Some preliminary evidence, KPMG International, Global Valuation Institute, 2012

20. Source: Profitability and royalty rates across industries: Some preliminary evidence, KPMG International, Global Valuation Institute, 2012

21. How valuable is the IP? How important is the invention?
Transformative—gene splicing?
Incremental—adding squeaky noise to a toy?
Citations to your patent?
Is the patent well constructed?
Does the patent protect the IP?
Market dynamics and licensing strategy
Competition
Structure of deals?

22. What determines the profitability of the IP?
Uniqueness
Know-how
Design-around
Number of suitable licenses
Risks of two parties
Level of investment by each party
Incremental profitability relative to industry norms

23. Example Profit Split
Source: Tim Heberden, Intellectual Property Valuation and Royalty Determination, Chapter 4 of International Licensing and Technology Transfer: Practice and the Law

24. Source: Tim Heberden, Intellectual Property Valuation and Royalty Determination, Chapter 4 of International Licensing and Technology Transfer: Practice and the Law

25. ktMine Royalty Rate Resource Guide 2013

26. ktMine Royalty Rate Resource Guide 2013

27. ktMine Royalty Rate Resource Guide 2013

28. ktMine Royalty Rate Resource Guide 2013

29. ktMine Royalty Rate Resource Guide 2013

30. ktMine Royalty Rate Resource Guide 2013

31. ktMine Royalty Rate Resource Guide 2013

32. ktMine Royalty Rate Resource Guide 2013

33. Utility Novelty Nonobviousness
Legal Requirements for Patent Validity that Relate to the Economic Value of IP
Utility
Novelty
Nonobviousness

34. Selected Georgia-Pacific Factors
The rates paid by the licensee for the use of other patents comparable to the patent-in-suit;
The nature and scope of the license, as exclusive or non-exclusive, or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold;
The licensor’s established policy and marketing program to maintain its patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly;
The commercial relationship between the licensor and the licensee, such as whether they are competitors in the same territory in the same line of business, or whether they are inventor and promoter;
The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of its non-patented items; and the extent of such derivative or convoyed sales;
The duration of the patent and the term of the license;
The established profitability of the product made under the patent; its commercial success; and its current popularity;
The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results;
The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention;
The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions;
The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer;