What is IP? And how to best leverage it?

We at Rapid Innovation Group are in the business of IP commercialisation. When we disaggregate that term, the most debate within the company, and a healthy debate it is I must add, is what does the term commercialisation mean. Is it sales and revenue generation at its most basic, or is it something far more fundamental than that? That’s a topic for another time and for someone with a little more nuance than me to tackle within our firm.

Instead I thought I’d write about what we mean when we talk about IP. Historically at Rapid Innovation, IP has been about the strength of the patent portfolio which we felt automatically granted a certain form of defensibility to our clients. However recently, I’ve been involved in a few engagements where what constitutes IP has had a rather more murky definition which has led to a more evolved position on IP in my thinking:

  1. One of our clients is doing a series A fundraise at the moment. They have a significant breakthrough in combustion technology and their business model is to develop and integrate it with large industrial collaborators, with the view to licensing to generate long-term revenue streams. One of the investors who is currently investigating them invests purely on the strength of the IP position. Our client has 7 patents across multiple patent families. Nevertheless, and despite NDAs, our client has not yet got to the stage of sharing their detailed designs because that is where their real technological differentiation lies. So where is their IP? In the patents, or in the design which is only briefly alluded to in the patents?
  2. Another client has licensed their IP to a company that has built large industrial plants using their technology. The core patent has expired but the license persists – both parties know, and will freely admit, that while much of the core technology is in the public domain, it is the secret knowhow and process knowledge that allows the licensee to profitably run the plant. How do you quantify that know-how? How do you protect it? How do you price it? Either way, their defensibility lies in that secret know-how. That plant cannot be run profitably without their process knowledge and know-how.
  3. A third client has a space heritage but like in the previous case, the core patent for their technology has expired. As such they have developed some process, and application patents. Fundamentally though, they do not have IP that protects the application, only their unique efficacy. What they do have is an emerging market with a clear need, a defined way that the market will adopt the technology, and a better product / design than their competitors. As such, their strategy is very much focused on selling this to as many customers as quickly as possible, and to find the right manufacturing model that will protect their design. Their defensibility lies in their commercialisation strategy, and their speed to market which is something that smaller, more agile companies are well suited to. They are very much a “deep-tech” company but are they an IP company – I don’t know and quite frankly don’t care as long as we have a product and a strategy that will fundamentally build market defensibility and long-term growth.

These are just a few examples of the extent of the diversity of challenges that have to be overcome “IP companies”, and while this is very generic, and fails to take into account several other hugely important contextual factors, it does provide a starter for six.

If you’ve got secret know-how and no one can reverse engineer your product / process when they get their hands on the product, then manufacture. This has two benefits as 1) it minimises IP leakage and 2) Allows you to price at the level you want as your customer has no way of knowing how it is you manufactured the technology and so is more willing to pay on the value of the problem being solved as opposed to imposing a cost plus model on you. Conversely, you shouldn’t dream of licensing in this scenario as you leave yourself open to your secret knowhow getting into the public domain and run the risk of your licence being compromised. Alternatively, if you’ve got a strong patent position, then license away as it’s pretty easy to see if someone is infringing on the patent.

Chester Karass said, in business as in life, you don’t get what you deserve, you get what you negotiate. The IP corollary is that your IP is only as strong as your wherewithal to protect it. Which for early stage companies with limited financial and even fewer legal resources is not very high. That’s why I’m a firm believer in the best piece of IP advice anyone ever gave me – keep secret what you can keep secret (and manufacture if no one can reverse engineer it) and patent what you can’t!

 

 

 

Negotiation Tools

Successful commercialisation requires a great technology with differentiated IP, a sound strategy with clear execution, and a little bit of unexpected foresight.

Case in point, a RIG client had a market-leading technology, a clear but simple strategy that resonated with its customers, partners and employees, and a strong execution-focused team that collaborated closely across the different functions of R&D, production, marketing, sales and support. This put the company in a winning position. However, an unexpectedly genius bit of negotiation led to the first few years of growth and sales being far smoother than previously imagined.

The technology had been incubated in university and was godfathered by one of the world’s largest energy companies who had provided clear technical specs, some development funding, and some of their business units to act as field trial partners until a commercial version of the technology was available. The quid pro quo from our client was that the energy company had exclusive access to the technology for a period of time. In order for the technology and the company to be viable and valuable, it had to unshackle itself from its customer and prove that it had worldwide application within its target market.

We had prepped and planned the negotiation for weeks on ends mapping out the various stakeholders and persons of interest within the energy company. Over a several month negotiating cycle we managed to secure a removal of their exclusivity on the technology without any change in shareholding. The key concessions were royalties over time and a Most Favoured Nation (MFN) pricing structure for the energy company. Little did we know the second thing, which we saw as a necessary evil, became one of our client’s most powerful negotiation tools.

As we started commercialising the technology out in the global energy market we discovered that there was real interest in the problem our client was solving, and a real differentiation in how they solved it. The market was keen to adopt the technology and we were able to get through the technical qualification process and identify significant problems that we could solve so that budget could be secured for initial uses of the technology. While this process wasn’t rapid, reflecting the sales cycles in the energy industry, it was smooth progress. We believed that we’d hit rough waters when it came to procurement especially as we were selling this across the world and we believed that different geographies would have different spending thresholds. Sure enough, during negotiations, having agreed all the terms and conditions, and just before producing an order, procurement teams would invariably ask for discounts saying that the budget secured was only for a certain round figure. However we knew that the problem was significant, and that our client’s technology could solve the problem best, so we stuck to our guns. However the argument we used every time, and with significant credibility, was the MFN pricing. The conversation normally lasted as long as this:

Potential customer: We’d like a 20-30% discount on the unit price of your technology. Our budget is only x. Our internal customers (the operational and technology team) want to use your technology but you have to work with us to fit the budget.

Us: I’m sorry we can’t do that. Energy Company Y has a MFN pricing agreement with us where they get 5% less than the lowest price in the market. So if we discount you by 20-25% we’d have to do the same for them and given that their volumes are an order of magnitude higher than yours, we can’t afford to do that.

Potential customer: Ok understood. We’ll prepare the order in the next day.

As you’ll note, the conversation was never about your price versus your competitors because our sales process ensured that we had identified that the problem we were solving was significant and had established in the users’ minds that our technology was best equipped to solve it. As a result, it was never a competitive scenario so the lever the customer had was at best made of rubber while ours was made of steel. It was never a lever that we had ever remotely imagined we’d have to use.

We probably trotted that line out to 30 different customers in 15 different geographies during the first couple of years of commercialisation. It worked with everyone but one: a family-owned energy company in India from who we decided to walk away from after two years of discussions and negotiations. Speaking for my countrymen, despite us seeing the value and understanding the logic, we just can’t live without a discount!

"I want clients that have the potential to exit at $100m": An interview with Sameer Pal

Sameer Pal has been with RIG almost since its inception. Previously he was with Mercer Management Consultants. Sameer is a RIG partner. A citizen of the world, he was educated in India, Botswana, and the United States. Not a convert (yet) to the religion of blogging, he was interviewed by RIG Principal, Shields Russell.

Sam, why did you join RIG?

I did the big consulting practice. I wanted stay in consulting but to do something entrepreneurial. RIG is an entrepreneurial project in its own right and we work with entrepreneurs. I like seeing the fruits of my labour becoming something real and tangible. The beauty of young companies is that you are starting with a fairly blank slate.

How would you describe what you do?

Well, to be blunt, we help companies (our clients) figure stuff out and get stuff done and we do it better than anyone else. Our value lies in strategy and intelligent execution. We are not afraid to get stuck in and I have no hesitation in saying we are good because we are really smart and we have a strong bias for execution.

Tell us about the most successful client in your current portfolio

Let’s start with revenues won because ultimately that’s what matters. In two years, they have gone from being a single customer vendor to a company with more than 25 major customers. This year (2012) we have closed nearly $6m. That’s what matters. I, and the RIG team, have worked with the CEO to close deals in 5 continents, 17 countries, working in several time zones. And we have done deals in multiple languages including Spanish, French, Chinese, and Portuguese. All our consultants speak more than one language fluently. All, of course, except you Shields.

Describe your ideal client?

First thing, they must have global ambitions and that means they must be targeting a big market.

Second, the product doesn’t eat anyone else’s lunch and can compete in the market based on its technology rather than any business model or accompanying service.

Third, there must be a very capable, professional CEO who has deep expertise and understands their own and the company’s limitations. Someone who is willing to engage with us in a continuous feedback loop. That really matters to me. Someone who is not a micro-manager but trusts us to get the job done in the company’s best interests. And they must not be cheap. By which I mean that they are willing to pay us well because they recognise that when we do our job well we are adding significant equity and cash value.

Accountability is the last point I would make. It has to operate both ways.

Since you aren’t going to be working for them, describe a client you absolutely won’t work with?

The serious nightmare is a company that has a recipe that in my view adds up to nothing but a hard slog and low growth prospects: a company working in commoditised marketplaces where the competitive differentiation is on the margins and value based pricing is near impossible to extract. And it is all made worse when you have a CEO in these circumstances who believes they have a breakthrough product. What you have there is the delusional entrepreneur with misplaced expectations. I am also uninterested in working with companies that have a narrow geographic focus.

What’s it like working at RIG?

We are all different. We are all smart but in markedly different ways. We are a small boutique firm really. Very flat. Producers matter. Can’t produce means you will leave. In that sense, we are an up-or-out company. We are a pretty outspoken bunch. We have a lot of freedom as long as we look after our clients and each other. Teaming really matters for us, both with clients and colleagues. It is a negotiated workplace and that is a good thing. That is the basis of our culture. We don’t always get it right but we know whom to look at when we get it wrong.

What sort of people are you looking to add to your team?

I am not demanding. I just want sharp people with the ability to develop a quicksilver commercial nous. I want people with a genuinely global outlook who aren’t of the nine to six variety. I don’t mean people who taught English in the jungle on their gap year.

What are your ambitions in the next two years?

I want to create an ass-kicking team focused on IP-rich companies with a global market and a product that is truly differentiated and a team of bright ambitious people who are seriously focused on building equity value. And I want clients that have the potential to exit at $100m. That’s fun. That’s a trip. I haven’t manage this yet but I wouldn’t bet against achieving that goal in the next 24 months.

And lastly, why don’t you blog?

My portfolio clients come through reference. I don’t need to blog and I don’t have the time to blog.