Technology Transfer As A Contact Sport

Technology transfer is often characterized as a “contact sport.” Technology transfer practitioners from industry, universities, and intellectual asset management professional service providers understand the importance of their personal networks and their ability to reach out ' on a personal level ' to those with whom they need to work. Moreover, technology transfer is a contact sport because the capture of the economic value of IP and the transfer of financial risk are both dependent on the negotiation skills of the individual practitioners.

The single greatest benefit to this personalized nature of technology transfer is quality. The rough and tumble space discourages technology transfer dilettantes; the commensurate cost of quality discourages those with IP assets of questionable value. The single greatest cost is time ' time to find buyers and sellers, time to value the asset, and time to craft risk transfer provisions. The cost of time comprises labor costs associated with the tech transfer process and the opportunity costs associated with the absence of revenue generating activity during the transfer.

Once, when a limited number of high value assets were transferred between a handful of institutions, these costs could be absorbed. But today, when a significant volume of more modestly valued assets are transferred throughout the supply chain in many industrial sectors and from academia, the costs may impede economic activity.

Fortunately, the growing size of the IP asset base, the increased velocity of transfers, and the relationship between IP and corporate value have caught the attention of the finance community. This community is now bringing in an entirely new set of tools to technology transfer.

Technology Transfer Costs are High

While data are limited, there are a handful of public or formerly public technology transfer businesses for which operating expenses are public. The financial records of these companies show that technology transfer is not a profitable “wholesale” business. The principal companies are BTG plc; Scipher plc, which also acquired or owned Fairfield Resources, QED, and Yet2.com; and Competitive Technologies, Inc.

BTG plc (LSE:BCG) has been publicly traded since 1995 and is the senior member of this exclusive club. The company's principal activities are the acquisition, development, and commercialization of technologies. The company has lost money for 4 of the past 5 years. Scipher plc (LSE SIP) briefly took special interest in the technology transfer business. The company's principal activities are the development, licensing and sale of technology. In December 2001, the Company acquired Fairfield Resources to augment its existing licensing activities that were occurring through its wholly owned QED subsidiary. In announcing the acquisition, Scipher disclosed that Fairfield had lost $0.2m in fiscal year 200. In December 2002, the Company acquired Yet2.com and merged its activities with QED. In 2004, Scipher disposed of Fairfield, Yet2.com, and QED. In announcing its disposal, Scipher reported that Yet2.com had experienced a net loss of '0.6m for the first 6 months of 2003. Overall, Scipher has lost money consistently over the past 5 years. Last, Competitive Tech nologies, Inc. (Amex: CTT) may be the only remaining public U.S. technology transfer company. Although profitable in 1999 and 2000, the company has lost money for the past 3 years (see Table 1, below).

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Market Solutions to Cost Reduction

Historically, technology transactions have taken months, if not years, to conclude. A primary cause of delay has been the existence of various transaction risks. Among the sources of transactional risks have been:

• Unknown integrity of principals;
• Technology information asymmetry;
• Uncertain IP valuation;
• Uncertain legal (asset integrity) risk; and
• High opportunity and failure costs.

For mitigating these risks, products and services inspired by disciplined financial markets, have been produced to supplement the traditional contact sport methods. Innocentives and Nine Sigma, for example, operate “technology exchanges” where of high profile technology buyers lend their brand strength to provide assurances of authority and credibility. Coupled with Internet-enabled equal access to information, a key element in building trust, this approach may help reduce the time and costs consumed matching buyers with relevant sellers.

But while matching principals is time consuming, the two greatest risks are asset integrity risk and valuation risk. These are risks that directly impact the net present value of a transaction, cause the greatest amount of market friction (read as time-cost), and are most amenable to financial market solutions. Asset integrity risk comprises the pair issues of patent validity and a patent's ability to grant freedom to operate. Through legal opinion letters, asset integrity risk is indirectly transferred from the transaction principals to the consulting law firm's professional liability insurer. Several years ago, the reinsurance giant Swiss Re developed a bona fide insurance product that was offered directly to transaction principals. The product did not attract much demand and Swiss Re withdrew it.

In March of this year, this direct indemnification of principals was revived specifically for software licenses and risks of copyright infringement. The need for such a product became apparent when the SCO Group Inc. (NASDAQ: SCOX), asserting that Linux infringes its Unix IP, began to sue companies that use Linux. In a financial market response, Open Source Risk Management LLC (OSRM), introduced both a consulting service and an insurance-like IP indemnification plan for all mainstream Linux distributions.

Valuation uncertainty is the greatest transactional risk. Valuation risk has been estimated to represent 95% of the transactional risks of an IP-centered deal. Several years ago, The Patent & License Exchange (pl-x.com) introduced a capital markets based tool to value IP in real time. The valuations were derivatives of the enterprise values of custom portfolios of small publicly traded pure play companies. The valuation data were published regularly by the finance newsmagazine, The Daily Deal, but the lack of transactional verification left too many questions regarding the accuracy of the valuation methods. The search for valuation algorithms continues; significantly, the Sarbanes Oxley legislation is reinvigorating interest in capital markets based tools ' at least with respect to technology transfer deals that will impact the finances of publicly traded companies.

Conclusion

We believe that financial markets, through the provision of such instruments as insurance and market-based valuation, can provide the technology transfer community with the tools needed to support a contact sport that must evolve into something that can move a greater volume of assets faster and cheaper. As the CEO of Duff & Phelps Capital Partners noted last year: “Don't kid yourself into thinking that the investment banking community, the commercial banking community, and the private equity community aren't spending a whole lot of time trying to figure out how to structure financial products to capture [the implied] value [of a patent portfolio] and to monetize it.”

Technology transfer is often characterized as a “contact sport.” Technology transfer practitioners from industry, universities, and intellectual asset management professional service providers understand the importance of their personal networks and their ability to reach out ' on a personal level ' to those with whom they need to work. Moreover, technology transfer is a contact sport because the capture of the economic value of IP and the transfer of financial risk are both dependent on the negotiation skills of the individual practitioners.

The single greatest benefit to this personalized nature of technology transfer is quality. The rough and tumble space discourages technology transfer dilettantes; the commensurate cost of quality discourages those with IP assets of questionable value. The single greatest cost is time ' time to find buyers and sellers, time to value the asset, and time to craft risk transfer provisions. The cost of time comprises labor costs associated with the tech transfer process and the opportunity costs associated with the absence of revenue generating activity during the transfer.

Once, when a limited number of high value assets were transferred between a handful of institutions, these costs could be absorbed. But today, when a significant volume of more modestly valued assets are transferred throughout the supply chain in many industrial sectors and from academia, the costs may impede economic activity.

Fortunately, the growing size of the IP asset base, the increased velocity of transfers, and the relationship between IP and corporate value have caught the attention of the finance community. This community is now bringing in an entirely new set of tools to technology transfer.

Technology Transfer Costs are High

While data are limited, there are a handful of public or formerly public technology transfer businesses for which operating expenses are public. The financial records of these companies show that technology transfer is not a profitable “wholesale” business. The principal companies are BTG plc; Scipher plc, which also acquired or owned Fairfield Resources, QED, and Yet2.com; and Competitive Technologies, Inc.

BTG plc (LSE:BCG) has been publicly traded since 1995 and is the senior member of this exclusive club. The company's principal activities are the acquisition, development, and commercialization of technologies. The company has lost money for 4 of the past 5 years. Scipher plc (LSE SIP) briefly took special interest in the technology transfer business. The company's principal activities are the development, licensing and sale of technology. In December 2001, the Company acquired Fairfield Resources to augment its existing licensing activities that were occurring through its wholly owned QED subsidiary. In announcing the acquisition, Scipher disclosed that Fairfield had lost $0.2m in fiscal year 200. In December 2002, the Company acquired Yet2.com and merged its activities with QED. In 2004, Scipher disposed of Fairfield, Yet2.com, and QED. In announcing its disposal, Scipher reported that Yet2.com had experienced a net loss of '0.6m for the first 6 months of 2003. Overall, Scipher has lost money consistently over the past 5 years. Last, Competitive Tech nologies, Inc. (Amex: CTT) may be the only remaining public U.S. technology transfer company. Although profitable in 1999 and 2000, the company has lost money for the past 3 years (see Table 1, below).

[IMGCAP(1)]

Market Solutions to Cost Reduction

Historically, technology transactions have taken months, if not years, to conclude. A primary cause of delay has been the existence of various transaction risks. Among the sources of transactional risks have been:

• Unknown integrity of principals;
• Technology information asymmetry;
• Uncertain IP valuation;
• Uncertain legal (asset integrity) risk; and
• High opportunity and failure costs.

For mitigating these risks, products and services inspired by disciplined financial markets, have been produced to supplement the traditional contact sport methods. Innocentives and Nine Sigma, for example, operate “technology exchanges” where of high profile technology buyers lend their brand strength to provide assurances of authority and credibility. Coupled with Internet-enabled equal access to information, a key element in building trust, this approach may help reduce the time and costs consumed matching buyers with relevant sellers.

But while matching principals is time consuming, the two greatest risks are asset integrity risk and valuation risk. These are risks that directly impact the net present value of a transaction, cause the greatest amount of market friction (read as time-cost), and are most amenable to financial market solutions. Asset integrity risk comprises the pair issues of patent validity and a patent's ability to grant freedom to operate. Through legal opinion letters, asset integrity risk is indirectly transferred from the transaction principals to the consulting law firm's professional liability insurer. Several years ago, the reinsurance giant Swiss Re developed a bona fide insurance product that was offered directly to transaction principals. The product did not attract much demand and Swiss Re withdrew it.

In March of this year, this direct indemnification of principals was revived specifically for software licenses and risks of copyright infringement. The need for such a product became apparent when the SCO Group Inc. (NASDAQ: SCOX), asserting that Linux infringes its Unix IP, began to sue companies that use Linux. In a financial market response, Open Source Risk Management LLC (OSRM), introduced both a consulting service and an insurance-like IP indemnification plan for all mainstream Linux distributions.

Valuation uncertainty is the greatest transactional risk. Valuation risk has been estimated to represent 95% of the transactional risks of an IP-centered deal. Several years ago, The Patent & License Exchange (pl-x.com) introduced a capital markets based tool to value IP in real time. The valuations were derivatives of the enterprise values of custom portfolios of small publicly traded pure play companies. The valuation data were published regularly by the finance newsmagazine, The Daily Deal, but the lack of transactional verification left too many questions regarding the accuracy of the valuation methods. The search for valuation algorithms continues; significantly, the Sarbanes Oxley legislation is reinvigorating interest in capital markets based tools ' at least with respect to technology transfer deals that will impact the finances of publicly traded companies.

Conclusion

We believe that financial markets, through the provision of such instruments as insurance and market-based valuation, can provide the technology transfer community with the tools needed to support a contact sport that must evolve into something that can move a greater volume of assets faster and cheaper. As the CEO of Duff & Phelps Capital Partners noted last year: “Don't kid yourself into thinking that the investment banking community, the commercial banking community, and the private equity community aren't spending a whole lot of time trying to figure out how to structure financial products to capture [the implied] value [of a patent portfolio] and to monetize it.”