Abstract
We examine the role intellectual property (IP) and intangible assets (IA) play in technology private placements from the viewpoint of an investor. We also incorporate the perspectives of various other stakeholders involved in launching, financing, operating, scaling, and exiting technology ventures. We attempt to engage and educate our readers through illustrative case studies based on our combined six decades of relevant and personal experiences and provide actionable insights they can use, whether as an investor or an investee, in their next deal. We also draw upon the collective wisdom of various industry practitioners we have worked with during our careers
Founded in 2002, the Silicon Valley boutique firm Mobity LLC is a strategic advisory, IP transaction broker, and venture incubator/accelerator headquartered in Mountain View, CA, USA (Silicon Valley). www.mobity.com
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Notes
- 1.
S1 is a regulatory filing required for an IPO in the United States. Org meeting is the internal kick-off meeting of all stakeholders to begin this process and associated IPO preparations.
- 2.
Praveen founded Mobity LLC (a Silicon Valley boutique strategic advisory, IP transaction broker, and Silicon Valley venture incubator/accelerator) in 2002 right after leaving this firm. He continues to lead it to-date.
- 3.
We often see IP-centric deals in non-technology industries, including in construction and many others. One such deal hinged on IP in the design and manufacture of flooring products. If IP was a key decision factor, we define it as technology private placement.
- 4.
A lifestyle business is unscalable. Its SAM (segmented addressable market) is small. If successful, it can comfortably feed its owners, operators, and a small number of employees. However, it cannot deploy external investment capital well.
- 5.
Peter Lynch coined the term Ten-Bagger for investments that return their principal 10 times. VC outcome distributions are so skewed that winners can be (and need to be) a hundred-bagger.
- 6.
This is why traditional banks, which need tangible assets as collateral, struggle to fund tech start-ups. Only niche investors such as Silicon Valley Bank or Sovereign Wealth Funds have the expertise and appetite needed to do so. However, their opportunity costs and fund sizes are high. Only a few start-ups need and can use the minimum check size of the venture debt they often issue.
- 7.
The IP practitioners who are aware of the impact Kevin G. Rivette’s and David Kline’s influential book Rembrandts in the Attic had on their industry will quickly get this reference and its significance. Patents were seen and monetized in a whole new light and at a whole new level as a result of this book. Today, data is seen and monetized like never before (Rivette & Kline, 2000).
- 8.
We see both “data licensing” and “IP licensing” as equally powerful tools and view both as an art as well as a science.
- 9.
This start-up successfully raised angel funding and subsequently realized an acquisition exit.
- 10.
IRR = Internal rate of return.
- 11.
MOIC = Multiple of invested capital.
- 12.
These considerations may also apply for evaluating later-stage deals.
- 13.
See case study 8.3 where the IP liquidation value was instrumental to a turnaround strategy.
- 14.
In the United States, such Employer-Employee IP conflict rules can be state specific.
- 15.
Such as the large established company from the case study we present in Sect. 8.1 of this chapter.
- 16.
The term “Alice risk” refers to a 2014 U.S. Supreme Court decision in the “Alice v. CLS Bank” case. This decision set difficult-to-pass criteria to determine whether a software invention is patentable. If the claimed invention is an “abstract idea” then it must contain an “inventive concept” beyond just the computer implementation of code for this invention to be patentable. Unless the invention improves the functioning of the computer, and if it merely uses the computer as a tool, then the “abstract idea” lacks an “inventive concept” and hence the claim is not patentable. For this reason, a previously issued patent can get invalidated in litigation. This 2014 decision radically altered how (and, if at all) software patents are claimed, analyzed, and litigated in the U.S. In the last eight years since Alice, there have been multiple unexpected results. Different courts have applied the “Alice” criteria in their patent rulings in unpredictable ways, adding even more uncertainty and complexity to patent enforcement, an inherently uncertain and complex topic to begin with.
- 17.
Recurring and non-recurring revenues are reported (and should be viewed) differently. A breakdown of items classified as nonrecurring is provided in the footnotes of financial statements.
- 18.
All contracts clearly defined background/foreground IP and clarified which party has which IP rights in which vertical. This helped keep the IP clean and pass future investors’ diligence.
- 19.
NOL = net operating loss(es).
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Shah, P., Shah, P. (2023). The Role of IP and Intangible Assets in Tech Private Placements: An Investor’s View. In: Bader, M.A., Süzeroğlu-Melchiors, S. (eds) Intellectual Property Management for Start-ups. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-031-16993-9_7
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