In this episode we discuss: Patents and IP strategy for Scaleups. We are joined by Jon Calvert, IP strategy expert.

Love The Operations Room? Please support us by rating and reviewing it here.

We chat about the following with Jon Calvert: 

1. How can startups effectively protect their innovations through intellectual property (IP)?
2. What are the key differences between patents, copyrights, and trade secrets, and when should each be used?
3. How can a well-crafted IP strategy enhance a startup's valuation during funding rounds or mergers and acquisitions?
4. What steps should startups take to meet the criteria for patentability, such as novelty and inventiveness?
5. How can education and awareness about IP help startups maximize its value and explore alternative financing options like IP asset-based lending?

References 

• https://www.linkedin.com/in/joncalvert/
• www.clearviewip.com
• https://www.deloitte.com/au/en/services/financial-advisory/perspectives/deloitte-ip-360-survey.html

Reading list:

Protecting Intellectual Property: What Startups Need To Know

What is Intellectual Property? 

IP Competitive Benchmarking — ClearViewIP

IP Due Diligence — ClearViewIP

IP Sales, Licensing & Tech Transfers — ClearViewIP

IP Valuations — ClearViewIP

Valuing Intellectual Property Assets

Biography 

A globally recognised IP Strategist, Jon helps clients drive business value and competitive advantage through effective management of their intangible assets. Jon has advised investors, Boards and C-suite executives on hundreds of transactions and built winning Value Creation and Risk Management strategies for some of the World’s most innovative and successful organisations.

To learn more about Beth and Brandon or to find out about sponsorship opportunities click here. 

Summary

03:07 Introduction to Intellectual Property and Its Importance

14:22 Understanding Patent Types and Their Roles

16:33 When Should Startups Consider Patents?

19:35 What is Patentable? Exploring Novelty and Inventiveness

23:15 User Interface Design and Intellectual Property

25:25 Building an IP Strategy for Startups

27:52 The Role of IP in Funding Rounds

35:37 IP Asset-Based Lending: A Financial Strategy

38:39 Valuing Intellectual Property for Buyers

43:56 Final Thoughts on IP Education and Strategy

Additional Resources

Short essential e-learning:

WIPO Academy: DL001E - DL-001 Primer on Intellectual Property

EPO Course: IP strategy 

Further learning:

Academy Course Catalog

DL-170 Specialized Course on the Essentials of Patents

DL301E - DL-301 Patents

DL-302 Trademarks, Industrial Designs and Geographical Indications

DL-450 Intellectual Property Management

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

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next week.