When evaluating a company’s intellectual property, we consider credit, technology, and other intangible value. On the credit side, this includes the financial past and projected future of a potential borrower. The technology assessment includes a thorough investigation into the technology development and intellectual property history, as well as how that history is being represented in the company’s current products or services. Market factors then join the credit and technology considerations as we collectively assess whether a company is well-positioned to increase its market share in a meaningful, profitable way. Fundamentally, to accomplish this, a company must have some discernable competitive advantage.
There are many variables that can determine whether a company will be successful, but competitive advantage is important for any new business to thrive. Competitive advantage can come in several different forms, including technology, business, cost, or first-mover advantage. Often, the technology is the source of additional competitive advantages.
This is where the value lies in our technology assessment. It’s not enough for a technology to be cool, interesting, or expand the public knowledge. It must give a business a leg up in the market.
When we evaluate a company’s technology, we evaluate it as it relates to what competitive advantage the company can glean from that technology. If it doesn’t somehow differentiate the company from the market and its competitors, then it’s not valuable from our perspective.
Below are five areas we typically consider when conducting a technology assessment.
1. Technology Attributes
In the simplest terms, a new technology should make something better, faster, or cheaper. It should be an improvement over what’s currently on the market and result in a competitive advantage for the company. And this boils down to whether people or businesses will want to buy the product, ultimately driving revenues. As it relates to PIUS specifically, we need to be confident a company will repay their loan. In the event the loan is not repaid, we need to know there is sufficient value to the assets to make us whole.
2. The IP Portfolio
The IP portfolio consists of patents, copyrights, trademarks, and trade secrets, which we evaluate early on as part of the technology assessment. Patents often end up being the most valuable type of IP asset, but we often see valuable copyrights or software algorithms. Software code is automatically copyrighted, but is also sometimes patented if it is innovative or an improvement to existing technology. We rely on the proprietary information held by a company to determine its advantages and how it can drive growth.
3. Mapping IP to Product Offerings
Mapping the IP to the company’s product offerings is a crucial step. We look at what patents a company holds and what products that technology is powering. Patents require filing and maintenance fees over their entire lifetime. If we see a company holds hundreds of patents, for example, but is only utilizing 10% of its portfolio, that may be a concern. In determining funding, it’s important to consider whether the company is overspending on maintaining patents that aren’t furthering its technology. This is an area where the phrase “quality over quantity” applies.
4. The Business Model
We look at how the technology relates to the company’s business model, often considering the razor/razorblade model. Will the technology equate to a one-time purchase, or is there opportunity for long-term or recurring revenue? Does the IP portfolio clearly correlate to business model, and is there protection for hardware and materials so that others must cooperate within specific parameters in order to create corresponding materials? A great consumer example of this is Keurig, the makers of single serve coffee pods and machines. The company no longer manufactures all their own coffee pods, but their IP is protected such that only approved makers can produce and sell pods compatible with its machines, while Keurig benefits from the licensing. The business model must make sense based on the technology and product offerings.
5. Market Assessment
Finally, while this entire process is certainly more art than science, performing the market assessment is perhaps the most nebulous. Here, we look at how the company, the product, and the technology all fit into the current market. We want to know the size of the addressable market(s), where the technology falls on the value chain, and who the suppliers, distributers, and direct customers will be. We also need to understand the true competitors, as well as other market players and trends. All of this gives us insight into what is happening in the market and how active that market is. An active market (and patenting landscape!) means others have identified it as an opportunity. When we see a quiet market, we take a step back and consider why. The company producing the technology could be revolutionaries, or occasionally, they may be misdirecting their efforts.
When we evaluate a technology, it is never in a vacuum, and it is often subjective. Each of these elements comes back to how the technology inter-relates to product, market, and competition. Great inventions or large patent portfolios are simply not enough – from an IP lending perspective, it is not valuable unless tied to a competitive advantage that will lead to increased market penetration and revenues.