When enterprises need to raise money to bring their ideas to market, the ability to quantify and communicate the value of their intellectual property is an important negotiating aid. This is even more important for companies that are yet to generate significant revenue streams, as OTSAW's experience demonstrates.
Although a company’s accounts can’t tell you what their intellectual property is worth, these non-physical assets are often the key to realising shareholder value, because they enable a company to protect its competitive advantage. As a result, serious investors are always interested in understanding what potential these assets have. An independent report provides the best way of informing this assessment, which is otherwise difficult – especially if the IP in question is not yet linked to significant market traction.
Ling Ting Ming is the Founder and Chief Executive Officer of a well-known and successful service and solution-based company in Singapore, ActiV Technology, which provides enterprises with network solutions and fibre optic solutions. Recognising that ActiV’s service-based model had some limitations, Ling decided to set up an R&D office in the USA, with the plan to build proprietary technology and product.
Why take the risk? As Ling sees it, creating your IP is the best strategy to build business value.
“There is less opportunity to grow a service-based company, as services can often be more easily replaced by competitors; they are price-sensitive, and year after year, their value may get weaker”.
Accordingly, in 2015, OTSAW was born to act as its parent company’s digital innovation centre, and the company recruited key technical staff from leading universities.
Setting out on the innovation journey
Initially, the company “played with a few things”, including software, Internet of Things (IoT) and robotics. “We thought these were the hottest tech at the time, so we researched all three of them—it was crazy looking back, but we didn’t know what the ‘secret sauce’ would be at the time”.
After a couple of experiments with mobile apps and IoT, the company decided to focus on robotics, settling on Autonomous Vehicle (AV) technology. It invested in the development of advanced machine learning algorithms powered by artificial intelligence and 3D SLAM (Simultaneous Localization And Mapping) technology, which help vehicles navigate autonomously. The choice of AV gives OTSAW a very high entry barrier and an edge over competitors.
“We don’t want to be one of many in the ocean—you are talking about the likes of Google and Tesla building these technologies”.
This deep tech is now used in OTSAW’s new vehicles, particularly the O-R3 self-driving ground-aerial security solution. Designed to patrol sensitive areas, it is controlled by a central fleet control system but incorporates programming and the ability to learn, so that it can avoid obstacles and not crash into people. O-R3 can help to look for suspicious items or activity, triggering an alert where needed.
Financing IP (and deep tech)
‘Deep tech’ is a term most often associated with cutting edge, disruptive technology that is founded on a scientific discovery (e.g. mathematics, physics, medicine, engineering innovations). Often it involves techniques such as big data and artificial intelligence. The returns for successful innovations can be very high, making them attractive investment opportunities: however, deep tech also carries considerable risks, especially when the company is some distance from market, or the market itself is effectively untested (because of the level of disruption the deep tech may bring).
The value of OTSAW’s core technology is enhanced by the fact that the company has taken time to seek registered rights for it, including patent protection. Since the company believes the technology has applicability in many different sectors and uses, from agriculture to logistics and road cleaning, “We decided to patent the brain that can then be transplanted into another body”.
After a very successful launch of the O-R3 at Communication Asia 2017, OTSAW needed to raise finance to move into the production phase and cope with market demand. The most important asset the company owned at this point was its IP. However, as Ling shares, it was not all plain sailing.
“We had customers and investors coming up to us at the launch, and we had not really prepared ourselves for that journey. People started asking, ‘What is your valuation?’—while we were really only thinking about launching a product that was pretty cool!”
Taking a three-step approach
While the company had taken time to seek patent protection for its innovations, the first step OTSAW needed to go through was a process of better understanding the intangible assets it had and formulating the IP strategy that would best support its business model. Collectively, this provided the ‘due diligence’ foundation on which a credible valuation report could be built.
The company’s second step was to understand its finance options and the needs of lenders and investors. One possibility the company explored was a bank loan, but despite the lender’s initial enthusiasm and support, the nature of the deep tech innovation proved to be too much of an unknown risk, especially when at a time when OTSAW itself was yet to become revenue-generative. As Ling observes,
“a bank will say, ‘if I loan you money, I must make sure that you have the ability to pay me back’. Having IP as collateral is not enough on its own—it is not land or property—and banks are very pragmatic”.
OTSAW was open to other finance options and new ideas, recognising that
“We can’t dictate the terms most of the time, it’s the banks and investors that do so. We are the ones that need to be realistic; if we want them to invest in us, we need to be flexible”.
After investigating the alternatives, OTSAW decided equity investment was preferable to a bank loan at its stage of development: “A loan is just a loan, but an investor is on the same journey with us”
The final step was to learn what an IP valuation entailed, to support the company’s discussions with potential investors. Ling explains;
“Few investors specialise in deep tech—their common denominator is to look at revenue and sales. Therefore, an IP valuation is required for a Series A or pre-Series A company with no or little commercial traction or sales revenue to justify the value being placed on technology. The company’s value is dependent on its IP, as there is no revenue, and often nothing to show for it on the company balance sheet.”
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