Hello and welcome to another episode
of The Operations Room, a podcast
for CEOs.
I am Brandon Bensinger, joined by my
lovely co-host, Bethany Harris.
How are things going?
Bethany Kirk I can't
say they're great. Say it's Monday
morning. I'm tired.
I don't want to go to work.
I don't want to go to Manchester
tomorrow.
I think we hit the ATM mark on
Monday morning.
It is a tough go regardless of
whatever is happening, especially
when it's cold and dreary outside,
it makes you feel like you just want
to leave the covers of your bed.
Yeah. And my room is currently
18.8°C.
Why is that?
Crank up the heat.
What's going on?
WOMAN It's just taking a while
because I'm at the top of the house.
It's a Victorian house.
It has no insulation.
Are you a nest user, by the way?
So I love my nest because I can set
it to go off when I want.
Yes, I am.
Although I was thinking about
getting the doorbell, but I'm
having so much problem with
technology, I'm not sure I can brave
the doorbell.
Do you have a video doorbell?
No, I don't actually have one.
Well, everybody on our street has
them, so any time a package goes
missing or some sort
of event happens, there's a call
around the
house. There seem to be events on
our street.
I mean, it makes it sound bad, like
a mugging or a car breaking
in or an altercation.
It is London.
These things happen and then
everybody asks for the doorbell
footage.
And I feel a bit left out that I
don't have doorbell footage.
It seems to be very popular.
And then as Black Friday recently
and then they had some really cheap
doorbells ring doorbells
I think Amazon owns Ring and
Google owns Nest and so
they're like half price.
But then I didn't know what to do
because there's motion detector
things you have to add and then
there's the doorbell and it's
removable to charge it.
But then I thought, given it's
looking for crime, are people just
going to steal my removable doorbell
for whatever reason?
And then you need to add another
chime inside.
And suddenly it went from being
quite cheap to all of this stuff.
And then they have to get somebody
in to do it because
I don't even know how to attach
a motion detector on to my house.
It's actually when I installed Nest
and there was similar complexities
like the the boiler was in a self
enclosed unit. So I literally had to
like rip apart the boiler and the
unit itself to be able to somehow
string nest in there to activate.
It was ridiculous. The guy took like
five hours to do an install of nest.
Yeah, I'm struggling with technology
in general. I am definitely starting
to feel old or curmudgeonly
or, you know, just like
none of it works.
It's supposed to make our lives
easier.
I bought a new phone and
my new phone changed all
of my settings on my computer and I
can't get the notifications to stop
on my computer, even though the
notifications are not happening on
my phone.
Now, they pain in the ass.
So we have got a lovely topic
for today, which is patents and IP
strategy for Scaleups.
And we have an amazing guest for
this. And John Calvert, he is the
CEO of Clearview IP and
truly an expert in all things IP
related.
So I guess what I wanted to start
with, Bethany, was he had
talks about something I never knew
about or realized, but this thing
called patent box in patent box is
a tax incentive scheme from the UK
government where if you have a
single patent on a product and
that product is profitable,
you can take that profitability and
the tax rate that is put on that is
10%, not 25%.
So if you are truly a scaling
company of size where your product
is killing, it is highly profitable.
The 10% can make a massive
difference, obviously, in terms of
your bottom line.
And I was just wondering what you
made of that.
It was news to me as well.
I guess this is what happens when
you never work for profitable
companies or profit making
companies. We've never had to think
about this.
R&D tax credits.
I understand it very well.
It definitely made getting
patents more compelling because
in my experience has always felt
like a bit of a vanity
project.
Patents And that's supposed to help
with fundraising.
But for the most part, VCs like you
have patents and you go, yes, they
go, okay, fine.
And if you VC says you have any
patents you like. No. And they like,
well, okay, fine.
It never seems to really change
things either way.
But getting tax benefits
from it is great.
So I think this strikes at the heart
of the matter here, which is what is
the value of intellectual property
for B-to-B SaaS companies
generically.
I struggle with this a little bit,
even post our conversation with
John, because when I think back to
my past, I was in a space that
was highly litigious back in the
day, which is voice recognition,
input technology, handwriting
recognition, predictive technology
and so on.
And there were so many patents
that were being filed in the space.
It was off the charts.
And my former company
was sued numerous times
because of the IP side of things.
And I remember at some point the
companies called Nuance
Communications. They were probably
the biggest vendor at the time for
voice recognition technology.
They owned all the intellectual
property associated to that.
So any scale a company that would
come on the scene with new voice
technology or a new kind of input
technology, they would basically
take their IP portfolio and
litigate you to death, which is
they recognized that they were the
business company, they weren't
innovating and they would take their
patents, sue the company to the
ground, the scale of company, and
then based on that and suppressing
their valuation, they would buy them
at that point. And so as an example,
the company that I used to work for
back in Calgary, Canada, we had
revenue at some point here of around
a million, 10 million US and
our litigation bill that year was
8 to 10 million US.
So it was ridiculous.
You can imagine from an investor
standpoint, being sued like
that, you start asking yourself the
question like, is this even viable?
And we ended up in 2009,
back when the markets tanked.
The investors wanted to flee
effectively based on the market
and based on the litigation that we
end up selling off that company for
the time, which was a terrible price
for the company, I think, to be
honest, was around 25, 30 million
U.S. at that point to Nuance.
So coming off the back of that
experience and rolling into
SwiftKey, which again was in
the same space, we had a very
concrete program of intellectual
property development where we
worked a lot with John Calvert to
build out the portfolio, articulate
it correctly in terms of for future
investors, what that value was, why
that was and so on.
And it became a key component of our
valuation that we sold on to
Microsoft at that point.
And Microsoft also bought Nuance
Communications.
So Microsoft effectively now
owns every intellectual property
asset you can possibly imagine
around the input space.
So in that world, it was very, very
important. And then post that when I
joined the more generic B2B
SaaS companies, it was almost like
an afterthought, to your point.
And I'm just saying when you think
about this because it feels like
maybe to your point they were
making, maybe it doesn't matter.
I think it really matters on clearly
what space you're in.
At New Voice Media, we were also in
this kind of call center
comms space and we had a
lot of patents and there was
also like some level of patent
swapping or patent one.
I think somebody would come to you
and go, you have broken our patents,
we have a patent on this.
And then we would look at that maybe
like you have broken our
patent, we have a patent on this,
and then you both write threatening
letters to each other and then you
both are like, okay, fine, and you
just carry on.
We had a patent for popups
on the agent screen.
I'm amazed is patentable, but I
guess at one point the ability to
pop up on an agent screen was novel.
And so anybody who had a
pop up on an agent screen, we were
able to be like, Wow.
Like every call center software
application on the planet.
Yeah.
And then they would back off.
So I think there is something to be
said, like we are in a space
where there is a lot
of litigious patent
swapping and like being around your
marketing, your a little bit of
territory and finding it.
But my experience later on is that
it hasn't been as big
a deal, but maybe it just depends.
On.
Are you a company that is stitching
things together, or are you a
company that's inventing
within an ecosystem of other
companies that are inventing?
Because the other one is if you're
completely novel, there's nobody
else in the space.
I think you're right. I think this
is maybe the difference because the
last couple of B2B SaaS companies
have worked for largely speaking,
there were applications that were
part of workflows for end users.
So the true innovation, if
you want to call it that, it really
wasn't there.
And I think when we talked to John
on the call, he talked about a lot
around deep tech companies and
octopus venture investment companies
where they were truly doing some
groundbreaking work and there was
intellectual property that was being
followed around that.
And maybe to your point, maybe
that's a bit of the difference,
which is if you're stitching
together a bunch of stuff to create
an application, you know, there's
not a lot of utility to creating
patents around that.
Or if you're doing end user
applications where you're leveraging
a bunch of APIs from others.
Again, not a lot of value
and utility in doing IP in that
case. So maybe that's the
distinction.
I guess, although it's just one
where I guess we did a lot of it at
news media and then subsequently we
haven't done nearly as much.
And so it's probably just some sort
of recency bias of does it
matter? Although John is saying that
there are increasing numbers of
patents, like everything is being
patented, though.
Maybe it's like we're in a weird
microcosm or we're not seeing the
bigger picture.
Yeah.
He also talked about from his point
of view that if you're going to do
IP, the sensible starting point
is when you're at series A, which is
you do some initial filing around
something that you think is
sensible, basically, and you
create an IP narrative around that
as well as when you go to your
series B investor said you can say,
Look, we have an IP strategy.
We have one initial filing in place.
We think there's more to be done
here in terms of securing that
initial patent.
And by the way, we ask for trade
secrets for Arabian Sea, and we
have some thoughts around evolving
our patent portfolio.
And this is what it looks like, that
Series B investor that
resonating, I guess, with the series
B investor them wanted to actually
put in money and have allocated
resources to actually fund
the next step for the IP narrative
story in that way.
I think it's icing on the cake.
Like you can have loads of patents,
but if you're not hitting your go to
market metrics, it just
doesn't matter because
then your patents and things that
nobody wants to buy.
So I think it's you have good
product market fit, you're growing
well, investors are interested
in you. And then you say, and
by the way, part of our competitive
moat are all these patents
and then they go, okay, cool.
That makes you more appealing, but
not in and of itself.
And also, if you go we have all of
this growth and we're going well and
we don't have a single patents and
we've never thought about it.
But could you help us then they'll
also go, Yeah, okay, we can help you
there.
I guess I'm just a bit cynical on
how much the patents itself helps as
a fundraiser.
And I guess it also depends on your
buyer set or your strategic
trade sale opportunities set
in that way. Because, you know, in
our case, Microsoft clearly
had a huge interest in the kind of
IP that we were developing, as did
Google and some other companies as
well. And so from a trade sell
standpoint, that was in our mind's
eye a little bit. So I'd imagine
that has an impact.
So if you're strategic buyers that
looks like X and they actually have
legit interests in IP for whatever
reason, then there's probably some
utility in value in actually doing
it. And the other thing you
mentioned, which was of interest was
the initial filing that you do.
He pointed out that modifying
that filing step by step
in the examination office.
And, you know, and also when you go
international, very important
to do and to ensure that you're
optimizing your filing to make it
valuable and to ensure they have a
good outcome for that filing,
because your initial filing may be
off base for all sorts of different
reasons and also the value of that
initial filing in your eyes and
in the market size may change over
time. So you saying don't leave it
with your patent lawyers, think
it through to make sure you're
modifying it step by step to ensure
that it's the best possible option
that you could possibly have.
Yeah. And also the reason why you
modify along the way is because it
takes so long that you're thinking
will have changed across the board
rather than that it's a three
month process and you need to modify
along. You know, it's a 18 month
to two year process.
And so as a small company, you'll
learn a lot.
And the reason why that's beneficial
is then if it's closer to reality,
if your patent reflects closer to
reality, then when it comes around
to patent box, you're able to
explain why your patent is valuable
and you should get the 10%
corporation tax.
And then the last point that I made
was the IP asset lending.
And I think the way that it
described is, was that if you're
looking for a debt facility,
this can be an added bonus
to get the debt that you want and
get the rates that you want based on
the fact that you have whatever RR
they have in the business with
whatever gross levels.
But if you have a bit of a story and
a bit of a filing scenario value
around intellectual property, that
you can actually throw that into
that mix to get those better rates
and to perhaps get that debt
facility and kind of put it over the
top, so to speak, for the company.
Yeah, just basically is another
piece of collateral.
It has value in and of itself
for all the reasons we just spoke
about companies that.
To just collect patents and sue
people.
So why don't we park it here and get
on to our conversation with John
Calvert.
Maybe a bit of orientation to start
with because they're all nowadays
quite a few different types of actor
in the IP space.
So I guess originally
IP was left to, I'll
say the lawyers, but the really
two flavors you get of maybe
actually three flavors, you get
solicitors, as we would call them in
the UK, which are really
lawyers helping with license
agreements and contracts and
transferring IP rights and
that sort of thing.
You'd have patent attorneys which in
the US are called patent agents
and they actually help you get
patent protection for your
inventions.
And then we have trademark
attorneys that actually help get
trademarks to protect your brand.
So it's probably those three.
And then the fourth, a new
entrant. But it's not so new now.
It's probably 15 years ago, we we
started a company called Clearview
IP to provide commercial
and technical and business advice
around IP.
So very much not to legal advice,
but to sit alongside those skill
sets and and help people figure
out what the value was and what to
do about it.
Does that mean that if you
want to file a patent,
you still need an attorney?
Yes, you do. I mean, in the end,
to file really good patents that
describe the invention well enough
in the right legal language.
You do need that skill sets and
expertise.
But there are hybrid models now
where companies like mine
actually will use technical people
to help understand what
the invention is and to work with
engineers or software developers to
actually work out really what's
special about it.
And that includes it needs to be
novel and inventive,
so it has to have various elements,
but we can write that up
and then give that to a patent
attorney to actually draft the
patent claims and the document
that gets filed with the patent
office. So we've worked at hybrid
models for about 12 years now, but
some patents that only firms prefer
to do the whole job, but actually
often their skill set is really in
the complexity and it is
difficult to become a patent agent
or an attorney.
And that's because it's quite
difficult to write good claims that
will survive examination and
become great patents.
When should a scale up consider
patents, if at all?
I think a little bit as it's a sort
of cultural and belief system,
because there are also
some industries and I'm thinking
of the software industry here where
there was over probably last 15
years a real push into open source
and then sharing code that's been
written with the wider community.
And that's almost the antithesis of
the idea of filing a pattern to
get a monopoly right, to be able to
exclude others from using your
invention. So there's that
cultural piece. And what we saw
probably 15 years ago, Silicon
Valley was a big tech
company. Start really thinking
patents for that important.
And you can see this going back 20
years. But then look at the
portfolios that Google and Microsoft
and Facebook have now.
So in the end, patents
matter. But the question is when do
they matter?
And they usually matter a
big offense in the life of a
company. So that could be a funding
round. So even as early as
we say, probably not at seed,
but at Citrix, a company wants
to be able to show or demonstrate.
I've got something that's unique
when it can have an algorithm, but
it doesn't want to share the
algorithm with an investor, right?
It just want to disclose that what
we would call a trade secret.
It doesn't want to disclose that
because that investor might be
looking at other companies that do
similar things, right?
So you really want to keep something
like that secretly.
You also might want to protect to
element top. It's so filing
an initial patent actually
says to investors, we've got
something that's protectable
and differentiated so that it
communicates with the greater value.
If you get later down to series B
and C, then various kind
of investors that are putting 50 to
75 million, maybe 100 billion into a
company and then looking
to see, well, is this IP actually
protected properly?
And nowadays people expect to see
patents as part of that, you
know, basket of rights that people
have secured. So the final
sort of stage of that journey is
when you do a trade sale to accept,
if it's a sophisticated buyer, will
be crawling through the IP position
in terms of due diligence.
And if you don't have it well
protected and you don't have a good
story around it, but chip down
the valley or they might not even go
through with the transaction if the
IP rights are all over the place
site. And finally, if
you go for an IPO,
then again you're open
to companies wanting to license
their patents to you.
And if you've got nothing that gives
you a defensive position, then
you're going to end up paying royalties
of diminished value of the company.
So for me, the thinking
about patents needs to start at the
beginning so that companies
learn about patents, why they
might be useful, where they might be
useful, and then they probably
start to get better in actually 78,
but maybe just one patent to then
steadily build a portfolio for time.
And I think maybe if we take a step
back, it would be good to understand
what is patentable.
Because I always found this a bit
surprising in that sometimes
the big things aren't, but little
tiny things are as
if we could explain what novel
which means new and inventive
because, like, what's the difference
between new and inventive?
That would be really helpful.
And maybe some examples.
If you actually look at the
historical rates of patents filing
and you see the graph, you can
see that in recent years and I think
recent last ten years, it's
almost exponential.
So that's because many
more businesses, but many more
industries that may be interested
in patents have started to get into
patents to protect their inventions.
So the rate of filing has increased
dramatically.
So the chance of inventing
something that's fundamentally
breakthrough like for me, you
will, right?
The wheel was invented a while ago,
but maybe carbon fiber wheels
with a certain spiked island.
So that makes it lighter, stronger,
faster, but more aerodynamic.
You could probably file something
around there. Well, now it's getting
a bit narrower and a bit specific
about what that invention is,
but you've got a chance that it's
going to be inventive.
The inventive step is really
has you got something that's
technically clever or small that
really, you know, is a technological
breakthrough of some sort.
And then obviously the novelty is
if it's already been disclosed in
the public domain or
if someone's filed a patent claiming
the same thing in the past when, of
course, you can't get a new patent
on that, someone's already got it.
But patents are getting
narrower and narrower.
But if you look at maybe in recent
years, quantum computing,
the weren't tiny quantum computing
patents ten years ago, but now
there's thousands of them.
So there are many breakthrough
technologies that end up
getting that say, but
not that many that frequently.
I think it's fair to say.
And then also you can
patent AI diers
that are not yet proven.
From what I understand.
What you have to do is you've got
an invention.
So you have to describe that
invention in a way that can be put
in a patent document.
And one of the things you do is
you broadly in the specification
of the patent, you describe what the
invention is, why
it's different from the prior art,
what's special about it, How does
it work and how does it work?
It's called an embodiment, but it's
like an example of how
this invention could be implemented.
Typically, companies will put
several different embodiments or
different ways of implementing into
the patent and at the final bit
of the patent to some patent claims,
which are actually the legal
language that defined the invention
itself, that by putting
those different embodiments said
what you do have to really
demonstrate is that you
may not actually implement it yet,
but you're demonstrating that it can
be reduced to practice, it could be
put in place. So you can't really
just patents. And it's a terrible
idea because the
idea of a patent is you are actually
disclosing enough information
to allow someone in the field this
knowledgeable of that failed
to actually be able to implement
that invention. So you are expected
to describe it to a degree of
detail.
But by disclosing it,
you're saying or you can use it, you
need to probably pay me a royalty
for that. For trade, you're getting
a monopoly position by actually
educating the world as to what that
invention is so they can build on
it.
You know, we talked about software
engineers and kind of complex
algorithmic novel, innovative
things that are possible that you
might want to patent the user
interface design.
What's your your take on that?
The first thing about a user
interface is it has got a
design, let's call it, in terms of
the way it looks.
And some of those aspects can
actually be protected by copyright.
So website design or
otherwise you've implemented
something. If someone told me
something looks the same and it's
obvious the same, then
you can rely on me.
The copyright law.
You can somewhat rely on design
rights, but you can't patent
a design in that way.
If there's a technical effect of the
user interface where there's
some sort of embedded workflow that
does something special, that makes
the user interface work better,
I'm thinking of something like an
AI flash player or something that's
got some capability to produce video
in a different way, smoother
and more seamlessly.
Well, that underlying technology
would be patentable, but not the
actual user interface itself.
One of the skills here is
obviously sometimes where the legal
advice is tricky because
you actually are looking at assets,
software, platform or the user
interface and you say, Well, how
do I protect that?
Or how do I prove differentiation?
And you might want several different
types of IP rights to be used
together to achieve the outcome.
So indeed, you might keep the
algorithm secret, sort of trade
secret.
You might patent protect some
aspects.
You also my own training
data that's used for that algorithm.
So now status of intangible or IP
asset that you put some controls
around try or you might have the
rights to license in certain way to
the user.
In the end, you need companies to
learn enough about all of these
things.
The problem is if they go to a
patent attorney, they might get
encouraged to use the patents
approach more things than
they should.
So it's a balance of using
the right advisors, the right times.
But everyone has to raise that
knowledge.
In a series, a space where
generic B-to-B SaaS company doing
interesting things, maybe novel,
maybe not.
But the CEO is flagged by
this for like, okay, this might be
something for us to look at.
Where would they start and what
would they actually do in that
series? A space of investigating
what they have, what they don't have
or what they may have, and whether
or not they should do something.
What steps should they walk through?
So if they want, let's say, less
expensive forks, they might start
with a company like that, where we
also very inexpensively
with early stage businesses
are actually you can do a two hour
workshop with a client to actually
just understand enough about what
they're doing and to give them some
pointers for what they should be
doing or why they should
learn more so that the next meeting
is more productive.
But what we tend to find in that
series space is what they really
need is we call an IP narrative
and it is a deliverable.
We help produce for the client, but
it actually says what it
says. It has respect special.
What is my IP strategy?
Even though it might be embryonic,
but that's like a five page document
they can use with an investor to
say, We know what it is.
We've got a plan and we know what
we're going to do about it.
By the way, we've deliberately not
spent $50,000
building up loads of IP
rights, but we are going to post
Series A do the following things.
And that's usually enough to be able
to be comfortable that they thought
it through and they've got a plan.
And then obviously they then start
to execute on that plan as they go
forward. So we think a little bit of
an IP strategy or an
IP narrative is something that is
a good start and that gets the
stakeholders in the business to just
understand enough about the
strategy.
What you can also do.
But we don't always advise it's
necessary and you can actually
look at all your competitors or all
the kind of companies in the field
and see what they actually do.
So you can see how they file
patents, what if they filed or they
protected?
Because that's all in the public
domain. You can research that.
It's called a pattern landscape.
And that full may be what your
strategy ought to be.
So you're doing a similar thing
to industry cohorts, so you don't
look different in that you
look like you're behaving in a
similar way.
But often that can be expensive to
do that landscape work.
And we tend to note most of these
spaces well enough to just
help a client with what the right
answer is.
So the narrative story for
the investors for the next round,
and once you get to that next round,
you're almost setting the table for
the investor is going to invest
their money. They want to know how
it's allocated with the IP
narrative there.
That could be part of where you're
allocating money in, is your point,
I suppose. And then when you get to
those Series B and that next step
and they wanted to evolve that and
actually invest in it in some form,
what would that look like on a
practical basis?
What that usually will mean
is over that period of time
that have done some things, some
projects, those projects
will have resulted in most likely
some patent applications being
filed, maybe a handful,
maybe as many as ten, but probably
not 100.
It would also mean that.
Identified.
We call this IP discovery, but
they've identified other
assets, intangible assets
that are of value to that.
So that might be we've got
this proprietary data set
that we use to do X, Y and Z.
We've got this partnership
with a university
that contributes research
into our venture.
So there's different things that
build special IP value
and they might also go, we've
actually already established a
brand, so we filed a
trademark and we've got
the domain names that match that
brand of trademarks.
So we've got a bunch of IP
assets now.
And actually when you get to Series
B, they can tell a broader story of
we've got five different types of IP
rights that we're using to protect
the platform and the brand
and the license
agreements we have.
And that that is a really strong
story because I can actually
demonstrate that.
Now if you go further down
and I'm thinking back and I think I
can say this because in the public
domain, but we work for SwiftKey a
number of years ago and
in that case, and we've done this
with many other clients since, you
can actually build a dashboard
which visualizes those IP
rates, which it can use to
communicate that everything's really
well managed. The positions
improving over time.
When someone comes to invest or
buy the business, they can
get the wow effect of how well
managed this thing is.
I've just visualizing that data,
communicate it with real impact and
it drives value in the exit and
ultimately so.
So we think the communication piece
comes later.
But that as well when you exit
scenario or maybe a much bigger
funding round that's when
visualization of data and also
educating C-suites about to tell the
story is probably quite important to
drive value.
So I guess if I just take a step
back, I'm probably being unfair
to some SAS tools out there.
There seems to be kind of like two
groups.
Tech companies that are doing
actually interesting things with
tech and tech
companies that are making people's
lives easier.
And it might be inventive and novel
or it might just be
putting a bunch of opensource
together in a way that
is easy.
We should both companies be looking
at it because actually like how you
string that open source in some ways
can be interesting, or is it really
only companies that are doing
inventive technology
truly, and therefore
their value is around their
ideas rather than their product
that should be focused on
IP and patents.
Let's take the company that is glued
together lots of open source
components to
get a product out quickly
and that solves a problem.
So they've probably got first
mover advantage because they've
figured out how to piece these
things together.
They may be very successful
without feeling that they've got
anything that inventive or clever.
It might be quite hard to find
something that is actually
patentable anyway because getting a
software patent isn't easy.
You need good advice and it needs to
have some really good technical
effect or technical invention.
But eventually
the barrier to entry is quite low,
right? Because other people could do
the same thing and probably catch
up quickly just by having more
resources.
The other thing with your open
source situation is
if everything you've built is
reliant on, say, open source,
depending on the open source
license, which you have to
contribute your new
IP and new inventions back to that
community.
Some buyers have companies that are
big tech buyers.
They don't like to buy solutions
that are proprietary, so they won't
buy the company because it's riddled
with open source.
So we have to open source audits
sometimes to help clean up companies
because the value of the enterprise
is diminished because anyone
could do that, they could learn
together and actually commercialize
some of the IP as they'd like.
Now, not for the other side
where you've got someone
that's genuinely innovating well
technically in the software side and
therefore they could get some
patents.
And thinking of quite a number of
Octopus ventures clients we've
worked with over the years, which
they wouldn't mind of saying it.
You know, there's some really good
software businesses that also have
been invented, inventive and
protected, those with patents
and you've got those two flavors.
Now what matters later,
this is winding back forward to
maybe another five years is
when the business is successful and
it's actually making a profit.
Right?
And it's making a lot of profit.
And we've got lots of software
businesses making a lot of profit.
There are government incentives
like the patent box regime in the UK
where if you've got patents
covering the technology that's
making the profit, i.e.
the software platform,
you can get your effective tax
corporation tax rate down from 25%
to ten.
If you're making millions and
billions of profit, all of a sudden
your ability to retain cash, but
also the genuine profit of that
business is massively improved.
So we are seeing lots of software
companies that didn't file patents
coming to us and saying, have
we got anything that we didn't
disclose that could be patented
just so we can go to patent box?
Right? Because now they're very
profitable.
That's another strategic reason
to have patents, which becomes
actually a real operational
cash flow. Business can be improved
with it.
Do you have to prove
that you're specifically making
money from those patents?
It's a few different tests.
One is that you have to be doing R&D
related to the technology, and there
are some nuances I won't go into
around that.
You know, you have to mandate
somebody.
The requirement is really that the
patents or patents, you
only need one.
In the case of the UK, you need one
to be granted access.
That covers an aspect of the
technology that's in use and
creating the revenues.
So if you have a
payment platform and all the
revenues flowing through it.
What should we do to promote?
A while ago, every transaction
was using a particular feature
and because they could get a patent
on that feature, then every
bit of revenue of that business
could be fall into the patent box
calculation.
So therefore all the profit
generated could be considered.
There's lots of different ways of
counting. While you have to
manipulate things to get the claim
together to decide how much you get.
But that is generally the
case. You don't need the whole car
to be packed into it if you have
bits of the engine but averages in
every car you sell and
it all comes in.
The other thing that you mentioned
when we chatted beforehand
was asset based
lending as an alternative
to equity finance.
So for Lent, we talk about the money
stuff. Right now.
Probably about 15 years ago
we started to see
some banks lending money
secured against the IP.
And actually we saw that was Silicon
Valley Bank, right?
So Silicon Valley Bank was probably
the leader in this and a number of
US banks and and
all that meant is a company needed
a debt facility to
fund it but they would
be investing in tech businesses
that was probably actually scale up
stage not startup stage.
So they've had a few rounds of
equity investments, therefore
a number of theses diligence some
several times.
So it was a good proposition,
but they needed more capital to get
to that point of profitability to
just go through that phase.
So they then need to secure
ten, 20, 30, $40 million.
Well, what was the business like
that got that you can secure it
against? What is the IP?
So in the case that the business
fails, then the lender
gets the IP.
And maybe they can monetize
it somehow.
Right. So that's the concept of
asset based lending and what we've
actually seen.
We've seen Barclays, Clydesdale
Bank, HSBC,
NatWest, that actually we've seen
a number of banks starting to do
more of that in recent years.
And so what they're doing is they're
looking to because we've worked in
this space, they always have a
credit committee that will make a
decision to lend the money, and
they're lending the money based on
that likely PNL of
the business and how it will get to
profitability.
But the AP is sort of pushing the
risk gap between that
so that they'll look to us
to understand what the
IP is, what might its value
be, how might you get the value in
extremis if it collapses?
And then they'll use that as an
additional bit of collateral to just
tip them over the edge, to be
confident to make the loan.
Or get better rates on the loan.
Yeah. And they've been very
successful. So the
sort of failure rate until recent
times has actually been, as
Richards put it, helps
for the company because they tend to
get any further equity dilution.
And in times where money's hard to
raise, which at the moment is or has
been for 3 or 4 years,
then some of those funding solutions
are actually on the
cusp and they've got a choice
of either downsizing and reducing
headcount, which delays
the gratification of the growth and
success, or actually maybe
this extra funding can just get them
through that 2 or 3 year period
that if they got it with motivation
but a roving credit facility
they pay for.
So when you think about the ultimate
end point where you have a strategic
buyer, let's assume that they're
interested in intellectual property.
What is that strategic buyer going
to be looking for in your portfolio?
Or what's the criteria
considerations to ensure that they
feel satisfied you've got something
that actually matters?
You've actually cataloged it
correctly and they can ingest that
into their larger corporate
portfolio.
A little bit depends on the buyer,
and we've seen different buyers with
different levels of sophistication.
So the bare minimum
is when there's some form of
share purchase agreements,
it's got some IP clauses and that
say and all the IP comes across
and sometimes there's a schedule
in the purchase agreement that lists
the IP. So typically
that would be a list of registered
rights, which might be the domain
names, the trademarks and the
patents, because they're easy to
find but easy to find
in the public domain.
And they will do what we would
call the legal basics of checking
that the company owns
legal title to those assets
and can demonstrate that
and that it probably hasn't granted
rights to the other parties so
that they've got the ability to
control and use those rights going
forward.
So we call that the legal basics.
And actually, many companies tend to
use outside counsel to do IP
diligence, and that's the kind of
thing they do.
The extra thing that sophisticated
buyers do is they actually want to
know is the IP any good?
Does it actually protect the
valuable bits of the business that
we think is going to and make all
that much of a profit for us?
Or that technology would
have to integrate with our office
platform or whatever it is.
They want to know that they can do
that and that it will.
You know, it really is special.
Well, that comes down to what's the
quality of the IP and do the patents
cover the technology properly?
Are they well written?
Are there any gaps or risks that
need to be filled? So there's sort
of that or I'll say the boring legal
bit because I missed the value and
quality balance, which
we think is really important.
But it's also important that
if you're selling a business to be
able to tell that story because then
it's convincing and people
like to know that they've got
a strong position.
I think if you've got one, you might
as well tell people about it.
And on the other side, if we're
acting for a buyer, it's
very easy to find holes in your IP
and you often find companies have
got lots of patents, but
there are 2 or 3 that cover the
valuable bit that people would want
to buy. So there's always a mismatch
and that's not always spotted.
And then from a buyer standpoint
and from a seller standpoint as
well, how do they come to a place
where the valuation put on that
IP actually makes sense because I
suspect that's quite a struggle in
the sense that it's quite intangible.
Yeah. So I think the way we've we've
seen a different flavor, say the
simplest flavor is
there's no value ascribed to the IP
at all because they're buying the
business based on its
future cash flows and the economics
of the business.
That's sort of the accounting view
as well. But often that's how
businesses support.
They might then pay a multiplier
or premium or pay
more for that business because they
think it can accelerate or do
something special or different,
and then they might pay even
more if they can see that the IP
story supports that differentiation
in the long term.
So I would say it's a bit of a
kicker to value, but you wouldn't
necessarily discretely value the IP
separately.
Some companies, though do actually
say, Yeah, but what's the IP
worth?
And that's really they're looking
for some sort of financial
quantification.
We do build valuation models.
If you are a tech business that's
used to having to cross license
patents because you're getting sued
left, right and center, when
you're buying a business, you will
actually look at what
licensing potential might those
patents have. So I can buy the
business and enjoy the revenues of
the business. So it's integration of
the technology.
But maybe I can also additionally
leverage the patents to help me
reduce my cross licensing fees.
Google bought Motorola mobility
back in 2011, so it was a 10.2
billion.
Either for the patents or it's
hardly a business.
Well, that's right.
But they didn't have any patterns at
the time.
Various patterns have helped them
to not pay huge
royalties to many, many other
businesses across the world because
they've got cross-licensing
firepower of those assets.
So that's where the patents
take on a bit more of the front
and center of the value.
So my question is, when you talked
about companies will have loads of
patents, but only maybe 1 or 2 of
them are valuable, That is 100%
my experience.
And I feel like companies don't
actually know because we're being
inventive. We're trying to figure
things out which ones
are going to be valuable.
So then I guess is is the argument
to default for just doing all
of them just in case or
actually try and figure out
do the hard work of
this one matters?
This one doesn't.
I think there are some basic
processes you can put in place to
treat every invention in a certain
way, which means you're absolutely
guaranteed to have much better
quality patents.
So many more of them will end up
being good.
The other thing you can do is ask
those patents, go through the patent
office examination process,
which takes years, right?
You can adapt the scope of the
patents over time
to cover where your invention
landed.
Many companies don't do that.
And if you do that well, you end
up with many more higher cost
patterns that are protecting
your business.
And that's the problem as people
sometimes leave it to outside
counsel to sort of manage all that
prosecution.
But they lose sight of what the
inventions actually become in
terms of the patents.
So that needs to be coupled more
closely.
What I would also say, because
you're what your audience is, let's
close, right. They're really
practical people and they're trying
to run businesses and make stuff
happen. We've talked about some
quite complicated concepts, but
actually they're all grounded in
what's the right economical
commercial thing to do.
And there are some very simple
guidelines that if you put certain
processes in place, well,
and maybe the right skill set or
either advisors or in-house people,
then it's not that difficult to do
this well anymore because there's a
lot of skills around, there's a lot
of knowledge, whereas ten years ago
no one did not to do this
particularly well.
So if you do want to get started,
what do our listeners do?
What's the first step?
There are quite a lot of public
domain resources for people to read
white paper documents, read
the full education courses that are
free.
With about ten hours of investment,
you can actually become pretty
valuable and then you can get
free conversations with advisors
to actually just orientate
and work out what you might want to
do before you actually spend money
on this stuff.
Out of everything that we've covered
today or not, if
our listeners can only take one
thing away from the conversation,
what is it?
If it's one thing, it would be
education.
So learn about IP that
this actually drives value
and it certainly diminishes value if
you get it wrong. So I would
get educated.
Perfect. All right. Thank you, John
Calvin, for joining us on the
operations room. If you like what
you hear, please leave us a comment
or subscribe and we will see you
next week.