License to Skill

Small or medium enterprises walk a tightrope between acquisition and extinction. With IP competence often the deciding factor, a strong licensing plan could be the key to future success, as Morgan Reed, executive director of lobby group, Association for Competitive Technology (ACT), explains to Matthew Packer

Small and medium-sized enterprises (SMEs) are a rich source of innovation, but without a clear IP structure in place, it can often be difficult to get their good ideas to market.

Morgan Reed has no doubt about where a SME should start with its IP programme: ‘You should be building a “culture of IP” from day one,’ he says. ‘IP stocks should be valued and treated in the same way as other elements of your office space; for example, your computer hardware or tables and chairs.

‘Just as staff will be hired and assigned based on their administrative, sales or creative skills, so too should you be hiring someone who knows about IP. You should be able to ask the question: “Who’s in charge of IP?” and for the answer to be evident.

‘From the start, you want the employee to see the value of IP to the company, and take the idea from the tube to the office – turning it into something of value to be proud of, rather than discarded with the newspaper at the last train stop.’

While banking employees’ ideas is important, Morgan stresses that problems could be on the horizon, particularly with licensing, if the paperwork to administrate them is not in place.

‘From the get-go,’ he says, ‘you must establish your nondisclosure agreement and what it should look like; establish the scope of what your employees do at work and at home, and how those work patterns contribute to the company’s IP; establish ground rules on work-for-hire, as clients can end up owning IP your own employees have developed; and ensure that your company documents, including staff contracts and licensing agreements, reflect the true intent of your core business at all stages.’

Morgan commiserates the actions of some new SME managers who, through simple naïveté, have copied template company documents from the Internet to cut corners and put them straight into action without tailoring them to their business needs – a foolhardy course of action, to say the least.

Niche markets
Licensing can play a vital role in communicating the competence of a business to the market it wishes to work in. for firms trying to distinguish between what ip they should license and what they should protect, Morgan advises: ‘All small businessmen have to ask themselves is what they want to do with their enterprises. This means choosing whether they want to a) make a company they can leave to their children; b) make a company that will be acquired; or c) make a company that will eventually go public.

‘Most companies end up in category a), and almost none end up in category c)! For a company aiming to be in category b), licensing everything could be the best route to take.

‘For a company aiming to be in category c), the question is: what is your core business? You may want to sell any IP that is not part of your core business.’

‘Firms like Microsoft and Sun Microsystems may have lots of good ideas, but they can’t always build markets around them. Licensing IP to smaller firms who can open up niche markets helps both sides.’
- Morgan Reed

Cross-licensing can support growth by helping firms to bolster their reputations and balance risk. ‘Big firms like Microsoft and Sun Microsystems may have lots of good ideas,’ he says, ‘but they can’t always build markets around them.

Licensing IP to smaller firms who can open up niche markets helps both sides. ‘Equally, licensing IP from a major company can be a useful way for an SME to build revenue while the bigger firm bears the risk. it will also provide a small firm with credentials to refer to when it goes to venture capitalists: it can be used to demonstrate flexibility productively, as it has been an effective custodian of a larger company’s assets.’

Cross-licensing
Morgan highlights the example of Apple computers in its earliest days, which licensed tools from the long-established Xerox in order to develop the Macintosh. At the time, no one thought anything of it – yet its repercussions for the IT industry are still being felt today.

‘Small businesses tend to lead the way in true innovation,’ says Morgan. ‘But when deciding whether to license technology upwards, an SME manager must ask: is this going to help my firm to be acquired? Can I compete in that intellectual space? Will the lawyers lock me out of decisions involving my own technology?’

In all, cross-licensing can help SME to grow through the acquisition of either cash – in the form of royalties and fees– or further IP holdings. Yet Morgan is surprised when we invite him to clear up the mysteries shrouding the valuation of IP stocks: just what are the best methods for determining fees? ‘That’s the $1.52 billion question!’ he replies, referring to the recent settlement awarded to Alcatel for infringement of its audio technology. ‘Fee valuation is more of an art than a science, as it relies on a vision of what the marketplace will be rather than what it is.’

To set out the range of difficulties faced by small firms when striking licensing deals with majors, Morgan draws on results from a recent ACT survey. ‘We asked 750 members for their opinion,’ he explains, ‘and from all those who replied, three core challenges became clear.’

The first related to communication and transparency: ‘When a small company meets with a major, the major must remember that most small businesses are cash-starved, so communication plays an important part,’ Morgan explains. ‘Small firms become very anxious if there’s a deafening silence for weeks after a big meeting. It’s a little like going on a date with a beautiful girl and then sitting around waiting for her to call.’ Secondly, members highlighted the issues of respect: ‘A typical SME feels that a large firm doesn’t acknowledge the amount of effort it has put in to perfect a new tool,’ he says. ‘A major must show the inventor some respect, and show a willingness to become a partner to support that idea, and then develop that partnership.’

Finally, SMEs need to be aware of the level of disruption that a large corporation is likely to accept. ‘Many members said: “We went to a big company with a great idea, and they just didn’t take it.” However, in large companies, you’re looking at longer lead times to put new ideas into practice, and more disruption.

The entire culture in a large firm is built around avoiding disruptive technologies.’ In order for SMEs and large corporations to create licensing partnerships, that culture gap must be closed. But, Morgan is keen to stress that SMEs are becoming more aware of the intricacies of successful licensing deals and creating better agreements as a result. ‘The motto of one SME that took part in our survey is: “We will succeed because we have a well-written patent and good technology”,’ he says.

‘The word ordering here is very important, because if you haven’t got the paperwork in place, you haven’t got anything at all. Above everything else, you need well-written, well-ordered and well protected IP.

‘SMEs need to build their business around their core IP assets, as ultimately the better their IP, the better their chances are,’ he concludes.


LICENSING GREATS:

Xircom From deciding early on that it wanted to be an IP company, Xircom filed for a patent on a key product at the same time that its CEO realised the value of licensing. Committed to a software and hardware tool that allowed laptops to interface with corporate networks, it cut a string of licensing deals with AT&T to dominate the ‘mindshare’, or IP space, around the concept. The patent failed – but this didn’t matter as Xircom had already established a thriving IP culture through its licences. It went public and was eventually acquired by Intel in 2001.

DIVX This tool for compressing movies was a Digital Rights Management concept by a small firm of the same name. Although its patent application failed, the company had patented key algorithms that were used in other technologies and recovered. It has recently had a huge initial public offer (IPO).


HONOURABLE MISSES:

Mike Sax Rich in ideas, but paperwork-shy, this talented innovator built a tool that enabled pieces of hardware and software to talk to each other: for example, allowing a manager’s laptop to talk to a robot on a factory floor. Mike licensed the tool to a programmer who used it to create a product that became a key component in millions of printers – yet, because of flaws in his original contract, Mike only took home a few thousand dollars.

Sax.net Not content with his previous innovations, Mike then advanced the cause of a certain online retailer by building one of the web’s first shopping carts. Although he failed to license the virtual basket, created for his own online venture, it was referenced in the prior art list of Amazon’s famous ‘One-Click’ patent. Determined to steer other innovators in a more fruitful direction, Mike now sits on ACT’s Board. ‘He’s now adopting a more IP-focused model,’ says a wry Morgan Reed.


This article first appeared in IP Review, issue 19