Venture Capital-Free Accelerated Monetization of Non-Core IP: A Case Study of an Innovation Company

Monetizing non-core IP is rational, practical, and increasingly common. The IP literature is now rich with examples of accelerated monetization of cash-generating IP through the transfer of assets and risks, usually assisted through some form of structured finance. The literature is even richer with countless examples of painstakingly slow monetizations of non-cash-generating IP usually through joint ventures or venture capital-backed transactions. We describe a case in which non-core IP was monetized rapidly after which the bulk of the reward potential remained in the hands of the original IP owners. We suggest that when non-core IP is generated consequent to market demand in the course of the Parent's operations, and merely happens to reside outside the Parent's core business, a rapidly structured Parent-financed spin off can create accelerated financial and strategic benefits.

Time Value Spectrum of IP Monetization

Cash-Generating Assets

The potential rewards of accelerated intellectual property monetization have generated an extraordinary ferment of financial innovation. Elaborate securitization structures have been devised and, in the case of trademarks and copyrights, some real wealth has been generated. Patents have proved to be more resistant to financial engineering techniques, though we have seen increasingly interesting activity in the biopharma space.

Non-Cash Generating Assets

At the opposite end of the spectrum, there is an abundance of sound advice about basic licensing programs. We know more and more about how to negotiate, structure, price and audit licenses. And we all know how difficult negotiations can be when it comes to the sensitive issue of valuation in the absence of cash flows.

Time and Process Costs

What these two basic monetization techniques have in common is that they tend to be (relatively): (a) customized and, (b) expensive. The transactions progress slowly and approximate human gestation periods. They require commensurate expertise and expenditures in diligence, transactional work, and not infrequently, litigation. Consequently, a lengthy cycle of valuation opinions and legal opinions precedes revenue recognition for either a securitized or licensed portfolio. These time and process costs and risks are natural transactional inhibitors.

It would be interesting to ask if there is a more nimble route to operationalize the monetization of collateral or non-core innovation. Put more provocatively, if our operating business identifies market needs, possesses customer contacts, and an investment reserve, can we systematically capture smaller, less predictable innovations outside the core and monetize them serially without diluting managerial focus? And can we do so with a lower cost of capital and easier access to markets than a traditional venture capitalist such that the process creates net value for shareholders?

DestiNY USA: Enterprise As Laboratory

DestiNY USA (www.destinyusa.com) is an 800-acre waterfront destination featuring the world's largest enclosed and integrated structure; some 75 million square feet of dining, shopping, entertainment and recreation venues. The venues are integrated through both an overarching promise to experience “what comes next comes here first” and through a commitment to the highest levels of environmental friendliness and use of renewable energy resources.

But DestiNY USA has also been consciously designed as a living laboratory, facilitating further innovations in renewable energy, security and other urban-centric technologies. Thus, DestiNY USA has reinvented the leisure destination itself as a bundle of information. While conventional retail thinking has focused on the efficient utilization of floor space and shelf space, DestiNY USA has also focused on utilizing the information generated by millions upon millions of transactions and the interaction of customers, vendors and physical facilities. From inception, DestiNY USA has focused relentlessly on fully capturing the value of intangible assets, anticipating a non-linear path of innovation, and setting up internal structures to identify and consolidate collateral value. In terms of its IP portfolio, DestiNY USA operates in the expectation of surprise.

Managing Surprise

The dedicated IP portfolio manager, IP Control Manager, and organic IP legal specialist are not yet familiar roles in the HR organizational charts for destination resort operators, and so our firm was retained to provide central intellectual asset management and coordination services. Supple-mentary outside patent attorneys were promptly screened, selected, and integrated into a seamless working team. DestiNY USA executives were educated on the fundamentals of patentability and were tasked to identify and capture patentable creativity throughout the organization under the watchful eye of the IP Control Manager.

As DestiNY USA's portfolio was built out, values were conservatively tracked and clearly communicated to constituents on a timely basis. DestiNY USA grasped that the patent values burnished its brand value, and that before IP assets are monetized, it is essential for the organization to consistently recognize and communicate its intellectual asset value. DestiNY USA adopted and implemented this policy consistently and successfully.

Inventing By Listening

DestiNY USA founder and prominent real estate developer Robert Congel is a patriot. In the aftermath of 9/11, Congel directed his team to share DestiNY USA security innovations with the Department of Homeland Security (“DHS”). While Congel's intentions in doing so were altruistic, DestiNY USA's IP portfolio system ensured organizational alertness to sound commercial opportunities.

DestiNY USA's team entered into an extended dialogue with Robert Liscouski, then assistant secretary for infrastructure security. Early in the conversation, it became clear that DHS was inundated with technical proposals, but was most challenged by capital constraints. In other words, for the most critical sectors there was a surprisingly strong consensus on the technical steps that needed to be taken to improve safety and security. However, the administration was determined not to commit taxpayers to a blank check and many business owners were highly leveraged and reluctant to burden balance sheets with more debt. DestiNY USA had begun the conversation with elegant solutions to a secondary problem.

Liscouski, with a distinguished private sector background and an inventive streak of his own, challenged DestiNY USA to focus on the primary problem: capital. DestiNY USA's culture and machinery of invention seized on the insight that a capital solution, based on physical risk management and its financial counterpart ' insurance, would enable satisfaction of the market's demand for products and services.

Leveraging Vendors

Until Liscouski's challenge, DestiNY USA's experience with the world of insurance could be summarized succinctly: DestiNY USA frequently bought it. But without overselling its existing knowledge assets to DHS, key DestiNY USA team members grasped that this was actually a very promising beginning. Who has more credibility with sellers than buyers? And DestiNY USA's penchant for picking quality counterparties and maintaining long and positive commercial relationships conferred exceptional credibility.

DestiNY USA utilized its commercial broker of longstanding to survey the insurance market. Would price concessions be made in exchange for acknowledged security improvements? Insurance markets responded with surprising enthusiasm and offered the strongest endorsement possible in the absence of specific transactional details. Further research disclosed that the insurance industry routinely offers precise discounts that reward risk-reducing behaviors on the part of policyholders. Historically, such programs have occasionally been impressively scaled to achieve major industrial reforms. Sprinkler systems were introduced successfully into the United States, some decades after their deployment in Britain, based on generous underwriting discounts for compliant commercial properties. Of course the scope of what DHS was seeking was considerably more imposing than even this ambitious early 20th century success.

Leveraging Partners

It became clear to DestiNY USA financial professionals that capital on a scale that would adequately address the DHS challenge would be available only through financial leverage. Since we operate a correspondent company of UCC Capital, a leading IP merchant bank that has long dominated the space of trademark and whole company securitization, DestiNY USA encouraged us to explore this avenue further. Additional research suggested that structured finance could provide the financial leverage required.

At this stage, an insurance market expert was recruited; the DestiNY USA model was developed and stress-tested. If a lead underwriter agreed to rebate fixed premiums in response to defined improvements as an adjustment to (expected) declining risk and a structured finance investment bank were able to sell the associated contractual cash-flows, DestiNY USA could generate a “virtuous circle” in which the wealth creating effects of improved security would be efficiently monetized to fund improvements without impacting policyholder balance sheets.

DestiNY USA's answer to the challenge from DHS was increasingly assuming a novel, useful, non-obvious and highly detailed, tangible form. For us, DestiNY USA's IP portfolio managers, the path to opportunity was clear. Outside counsel was engaged and brought into the dialogue. With a speed and economy that could only have been the result of practiced collaboration, patent claims were drafted and filed.

DHS received DestiNY USA's proposal with enthusiasm. DestiNY USA could count on DHS moral support, itself a valuable if soft intangible asset.

From Innovation to Enterprise

DestiNY USA now possessed valuable intellectual property that was truly collateral and non-core. In the absence of immediate licensing revenue, many organizations would have been challenged to develop a revenue model. DestiNY USA turned to us, its intellectual asset manager, to provide an integrated solution for staffing and operations, marketing and sales.

Empowering Experts

In March of this year, DestiNY USA spun off a financial service entity with a dedicated professional staff centered about its insurance industry expert consultant. Motivated with performance-based incentives, DestiNY had a credible management team operating a wholly owned subsidiary business marketed with a previously banked abandoned brand and charged with delivering an innovative solution to a demanding property market in DHS targeted sectors.

Brokering Invention

Ultimately, penetrating a market requires “boots on the ground.” DestiNY USA's spin off recognized the need for a strategic partnership that would enable it to leverage its IP rapidly.

The insurance industry has a particularly well-developed brokerage system. Insurance buyers transfer cash in exchange for complex promises. A good broker's expertise and relationships confer obvious advantages in light of the information costs and counterparty risks that inhere in the insurance transaction.

However, robust competition particularly for the most desirable commercial accounts has somewhat commoditized insurance broking driving down returns. Thus, the traditional tools of the trade for insurance brokers are unlikely to prove effective in capturing the insurance business of the Fortune 500. At the high end of insurance broking the shift is away from “inside baseball” to innovative products and processes. The most successful commercial insurance brokerages are now inventive organizations, increasingly on a par with investment banks in the quality and scope of advisory services.

DestiNY USA's route to revenue was straightforward. Having a patent pending, market-tested business method endorsed by DHS at the conceptual level, DestiNY USA would select and partner with a global brokerage leader seeking to distinguish itself from competitors through superior intellectual capital.

DestiNY USA has recently selected the global brokerage leader and identified a lead underwriter. Negotiations are proceeding productively and, less than 5 months into the life of the nascent insurance enterprise, revenue is on the horizon in the form of identified paid engagements.

Lessons Learned

A summary lesson and the keys to the DestiNY USA model:

• Have the staff in place to identify and capture innovation;
• Educate non-specialist management and staff to support portfolio-building effort;
• Work toward transparency in timely communications to constituents about portfolio value;
• Reinforce the brand with the portfolio and the portfolio with the brand;
• Surround inspiration with rigor: stress test the models;
• Leverage relationships to conduct practical research;
• Bundle the IP with the know-how and the people and focus them commercially through a separate legal entity;
• Leverage banked brands; and
• Partner with the best, outsource distribution

As IP monetization alternatives become more complex and elaborate, DestiNY USA's model and example offers a healthy reminder that we should not overlook the value and virtue of relentless execution.

Monetizing non-core IP is rational, practical, and increasingly common. The IP literature is now rich with examples of accelerated monetization of cash-generating IP through the transfer of assets and risks, usually assisted through some form of structured finance. The literature is even richer with countless examples of painstakingly slow monetizations of non-cash-generating IP usually through joint ventures or venture capital-backed transactions. We describe a case in which non-core IP was monetized rapidly after which the bulk of the reward potential remained in the hands of the original IP owners. We suggest that when non-core IP is generated consequent to market demand in the course of the Parent's operations, and merely happens to reside outside the Parent's core business, a rapidly structured Parent-financed spin off can create accelerated financial and strategic benefits.

Time Value Spectrum of IP Monetization

Cash-Generating Assets

The potential rewards of accelerated intellectual property monetization have generated an extraordinary ferment of financial innovation. Elaborate securitization structures have been devised and, in the case of trademarks and copyrights, some real wealth has been generated. Patents have proved to be more resistant to financial engineering techniques, though we have seen increasingly interesting activity in the biopharma space.

Non-Cash Generating Assets

At the opposite end of the spectrum, there is an abundance of sound advice about basic licensing programs. We know more and more about how to negotiate, structure, price and audit licenses. And we all know how difficult negotiations can be when it comes to the sensitive issue of valuation in the absence of cash flows.

Time and Process Costs

What these two basic monetization techniques have in common is that they tend to be (relatively): (a) customized and, (b) expensive. The transactions progress slowly and approximate human gestation periods. They require commensurate expertise and expenditures in diligence, transactional work, and not infrequently, litigation. Consequently, a lengthy cycle of valuation opinions and legal opinions precedes revenue recognition for either a securitized or licensed portfolio. These time and process costs and risks are natural transactional inhibitors.

It would be interesting to ask if there is a more nimble route to operationalize the monetization of collateral or non-core innovation. Put more provocatively, if our operating business identifies market needs, possesses customer contacts, and an investment reserve, can we systematically capture smaller, less predictable innovations outside the core and monetize them serially without diluting managerial focus? And can we do so with a lower cost of capital and easier access to markets than a traditional venture capitalist such that the process creates net value for shareholders?

DestiNY USA: Enterprise As Laboratory

DestiNY USA (www.destinyusa.com) is an 800-acre waterfront destination featuring the world's largest enclosed and integrated structure; some 75 million square feet of dining, shopping, entertainment and recreation venues. The venues are integrated through both an overarching promise to experience “what comes next comes here first” and through a commitment to the highest levels of environmental friendliness and use of renewable energy resources.

But DestiNY USA has also been consciously designed as a living laboratory, facilitating further innovations in renewable energy, security and other urban-centric technologies. Thus, DestiNY USA has reinvented the leisure destination itself as a bundle of information. While conventional retail thinking has focused on the efficient utilization of floor space and shelf space, DestiNY USA has also focused on utilizing the information generated by millions upon millions of transactions and the interaction of customers, vendors and physical facilities. From inception, DestiNY USA has focused relentlessly on fully capturing the value of intangible assets, anticipating a non-linear path of innovation, and setting up internal structures to identify and consolidate collateral value. In terms of its IP portfolio, DestiNY USA operates in the expectation of surprise.

Managing Surprise

The dedicated IP portfolio manager, IP Control Manager, and organic IP legal specialist are not yet familiar roles in the HR organizational charts for destination resort operators, and so our firm was retained to provide central intellectual asset management and coordination services. Supple-mentary outside patent attorneys were promptly screened, selected, and integrated into a seamless working team. DestiNY USA executives were educated on the fundamentals of patentability and were tasked to identify and capture patentable creativity throughout the organization under the watchful eye of the IP Control Manager.

As DestiNY USA's portfolio was built out, values were conservatively tracked and clearly communicated to constituents on a timely basis. DestiNY USA grasped that the patent values burnished its brand value, and that before IP assets are monetized, it is essential for the organization to consistently recognize and communicate its intellectual asset value. DestiNY USA adopted and implemented this policy consistently and successfully.

Inventing By Listening

DestiNY USA founder and prominent real estate developer Robert Congel is a patriot. In the aftermath of 9/11, Congel directed his team to share DestiNY USA security innovations with the Department of Homeland Security (“DHS”). While Congel's intentions in doing so were altruistic, DestiNY USA's IP portfolio system ensured organizational alertness to sound commercial opportunities.

DestiNY USA's team entered into an extended dialogue with Robert Liscouski, then assistant secretary for infrastructure security. Early in the conversation, it became clear that DHS was inundated with technical proposals, but was most challenged by capital constraints. In other words, for the most critical sectors there was a surprisingly strong consensus on the technical steps that needed to be taken to improve safety and security. However, the administration was determined not to commit taxpayers to a blank check and many business owners were highly leveraged and reluctant to burden balance sheets with more debt. DestiNY USA had begun the conversation with elegant solutions to a secondary problem.

Liscouski, with a distinguished private sector background and an inventive streak of his own, challenged DestiNY USA to focus on the primary problem: capital. DestiNY USA's culture and machinery of invention seized on the insight that a capital solution, based on physical risk management and its financial counterpart ' insurance, would enable satisfaction of the market's demand for products and services.

Leveraging Vendors

Until Liscouski's challenge, DestiNY USA's experience with the world of insurance could be summarized succinctly: DestiNY USA frequently bought it. But without overselling its existing knowledge assets to DHS, key DestiNY USA team members grasped that this was actually a very promising beginning. Who has more credibility with sellers than buyers? And DestiNY USA's penchant for picking quality counterparties and maintaining long and positive commercial relationships conferred exceptional credibility.

DestiNY USA utilized its commercial broker of longstanding to survey the insurance market. Would price concessions be made in exchange for acknowledged security improvements? Insurance markets responded with surprising enthusiasm and offered the strongest endorsement possible in the absence of specific transactional details. Further research disclosed that the insurance industry routinely offers precise discounts that reward risk-reducing behaviors on the part of policyholders. Historically, such programs have occasionally been impressively scaled to achieve major industrial reforms. Sprinkler systems were introduced successfully into the United States, some decades after their deployment in Britain, based on generous underwriting discounts for compliant commercial properties. Of course the scope of what DHS was seeking was considerably more imposing than even this ambitious early 20th century success.

Leveraging Partners

It became clear to DestiNY USA financial professionals that capital on a scale that would adequately address the DHS challenge would be available only through financial leverage. Since we operate a correspondent company of UCC Capital, a leading IP merchant bank that has long dominated the space of trademark and whole company securitization, DestiNY USA encouraged us to explore this avenue further. Additional research suggested that structured finance could provide the financial leverage required.

At this stage, an insurance market expert was recruited; the DestiNY USA model was developed and stress-tested. If a lead underwriter agreed to rebate fixed premiums in response to defined improvements as an adjustment to (expected) declining risk and a structured finance investment bank were able to sell the associated contractual cash-flows, DestiNY USA could generate a “virtuous circle” in which the wealth creating effects of improved security would be efficiently monetized to fund improvements without impacting policyholder balance sheets.

DestiNY USA's answer to the challenge from DHS was increasingly assuming a novel, useful, non-obvious and highly detailed, tangible form. For us, DestiNY USA's IP portfolio managers, the path to opportunity was clear. Outside counsel was engaged and brought into the dialogue. With a speed and economy that could only have been the result of practiced collaboration, patent claims were drafted and filed.

DHS received DestiNY USA's proposal with enthusiasm. DestiNY USA could count on DHS moral support, itself a valuable if soft intangible asset.

From Innovation to Enterprise

DestiNY USA now possessed valuable intellectual property that was truly collateral and non-core. In the absence of immediate licensing revenue, many organizations would have been challenged to develop a revenue model. DestiNY USA turned to us, its intellectual asset manager, to provide an integrated solution for staffing and operations, marketing and sales.

Empowering Experts

In March of this year, DestiNY USA spun off a financial service entity with a dedicated professional staff centered about its insurance industry expert consultant. Motivated with performance-based incentives, DestiNY had a credible management team operating a wholly owned subsidiary business marketed with a previously banked abandoned brand and charged with delivering an innovative solution to a demanding property market in DHS targeted sectors.

Brokering Invention

Ultimately, penetrating a market requires “boots on the ground.” DestiNY USA's spin off recognized the need for a strategic partnership that would enable it to leverage its IP rapidly.

The insurance industry has a particularly well-developed brokerage system. Insurance buyers transfer cash in exchange for complex promises. A good broker's expertise and relationships confer obvious advantages in light of the information costs and counterparty risks that inhere in the insurance transaction.

However, robust competition particularly for the most desirable commercial accounts has somewhat commoditized insurance broking driving down returns. Thus, the traditional tools of the trade for insurance brokers are unlikely to prove effective in capturing the insurance business of the Fortune 500. At the high end of insurance broking the shift is away from “inside baseball” to innovative products and processes. The most successful commercial insurance brokerages are now inventive organizations, increasingly on a par with investment banks in the quality and scope of advisory services.

DestiNY USA's route to revenue was straightforward. Having a patent pending, market-tested business method endorsed by DHS at the conceptual level, DestiNY USA would select and partner with a global brokerage leader seeking to distinguish itself from competitors through superior intellectual capital.

DestiNY USA has recently selected the global brokerage leader and identified a lead underwriter. Negotiations are proceeding productively and, less than 5 months into the life of the nascent insurance enterprise, revenue is on the horizon in the form of identified paid engagements.

Lessons Learned

A summary lesson and the keys to the DestiNY USA model:

• Have the staff in place to identify and capture innovation;
• Educate non-specialist management and staff to support portfolio-building effort;
• Work toward transparency in timely communications to constituents about portfolio value;
• Reinforce the brand with the portfolio and the portfolio with the brand;
• Surround inspiration with rigor: stress test the models;
• Leverage relationships to conduct practical research;
• Bundle the IP with the know-how and the people and focus them commercially through a separate legal entity;
• Leverage banked brands; and
• Partner with the best, outsource distribution

As IP monetization alternatives become more complex and elaborate, DestiNY USA's model and example offers a healthy reminder that we should not overlook the value and virtue of relentless execution.