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Tuesday, 9 August 2016

Why Acquire IP from Someone Else?

Why not build it yourself?

Here's a bunch of reasons why you might be a fool to pass on the opportunity to acquire someone's precious intellectual property. A wise man once said, opportunity knocks, but does not wait forever. So why should you consider acquiring IP? Why shouldn't you build it yourself?

You might be a clever fellow, but....

Brainy people are a self-confident bunch. By and large, they know that they are brainy, and they base their self-confidence in that: Their intellect. Unfortunately, that might result in them looking at others who do ground-breaking research and thinking: "I could do that, too. If only I put my mind to it. And I might do it better than he does."

And so it's easy to pass off a golden opportunity, out of arrogance. Later, the brainy-but-arrogant guys kick themselves when they see it blossom into something that is too big to acquire. Think of when Yahoo could have bought Google for $1 million, and didn't take the offer.

Frank Sinatra had some good advice. Don't be afraid to acquire IP. Become knowledgeable about it, then make your decision. And if you need some advice, I'm offering.

You might not patent it first.

Let's say that Mr Brainy thinks that he could research it himself. There's a danger in that. Once the existing researcher has started his or her journey, he might soon come to some discoveries, with some commercial value. 

If it's something ground breaking, a patent might soon be lodged. It is, I am told, an absolute bar for others to follow suit in exploiting the same technology. 

At least, until 20 years later, when it expires. Then it'll be free for all.

You might not make the connections.

Some discoveries, otherwise known as innovation, are the result of a series of "click" moments. (Read the book by Frans Johansson if you don't understand what I mean.) A researcher who is researching a "phenomenon of interest" or "area of interest" has a deeply embedded interest in the subject matter. He is invested in seeing some positive outcome. He has an unhealthy obsession with it. And because of that, he is likely to conduct experiment after experiment on the same damn thing, even if he meets failure after failure. At least, until the funding and grants run out. 

And every researcher is different. The one who is pushing it forward may have accumulated enough insights and enough understanding in the area to appreciate the value of each one. And when he makes that precious connection, it's the result of all those years of observations. He is like an opera singer who trains for years, only to get on the stage and sing a beautiful aria for that one beautiful moment. To the untrained eye, the opera singer looks magnificent. He makes it look effortless as well. But it's the result of years of hard work.

Your researcher might not find the problem interesting enough.

So let's say you throw the problem to a group of researchers that you've hired. They are on a payroll, and family time is important for them. Their wives would nag them about work-life balance. Their husbands would think that they are having an affair. No, you need that original researcher to work for you, because in his mind's eye, he has seen the outcome, and he knows what he is looking for. 

He will research it obsessively, deep into the night. He'll be obsessing about it over the long weekends and when he is making love to his wife. He might not even notice that his wife has recently had a haircut. And right after his wife has fallen asleep, he'll be back at his research.

So that leads us to the question of why should someone want to acquire IP from someone else.

Because you have the funds for it.

If you work for a large enough organization, you'll notice that your organization, or others of similar size, acquire other companies for their IP. Google acquired a bunch of startups over the years, and absorbed their features into its existing products to improve them. Ditto for Yahoo, Facebook, and others. 

For the Internet generation, it's entirely possible that their business model could be outdated overnight by two kids in a garage. And so, they acquire startups as a way of acquiring IP while absorbing the startup's founders into their own organization. It's called an acqui-hire. The founders get paid something for their company and they get paid a salary to stay on. 

The companies that you acquire could be your way of hedging your bets for the future. If you plant enough seeds, some of them will blossom despite the majority of them dying off. And let's face it, you really only need one to succeed beyond your expectations to meet all of your expectations. 

Similarly, but not entirely similarly, the IP that you acquire could turn out to be worth millions or billions in the future. Some bright young whizkid somewhere could have researched and developed some crucial technology that entire industries will depend upon. He looks like he could be the next Bill Gates. But .... He'll have to go through you first, if you hold patents that overlap with his discoveries! Think about Creative Technologies and Apple, in the battle of the MP3 players. Apple decided to settle for an undisclosed sum, which is amazing considering that Creative Technologies came from tiny little Singapore. But Creative Technologies also created the SoundBlaster all those years ago. It was a sign of greater things to come.

Because it shortcuts the hours of learning and failure.

Research takes time. People sometimes take decades to make breakthroughs. A man with a head full of hair might have lost half of it (the hair, not the head) by the time he gets his breakthrough -- if at all. Remember that many researchers never find what they were looking for. (I'm suddenly reminded of a song from the rock band U2.) That's why they are called "researchers", because they have searched, and they are searching again. (A bad joke, but you probably get it.)

So when a researcher actually hits pay dirt, his research represents hours of efforts and heaps of money, invested in that outcome. The experiments could have gone many different ways, but out of so many, one of the experiments yielded fruit. The researchers could have taken many different angles, but out of so many, one of the angles proved to be correct. And there were hunches, which nobody can deny, but nobody talks about. The researchers could have followed one of many leads, but out of so many, they relied on their hunches, and it proved correct. (Tell them to keep hunching.)

When you acquire IP, you short cut the hours and hours of failure after failure. You don't have to tell your R&D team to keep going because you can feel it in your bones. You don't have to try to be Ernest Shackleton and cheer your guys on with coffee in the freezing morning. You don't have to worry about failing while putting on a brave face and at the same time, constantly convincing your boss that the R&D team will produce something. (It might, and then again, it might not.) When you acquire IP, you skip the part about sleepless nights thinking that your hypotheses might be wrong. Because you'll know what you're looking at, and as the computer guys say, what you see is what you get.

Think about it. You can make your choices, and you must be accountable for them. So if you fail to make the most of an opportunity to acquire valuable intellectual property, which later turns out to be worth millions .... you have to live with that. Think hard before you say no. Think hard before you say yes. And if you can't figure out whether it's yes or no, you need independent expert advice.

Because you can evaluate it before you get it.

If you've read my last article about how to acquire IP from a dying company, you'll know that you need to evaluate its worth. It costs a lot to evaluate IP, and the valuators will likely make predictions about the applicability and potential of the IP. "It will be a game changer," someone might say. "This changes everything, and all the rules," someone else might chime in. And just like a chorus, the IP owner who is selling it to you will say: "Fantastic! Get it while it's hot." 

But because it's a willing buyer, willing seller kind of thing, you can time the market. Wait until the economic downturn, then go in for the kill. (Now seems to be a good time. People are losing jobs everywhere.) And when the right moment comes, prepare your roses and make your proposal. You can try a low figure, way below whatever it is you think it's worth. If they're desperate for money, they will bite. And once the transaction is over, get a bunch of press releases out so that the corporate guys will take notice of the IP. Then sell it to the highest bidder.

How to get people interested in buying your IP.

To make it clear, it should state: How to acquire IP, and get people interested in buying it from you. It's a business transaction.

You could consider the AIDA model in trying to drum up interest in your portfolio of IP. 
  • "A" for Awareness. This is the stage where people become aware that something exists. Before they became aware of your IP, they did not know that such a thing was even possible. After they become aware of it, they are aware of it. But if you ask them about it, they'll probably say, "Yes, I've heard of it. But I don't know much about it." This is the stage where you should be writing up press releases, and getting interviews in the industry magazines to highlight the potential of the IP. Casually mention that you are looking at working with partners to develop the IP further, and perhaps lead further research.
  • "I" for Interest. This is the stage where people start getting interested in your IP. It's technology that they cannot stop thinking about. They want to know all about it. It becomes their world. They spend time reading your patent. Then they read your white papers. Then they watch your corporate videos. And they can't get enough, so they gobble up all other information in the known universe about your product. Don't forget to upload your brochures for planet Zorg. Pretty soon, they'll start writing about your product as though it's the most interesting thing on Earth. Make it interesting for them. Engage them through a variety of forums, and all sorts of media. Send samples of the product to scientists to experiment with. Participate in exhibitions. Have a media kit ready for the reporters.
  • "D" is for Desire. This is the stage where they want your IP. They want it bad. They have seen the light and they know that your product is the bridge to success. It is the killer element in their arsenal, and the ultimate tool in their toolbox. They just have to have it. And so they'll start snooping around, getting valuations, and start considering competing technologies. And then they'll realize that you hold the crucial patents and that nobody has what you have. 
  • "A" is for Action. This is the stage where they start making moves. Negotiations with NDA's. Due diligence. The lawyers march in the room and take over the proceedings. Once they have their marching orders, the inevitable starts happening. An offer is made, and accepted after much haggling. And at the end of it, maybe a contract will be signed. 

Because your own R&D department might not be up to the mark.

We all like to tell ourselves that we are clever and intelligent. The Africans have a saying: Two great talkers will not travel far together. When people with big egos get together, they have to learn how to be team players. If there are alpha males in the group, there will be a clash of the Titans somewhere down the road. The team will have problems working together. Even significant discoveries may be thwarted in one of several ways. Someone might keep important discoveries for himself. Someone else might want to be named as the lead researcher. Some people might resent certain team members because they think that they are shouldering all the work. On top of that, your R&D department head might be unfairly telling his team members that whatever discovery or progress they make, they must put his name in on the patent. Otherwise, the matter will not be sent to the patent attorneys. 

When you acquire IP from someone else, you will have skipped all the possibilities stated above. It's like the difference between making your own birthday cake and getting it from the bakery. Yours might be edible, but not up to the mark. The bakery makes hundreds of cakes every month and their cakes are always up to the mark. They throw away the lousy cakes or donate them to soup kitchens. When you have money, you can get the ready made product for a fair price. And if it's a scam, then you can sue for your money to be returned. 

Because having more IP helps improve your company's valuation.

The fact is that having some IP is always better for your company's valuation, although exactly how IP is valued is a mystery to many. Some bankers have told me that it will be difficult to use your brand as a collateral. They cannot imagine foreclosing on your IP, so they avoid it like the plague, unless your brand happens to be world famous, like Coca-Cola or IBM.

Nevertheless, having IP is pretty impressive, and because of the vague nature of the valuation, your IP can be valued aggressively. Your company will look impressive on paper because of its patent pool. Think of Blackberry, armed with 38,000 plus patents, filing their 105 page summons. With many patents come many arrows. The mere mention of your name could send shivers down some spines. In the startup world, having bargaining power and having sources of revenue is key to succeeding. Think about Alexander Osterwalder's Business Model Canvas and you'll see how IP fits easily into the "Key Resources" and "Revenue Streams" segments. The bankers see that too, and your company gets a higher valuation.

Because you might be solving a business rivalry issue.

Sometimes you want to settle an issue with your business rival. If it's an issue involving IP, you can easily resolve it by buying over your rival. Enemies become friends, and teams merge. Two becomes one. Think about how Uber decided to sell its China operations to its rival, Didi Chuxing, in exchange for a stake in Didi Chuxing. Was it a smart move? Probably yes. It was a brutal rivalry, costing Uber profit margins and making it look bad, despite the possibility that its technology was superior to Didi Chuxing. (It's hard to say since I don't live in China.) 

But it frees up Uber's resources and Uber is now free to pursue plans for an IPO. Uber and Didi have also become invested in each other's futures, because of the way the settlement was structured. This might be a modern day East-meets-West application of the Japanese principle of keiretsu.

So if there's a business rivalry going on, and it involves IP, consider acquiring IP or your rival as a way of resolving the situation. It might just work. You'll have to make sure that it's a win-win outcome.

Some further reading.

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