As intellectual capital has become a valuable asset class, firms specializing in intangible-based financing are springing up, using them to raise capital for the next round of innovation. But unlike some of the exotic financial vehicles, these new firms are using traditional financial techniques in new ways to help innovative companies. Some of those new mechanisms for intangible-based financing are discussed in a new article by Ian Ellis and Kenan Patrick Jarboe “Intangible Assets in Capital Markets”.
Published in the May/June issue of IAM Magazine (subscription required — free trials available via registration), the material is take from our report Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance by Ian Ellis.
And see also our earlier paper in Issues in Science and Technology “Intangible Assets: Innovative Financing for Innovation”.
Regardless of what you think about Wall Street and financial reform, there is one thing that has come out of the latest Goldman story: that intangibles matter. In fact, Steven Pearlstein’s comment today (Two planets collide for three hearings on Goldman) nailed it perfectly:
What we learned on Tuesday is that when Goldman Sachs lends its good name to a new offering and sends its vaunted sales force out to peddle it to some teachers’ retirement fund in Omaha or a savings bank in Bavaria, it doesn’t actually mean that Goldman thinks people should buy it.
In fact, there’s a good possibility that Goldman knows it’s a dog, or suspects that the market is about to tank, and has already lined up a big customer who wants to short the entire issue. And as Goldman sees it, the firm has no legal or ethical obligation to inform those buyers of its views or its conflicting interests.
There was a time when issuers would pay a premium to have Goldman Sachs underwrite their securities, just as there was a time when investors would pay a premium to buy into a Goldman-sponsored offering.
Today, Goldman has fully monetized the value of its reputation, and anyone who pays such a premium is a fool.
From Jack Healy’s column in the Massachusetts MEP newsletter Sales and Marketing: Manufacturing’s Biggest Deficit:
Ask any manufacturer on how they would rate their respective manufacturing operations, on a scale of 1 -10, with the number one being very bad, and ten being very good? Most responses that we have experienced to this question have been in the 7 to 9 range and indicates how these manufacturers perceive their manufacturing capabilities.
Similarly ask the same group of manufacturers (or yourself) on how they would rate their respective sales and marketing organizations, using this same evaluation scale of 1 to 10. And responses to this question usually draw poorer evaluations – in the 3 to 5 range.
In other words, what manufacturers need is not just help with the manufacturing process but help managing their intangibles — like marketing and customer relations.
To their credit, MassMEP is offering assistance in this area including an upcoming workshop to help companies:
“• Create Basic Foundations for your Sales and Marketing Strategy
• Better understand your clients
• Articulate the value of your product and your customer
• Determine if you have the right product and/or services
• Target the right markets
• Develop a structure that enables your business to grow
• Innovation impacts your company and be introduced to the MassMEP Growth Strategy Development Program”
This is the stuff MEPs should be doing. But they need to be doing more. The Administration’s budget calls for doubling the MEP budget. But, as we argued in our Policy Brief–Intellectual Capital and Revitalizing Manufacturing, the scope of this assistance to manufacturers needs to be expanded to include innovation, new product development, and utilization of intellectual capital. Manufacturing companies have a wealth of intellectual capital that they often do not recognize or manage well. MEP services must include intellectual resource management that covers a broad array of assets, beyond help with intellectual property. The program’s budget increase should be used to expand services and staffing in areas such as marketing, finance, and business model development, in addition to new product development and process adoption. The MassMEP programs are a good first step in this direction.
For years, many have been making the case that corporations need to do a better job on financial reporting, including on intangibles. In part, the concern comes from the fact that company book value and market value are so widely disparate — and that account rules don’t cover intangible assets. Accounting for intangibles (i.e. adding them to companies’ books) has been either the holy grail or the chimera of financial reporting.
I have long stressed the need for better measurement — of intangible and of innovation.
In our report Reporting Intangibles: A Hard Look at Improving Business Information in the US, I called for FASB and IASB to confront the disparity in treatment of acquired versus internally generated intangibles and for the need to address the issue of expensing R&D. But in general, I came down on the side of increased disclosure rather than attempting to add everything to the balance sheet. As I said back then, even if all the accounting problems can be fixed, there is too much important data and information that can never be reduced to an accounting valuation.
I also noted that there were efforts underway to create a more comprehensive framework for expanded business reporting, but no consensus. Now Robert G. Eccles and Michael P. Krzus have a new book out on One Report: Better Strategy through Integrated Reporting. The “One Report” would be a compilation of financial and non-financial information that could then use Internet technology and Extensible Business Reporting Language (XBRL) to provide more specific information to relevant stakeholders. It also seeks to tie non-financial and financial metrics to overall company goals and performance. As the authors describe it, there are four primary benefits to companies:
1. Greater clarity about the relationship between financial and nonfinancial key performance indicators. This will help managers understand and confront the trade-offs necessary to balance financial and societal demands.
2. Better management decisions. As noted by the creators of the Balanced Scorecard, HBS professor Robert S. Kaplan and David P. Norton, there is compelling evidence that better measurement, and therefore better information, leads to better decision-making.
3. Deeper engagement with the broad stakeholder community. First, it will help shareholders focus on more than short-term returns and better understand the investments necessary to ensure long-term viability. Second, other stakeholders will begin to appreciate the need for a company to make a profit if it is to create value over the long term.
4. Lower reputational risk resulting from integrated reporting. Stakeholder engagement leads to better mutual understanding. Clear and consistent communications about a company’s financial and nonfinancial performance will be the basis for a constructive two-way conversation.
Both Eccles and Krzus are veterans of the efforts to improve corporate reporting. We will have to see if this latest effort can help move the ball forward.
BusinessWeek has published its The 50 Most Innovative Companies. Apple continues as number one. But, the big story is the rise of Asia:
In the 2010 Bloomberg BusinessWeek annual rankings of Most Innovative Companies, 15 of the Top 50 are Asian–up from just five in 2006. In fact, for the first time since the rankings began in 2005, the majority of corporations in the Top 25 are based outside the U.S. Asia’s newfound confidence is turning up everywhere you look, from wind turbines to high-speed bullet trains, just two of the technologies China is trying to export to the U.S. “We are the most advanced in many fields,” Zheng Jian, director of high-speed rail at China’s railway ministry, told The New York Times in April. “And we are willing to share with the U.S.” The U.S., of course, still has its innovators. Apple (AAPL) remains No. 1, followed by perennial first runner-up Google (GOOG). But just ahead of General Electric (GE) in seventh and eighth places are newcomers LG Electronics of South Korea and BYD, with Korea’s Hyundai Motor claiming a spot at 22.
So, tell me again how the US will be OK as the “thinkers” while Asia are the “makers”?
And one more item on patents. The Commerce Department recently published a new paper on patent reform:
Stimulating economic growth and creating high-paying jobs are key priorities for the Obama Administration. This paper provides data demonstrating that technological innovation is a key driver of a pro-growth, job-creating agenda. It further demonstrates that patent reform legislation, by accelerating the pace of growth and of job creation, will be a powerful and deficit-neutral mechanism for expanding America’s ability to innovate.
• Technological innovation is linked to three-quarters of the Nation’s post-WW II growth rate. Two innovation-linked factors – capital investment and increased efficiency – represent 2.5 percentage points of the 3.4% average annual growth rate achieved since the 1940’s.
• Innovation produces high-paying jobs. Average compensation per employee in innovation intensive sectors increased 50% between 1990 and 2007 – nearly two and one-half times the national average.
• Highly innovative firms rely heavily on timely patents to attract venture capital — 76% of startup managers report that VC investors consider patents when making funding decisions.
• Delay in the granting of rights has substantial costs. Recent reports conclude that the U.S. backlog (currently at 750,000 applications) could ultimately cost the U.S. economy billions of dollars annually in “foregone innovation.”
• The fee-setting authority patent reform gives to the USPTO will contribute significantly to the agency’s planned 40% reduction in patent pendency.
• The enhanced post-grant review provided by patent reform will substantially reduce the need for inefficient court challenges. The cost of such proceedings is expected to be 50-100 times less expensive than litigation and could yield $8 to $15 in consumer benefit for every $1 invested.
The piece is the Administration’s shot at supporting pending legislation. That legislation may be coming to the Senate floor in the near future. According to Tech Daily, Judiciary Chairman Patrick Leahy has asked the Senate leadership to schedule the patent reform bill for consideration right after the financial reform bill. The bill might get bumped however for a supplemental defense spending bill which some would like to get done before the Memorial Day break. But even if the patent bill gets put off until after the recess, it looks like things may be finally moving.
Joff Wild at the IAM blog has a posting on a new study on royalty reporting. The report It’s Just Not Fair: Unintended and Unforeseen Interpretations of License Agreement Language by the IP consulting group Invotex claims that only 14% of royalties are correctly. As Joff goes on to explain:
In 50% of cases, Invotex says, the underreporting is caused by licensees not disclosing all sales connected to the licence, while in over 30% of cases, it results from what is described as “questionable licence interpretation”. Other causes include non-disclosure of sub-licensing agreements, mathematical errors and royalty rate errors. So, it looks like there is a combination of honest mistakes and not-so-honest lack of candour. The bottom line is that all of it will have an impact on the licensor’s bottom line – and in many cases potentially a very significant (and therefore damaging) one, especially if the licensor is an SME.
It also has an impact on our economic statistics. Even if the Invotex data is on the worst case side (as Joff points out Invotex is going to do all it can to highlight the potential problems since they are trying to drum up business), these figures are of concern. If a significant portion of sales connect to a license are not reported (which Invotex claims are the reasons for half of the underreporting), then our data on the size of the economic trade in royalties is also off.
I recently came across an OCED report from last December on The Emerging Patent Marketplace written by Tomoya Yanagisawa and Dominique Guellec. The paper covers some of the same ground as our two working papers: Intangible Asset Monetization: The Promise and the Reality and Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance. The studies start at a very different place, however. Whereas our papers come at the issue from the financing and financial markets perspective, the OECD paper starts from the rise of open innovation and the need for knowledge flows. From that perspective, the report sees the role of IP intermediaries — brokers, analytic specialists, trading platforms, etc. — as key. They also see public policy as playing an important, and balanced role:
In order to facilitate the circulation of IP and promote innovation, it will be very important that policy makers maintain the order of the IP markets by carefully prohibiting anti-innovative activities, in addition to encouraging the development of markets for IP and businesses of IP-specialist firms. Since the characteristics of each IP exploitation activity regarded as anti-innovative are varied and differ in each case, there doesn’t seem to be a specific policy that can prohibit all anti-innovative patent exploitation activities. Therefore policy makers should develop comprehensive policies which include actions in various policy areas such as IP regime, competition and tax policy. In particular policy makers should explore ways of: enhancing transparency and predictability of IPR transactions (e.g. establishing a shared understanding of reasonable market prices by encouraging the disclosure of patent licensing and sales information); strengthening trust in technology transactions by securing the quality of patents; establishing properly tuned regulations against anti-innovative activities in IPR marketplaces (e.g. finding appropriate competition enforcement policies with respect to IPR transactions, and finding appropriate patent remedy policies).
As befits its title, the report is very IP-centric in it view. It does not look at whether patents are the best way of transferring knowledge. The OECD has a “knowledge markets” project underway to look at the broader range of knowledge diffusion mechanisms. I am looking forward to the findings of that broader inquiry.
Over at the New York Times Economix blog, Edward Glaeser has an interesting posting on cities and knowledge. The posting reviews an NBER conference proceedings (which Glaeser edited) on agglomeration economies. His bottom line:
Understanding the appeal of proximity — the economic advantages of agglomeration — helps make sense of the past and future of cities. If people still clustered together primarily to reduce the costs of moving manufactured goods, then cities would become increasingly irrelevant as transportation costs continue to decline.
If cities serve, as I believe, primarily, to connect people and enable them to learn from one another, than an increasingly information-intensive economy will only make urban density more valuable.
Other chapters reinforce that view. One is by Jed Kolko on services:
Mr. Kolko highlights a fundamental difference between manufacturing and services. For manufacturing firms it doesn’t much matter if suppliers or customers are in the same ZIP code or the same state. Goods are cheap to move. But services seem tied to suppliers and customers that are in the same ZIP code. Since face-to-face contact is so much a part of service provision, they are drawn to the extreme densities of cities.
Another is by Glaeser and Giacomo Ponzetto on “Did the Death of Distance Hurt Detroit and Help New York?”:
Improvements in transportation and communication costs made it cost-effective to manufacture in low-cost areas, which led to the decline of older industrial cities like Detroit. But those same changes also increased the returns to innovation, and the free flow of ideas in cities make them natural hubs of innovation. Since the death of distance increased the scope for new innovation, idea-intensive innovating cities were helped by the same forces that hurt goods-producing cities.
A few years ago I published a report on Knowledge Management as an Economic Development Strategy. In that paper I argued that clusters form because they are efficient knowledge management mechanisms. Clusters and agglomerations facilitate the transfer of tacit knowledge. So I agree with Glaeser that cities are likely to be more not less important in a knowledge intensive economy — advances in communications and transportation notwithstanding.
And speaking of manufacturing (see yesterday’s posting), the White House Office of Science and technology Policy (OSTP) has a new background paper on Advanced Manufacturing. Be warned however, this is not a overview policy piece but a detailed analysis of the technical and economic issues. For does interest in the gritty details, it is well worth the read.
The paper is part of OSTP’s online manufacturing forum (which ends today). FYI — see my posting under “strategy” which summarizes our Policy Brief–Intellectual Capital and Revitalizing Manufacturing.