First impressions really count when you present to investors, but even well-established companies can struggle to get their message across. Every entrepreneur out there wants to make sure they have the perfect investor pitch deck with which to impress investors.
One of Gateway 2 Investment's first clients is typical of the paradox many start-ups face when they look for finance. The company, which helps media organisations communicate with their clients across different channels and counts Mercedes, Channel Five, Endemol and The Guardian as customers, says: 'It's a complex environment. Our customers understand what we do, but investors didn't. What they wanted was the elevator pitch, but it always seemed to take us 22 minutes to do the one-minute pitch. That was the problem.'
Here was a company that has proven technology and a solid customer base, and yet it couldn't get the ear of investors. G2I helped by bringing investors to the table who were prepared to listen to a more complex proposition, and the company now has agreements in place for a considerable investment to follow: 'It allowed us to engage with investors for a longer period of time and in a way that suited us, so we could explain our business better and its benefits.'
It's not uncommon for smaller organisations to struggle with the presentation of a business idea. In fact, the government-backed Access 2 Finance scheme was set up in response to research backed by the London Development Agency, which found that the key reason businesses failed to raise finance was the way they presented themselves to investors. 'You want investors to ask questions,' says Richard Ellis, a business advisor with Business Link 4 London. 'But you don't want them to have reams and reams of questions. The business plan should cover off most of what they need to know.'
In many cases, however, poor presentation is a symptom of deeper running problems, and many start-ups struggle with more fundamental issues than merely explaining their idea. Geoff Sankey, managing director of The Capital Fund, says a surprising number of companies neglect the basics of sales, product and management - out of some 40 opportunities he receives every month, 'quite a number' are purely conceptual. 'People say they have an idea - and would we like to invest in it?'
Doug Richard, chairman of Library House, has had plenty of experience of entrepreneurs with great ideas but little perception of their market potential. As well as providing an on-line investment readiness test at Library House, Richard is a panellist on the 'Dragon's Den' TV programme, for which he spent 180 hours listening to pitches from 82 companies. 'I know what it's like when things don't exist to make entrepreneurs investment-ready,' he says, adding: 'But it's not rocket science - if it was then companies like Microsoft wouldn't exist. It's a matter of step-by-step planning and approaching that in a logical fashion.'
Richard says many entrepreneurs get so caught up in their idea that they ignore core issues such as whether there's a market for their product. 'I call them Hamlet investments [after the cigar adverts] - fantastic opportunities that are fatally flawed.' Richard agrees what entrepreneurs need is 'to be put in a position where they can get an honest answer, to understand what investors think about, what they look for and how to approach them.' Advisors may be able to help pick holes in a presentation and present the company in a more favourable light. 'Sometimes the business is ready, but it needs to fix or consolidate a few things, then come back in six months,' says Ellis. 'It's a clich�, but you'll never get a second chance to make a first impression.'
One of the key pieces of advice any professional adviser will offer is to give the process enough time and effort. Companies need to be prepare upfront for the fact that it can take six to nine months to hone a business plan, present to investors and get money in. 'If you go into this half-baked, you'll get a half-baked outcome,' says John Blowers, managing director of equity funding exchange AngelBourse. 'But if you can get together enough funds to spend on the right advisor and raise enough finance to extend the runway sufficiently, then it's worth the effort.'
By David Longworth
Sunday, May 20, 2007
Saturday, March 24, 2007
International Investment Capital
London may be the top European city for tech investment, but it still lags Silicon Valley. Entrepreneurs and investors gathered last week to discuss the challenges they face - and some solutions
'London is like a country in its own right,' observed Jens Lapinski, VP of analysis and consulting at Library House, about the capital's success in attracting venture capital. He was speaking at an event at Grant Thornton House last week to mark the unveiling of a new report from g2i, 'London: Anchoring European Technology Investment', which describes London as the best city to attract investment across Europe.
According to Library House's analysis of recognised investment deals, London received �485m venture capital in 2005, which is 38% of the total invested in the UK and more than the total invested in the whole of France (�457m) and Germany (�363m). The picture is particularly bright for technology companies, with IT accounting for a third of that investment, closely followed by the retail and services sector.
However, to put those figures in context, Silicon Valley attracts ten times the investment of London, according to Ernst and Young's Global Venture Capital Insights Report 2006. In fact, over 35% of the �12bn venture capital invested in the US went into Silicon Valley. Lapinski suggested that in order to catch up, London should form a 'super-cluster' with Oxford and Cambridge and 'build the things we need to support that - the infrastructure, finance and access to markets.' The aim would be to encourage collaboration across the South East, rather than each investment centre doing its own thing.
Just as important, while VC funds may be flowing, there are still significant obstacles for entrepreneurs to overcome earlier in the business cycle, not least in bridging the gap between early stage finance and venture capital. Angel funding is widely available in London - it's accessing it that's the problem, according to David Hunter, managing director of investment at funding body Nesta. Initiatives are in hand to formalise London's angel networks, including the recent formation of the British Business Angels Association, supported by Nesta. But Hunter said networks need to be clustered together better as they are around the universities in Oxford and Cambridge.
At the same time, many believe that more can be done with grants. Nesta itself handed out �22m in grants last year, many of which were in London, and the capital accounts for the single largest share of research grants. Nonetheless, Hunter suggested that some companies were leaving London because they thought they stood a better chance of accessing regional development grants.
Serial entrepreneur Philip Birch, CEO of Imperial College London spin-outs Veryan Medical and Heliswirl, called on the government to provide more help for London's entrepreneurs: 'There's a tendency [for the government] to think London is so well catered for, with experienced management teams and a truly fantastic investor base, that we'll find our own money. But a grant provides that first bit of undiluted capital that can get a company out of the starting blocks.'
Sarika Patel, director of enterprise and technology at Grant Thornton, one of the g2i partner companies, agreed that early stage funding was still a weakness in the capital, but argued that g2i was going some way to redressing this by helping companies access funding from the �50,000 to �2m mark: 'Before g2i there was nothing that connected the money and the companies seeking it across London,' she said. 'g2i brings a wide skillset and is putting those networks in place.' In assessing up to 25 companies a month for investment readiness, g2i looks at factors like skills gaps in management teams, technology weaknesses and the IP potential, as well as investigating joint venture opportunities and routes to market for its candidate companies.
Part of the investment equation is about growth potential, and many start-ups fall into the category of 'lifestyle businesses' that are happy to keep ticking over and surviving on cash flow, but with no dramatic ambitions to grow. One entrepreneur presenting at the event, Jon Holmes, CEO of Michelson Diagnostics, said it came down to motivation. 'You've got to be clear on why you're going into this. If you want to make a bit of money to support your family, that's not enough. You've got to really crave success.'
By David Longworth, Webster Buchanan Research
'London is like a country in its own right,' observed Jens Lapinski, VP of analysis and consulting at Library House, about the capital's success in attracting venture capital. He was speaking at an event at Grant Thornton House last week to mark the unveiling of a new report from g2i, 'London: Anchoring European Technology Investment', which describes London as the best city to attract investment across Europe.
According to Library House's analysis of recognised investment deals, London received �485m venture capital in 2005, which is 38% of the total invested in the UK and more than the total invested in the whole of France (�457m) and Germany (�363m). The picture is particularly bright for technology companies, with IT accounting for a third of that investment, closely followed by the retail and services sector.
However, to put those figures in context, Silicon Valley attracts ten times the investment of London, according to Ernst and Young's Global Venture Capital Insights Report 2006. In fact, over 35% of the �12bn venture capital invested in the US went into Silicon Valley. Lapinski suggested that in order to catch up, London should form a 'super-cluster' with Oxford and Cambridge and 'build the things we need to support that - the infrastructure, finance and access to markets.' The aim would be to encourage collaboration across the South East, rather than each investment centre doing its own thing.
Just as important, while VC funds may be flowing, there are still significant obstacles for entrepreneurs to overcome earlier in the business cycle, not least in bridging the gap between early stage finance and venture capital. Angel funding is widely available in London - it's accessing it that's the problem, according to David Hunter, managing director of investment at funding body Nesta. Initiatives are in hand to formalise London's angel networks, including the recent formation of the British Business Angels Association, supported by Nesta. But Hunter said networks need to be clustered together better as they are around the universities in Oxford and Cambridge.
At the same time, many believe that more can be done with grants. Nesta itself handed out �22m in grants last year, many of which were in London, and the capital accounts for the single largest share of research grants. Nonetheless, Hunter suggested that some companies were leaving London because they thought they stood a better chance of accessing regional development grants.
Serial entrepreneur Philip Birch, CEO of Imperial College London spin-outs Veryan Medical and Heliswirl, called on the government to provide more help for London's entrepreneurs: 'There's a tendency [for the government] to think London is so well catered for, with experienced management teams and a truly fantastic investor base, that we'll find our own money. But a grant provides that first bit of undiluted capital that can get a company out of the starting blocks.'
Sarika Patel, director of enterprise and technology at Grant Thornton, one of the g2i partner companies, agreed that early stage funding was still a weakness in the capital, but argued that g2i was going some way to redressing this by helping companies access funding from the �50,000 to �2m mark: 'Before g2i there was nothing that connected the money and the companies seeking it across London,' she said. 'g2i brings a wide skillset and is putting those networks in place.' In assessing up to 25 companies a month for investment readiness, g2i looks at factors like skills gaps in management teams, technology weaknesses and the IP potential, as well as investigating joint venture opportunities and routes to market for its candidate companies.
Part of the investment equation is about growth potential, and many start-ups fall into the category of 'lifestyle businesses' that are happy to keep ticking over and surviving on cash flow, but with no dramatic ambitions to grow. One entrepreneur presenting at the event, Jon Holmes, CEO of Michelson Diagnostics, said it came down to motivation. 'You've got to be clear on why you're going into this. If you want to make a bit of money to support your family, that's not enough. You've got to really crave success.'
By David Longworth, Webster Buchanan Research
Why People will always be key to success
Experts argue that getting the right management team can do more for the success of a tech company than the quality of its products. The trouble is, many start-ups can't afford to hire the best talent.
'I would much rather have a first-rate management team with average technology than have the reverse - a first-rate technology with a second-rate management team. The strong management team is much more likely to succeed.'
So says John Preston, associate director of the Entrepreneurship Center at the highly-regarded Massachusetts Institute of Technology, in a paper entitled 'Success Factors in Technology-Based Entrepreneurship'. With extensive experience helping commercialise inventions from MIT students and faculty, he's seen numerous tech start-ups in action, and he believes the composition of the senior management team is one of the key ingredients. 'One of the false impressions about entrepreneurship is that entrepreneurship is an individual behaviour,' Preston says. He points to work carried out by Professor Ed Roberts from the Sloan School of Management, who found that a company's chances of success increased dramatically as the size of the team grew, up to four or five founders.
But for many start-ups, building a management team is ultimately about making the most of whatever resource is available. Many companies are set up by former colleagues or friends of friends who share a common product vision, and it's often more by luck than judgement if the team ends up with the right balance of skills. The majority of hi-tech firms are set up either by a technology specialist with a product vision, or a sales and marketing professional who spots a market opportunity - it's relatively rare for someone to have both skillsets, and it's not uncommon for tech start-ups to fall short on the sales and marketing expertise. These core skills will need to be complemented with day-to-day financial expertise and broader strategic insight: in addition, many companies will seek out a non-executive 'expert' to add credibility in the eyes of investors and customers.
Even if they recognise the need to bring in additional expertise, however, most start-ups lack the resource to do so. As John Blowers, managing director of equity funding exchange AngelBourse, points out: 'Equity capital is so scarce at this level that they can't afford to headhunt key people - so they will try [people] they know who they can beg, steal or borrow. Not many start-ups are in a position to find an 'A' team.'
Most start-ups face up to these recruitment problems with a degree of pragmatism. Temporary help is one solution, although it's not always easy to find the right people - while interim management companies do operate in the start-up tech sector, the shortage of funds makes this a less attractive market for them to focus on. Networking events are also a potential hunting ground, particularly for non-executives, although they need to be approached with a degree of caution. As Blowers points out, at worst you may find 'a rather motley collection of saggy grey suits hoping to pick up some consulting work'.
Some of these senior management challenges ease when organisations make it as far as first round venture funding, where the combination of VC vested interest and a large infusion of cash helps tackle some of the recruitment problems. In many cases, VCs will bring in their own people to fill gaps on a short-term basis, or recommend independent external directors with particular expertise. Mark Albert, Partner at Seattle-based international law firm Perkins Coie, says the most successful start-up he's worked with was a software house that lacked both sales and marketing expertise, and hired two non-executive directors with experience in each. Their role was not confined to the boardroom: as well as attending board meetings, each worked directly with the sales and marketing team on a regular basis to help with both operational and strategic issues. In some companies, a non-executive's industry connections may also open the door for sales opportunities.
Carl Showalter, general partner at early-stage venture specialist Lightspeed Venture Partners in Silicon Valley, points out that given their extensive contact network, these independent directors may also be able to help recruit additional senior executives. That will come as a welcome relief to many technically-oriented founders who are uncomfortable assuming the role of chief executive but are unsure how to find a replacement.
In the long-term, the choice of independent director can prove critical. The typical hi-tech board of a financed company consists of five people - an uneven number designed to avoid paralysis through tied votes - and is usually made up of two founders, two representatives of the VC, and an independent director. There's an inherent conflict in this set-up: although the VC-appointed directors are charged with growing the company, they also have a responsibility to their own venture capital firm, and those interests may not always go hand-in-hand. As a result, the independent director may be in a pivotal position when it comes to bringing an objective view and making decisions.
'The independent person should clearly be an expert in the areas you need most help in,' concludes Albert. 'They should complement, not counteract, the CEO. You have to take a look at where you are today and where you want to be two years from now, and see what areas of your team are most lacking.'
Written by Keith Rogers, Webster Buchanan Research
'I would much rather have a first-rate management team with average technology than have the reverse - a first-rate technology with a second-rate management team. The strong management team is much more likely to succeed.'
So says John Preston, associate director of the Entrepreneurship Center at the highly-regarded Massachusetts Institute of Technology, in a paper entitled 'Success Factors in Technology-Based Entrepreneurship'. With extensive experience helping commercialise inventions from MIT students and faculty, he's seen numerous tech start-ups in action, and he believes the composition of the senior management team is one of the key ingredients. 'One of the false impressions about entrepreneurship is that entrepreneurship is an individual behaviour,' Preston says. He points to work carried out by Professor Ed Roberts from the Sloan School of Management, who found that a company's chances of success increased dramatically as the size of the team grew, up to four or five founders.
But for many start-ups, building a management team is ultimately about making the most of whatever resource is available. Many companies are set up by former colleagues or friends of friends who share a common product vision, and it's often more by luck than judgement if the team ends up with the right balance of skills. The majority of hi-tech firms are set up either by a technology specialist with a product vision, or a sales and marketing professional who spots a market opportunity - it's relatively rare for someone to have both skillsets, and it's not uncommon for tech start-ups to fall short on the sales and marketing expertise. These core skills will need to be complemented with day-to-day financial expertise and broader strategic insight: in addition, many companies will seek out a non-executive 'expert' to add credibility in the eyes of investors and customers.
Even if they recognise the need to bring in additional expertise, however, most start-ups lack the resource to do so. As John Blowers, managing director of equity funding exchange AngelBourse, points out: 'Equity capital is so scarce at this level that they can't afford to headhunt key people - so they will try [people] they know who they can beg, steal or borrow. Not many start-ups are in a position to find an 'A' team.'
Most start-ups face up to these recruitment problems with a degree of pragmatism. Temporary help is one solution, although it's not always easy to find the right people - while interim management companies do operate in the start-up tech sector, the shortage of funds makes this a less attractive market for them to focus on. Networking events are also a potential hunting ground, particularly for non-executives, although they need to be approached with a degree of caution. As Blowers points out, at worst you may find 'a rather motley collection of saggy grey suits hoping to pick up some consulting work'.
Some of these senior management challenges ease when organisations make it as far as first round venture funding, where the combination of VC vested interest and a large infusion of cash helps tackle some of the recruitment problems. In many cases, VCs will bring in their own people to fill gaps on a short-term basis, or recommend independent external directors with particular expertise. Mark Albert, Partner at Seattle-based international law firm Perkins Coie, says the most successful start-up he's worked with was a software house that lacked both sales and marketing expertise, and hired two non-executive directors with experience in each. Their role was not confined to the boardroom: as well as attending board meetings, each worked directly with the sales and marketing team on a regular basis to help with both operational and strategic issues. In some companies, a non-executive's industry connections may also open the door for sales opportunities.
Carl Showalter, general partner at early-stage venture specialist Lightspeed Venture Partners in Silicon Valley, points out that given their extensive contact network, these independent directors may also be able to help recruit additional senior executives. That will come as a welcome relief to many technically-oriented founders who are uncomfortable assuming the role of chief executive but are unsure how to find a replacement.
In the long-term, the choice of independent director can prove critical. The typical hi-tech board of a financed company consists of five people - an uneven number designed to avoid paralysis through tied votes - and is usually made up of two founders, two representatives of the VC, and an independent director. There's an inherent conflict in this set-up: although the VC-appointed directors are charged with growing the company, they also have a responsibility to their own venture capital firm, and those interests may not always go hand-in-hand. As a result, the independent director may be in a pivotal position when it comes to bringing an objective view and making decisions.
'The independent person should clearly be an expert in the areas you need most help in,' concludes Albert. 'They should complement, not counteract, the CEO. You have to take a look at where you are today and where you want to be two years from now, and see what areas of your team are most lacking.'
Written by Keith Rogers, Webster Buchanan Research
Wednesday, March 14, 2007
The New Rules on Outsourcing
Outsourcing product development is an attractive option for many start-ups. But as the services industry matures, entrepreneurs face new challenges in the way they manage their business partners
If you're wondering how to tap into the Indian skills markets and take advantage of the huge IT talent pool in Eastern Europe, it may be worth taking a quick trip to Richmond. Just along the Sheen Road you'll find the UK sales offices of GlobalLogic, a software engineering services company. With a global HQ in the US and development centres in India, China and Ukraine, it provides early and mid-stage software developers with a range of outsourced services, from help with initial design through to usability testing.
Given that the ratio of people costs to infrastructure has become so heavily-weighted in favour of the employee in the UK and US, it's no surprise that the idea of outsourcing parts of the product development cycle is becoming such an attractive option. Finding the right skills at a reasonable price can be a real challenge in some sectors, both geographically and in particular specialities - and finding the right combination of talent, price and personality can be even tougher, particularly in start-ups where team dynamics matter so much. Tapping into offshore skills, where the cost base is so much lower, definitely has a lot going for it.
One of the many challenges with offshoring, though, is that you have to know where to start. You might have a vague idea where Kiev is - you might even have an in-depth understanding of the nuances behind the explosive economic growth of India. But it's not as if you can just turn up in a hotel and start interviewing the locals. Companies like GlobalLogic, which has a bank of recruiters in India and clams to be the largest IT employer in Kiev, do have something of an edge in terms of brand, reach and hiring clout.
GlobalLogic operates as an offshore partner, working closely with client teams and handling the heavyweight coding and management of software development projects. Providing these kinds of services takes you several steps higher up the value stack than traditional infrastructure outsourcing, which tends to focus on providing infrastructure and tools to work with - these types of services, by contrast, are core to your business proposition. But ultimately, the principles underpinning any kind of outsourcing arrangement are the same. It's all about drawing a line to work out where you're comfortable collaborating with third parties, and where you feel functions are so critical that you have to run them in-house.
The problem start-ups face, of course, is that working in this kind of partnership is often unfamiliar territory. Many entrepreneurs have limited experience working alongside third party suppliers, and there's inevitably some level of friction as they muddle through the business processes and communications issues. In the future, this gap in experience may well broaden, because service providers' own expectations are now evolving.
Take GlobalLogic itself. When I met Tarun Upadhyay, the company's chief software architect, at a recent conference in San Francisco, he argued that what GlobalLogic offers is 'second generation' outsourcing. Early forms of outsourcing, particularly in the IT sector, tended to be characterised by arms-length relationships - put crudely, the idea from the customer's perspective was to get rid of a problem and wait to get the results. But that's not a particularly strong basis for a business relationship. For one thing, it's adversarial - so when problems crop up, they tend to erupt in bouts of finger-pointing rather than a combined effort to put things right. Given that blame usually lies on both sides of the fence when things go wrong, especially when it comes to communications breakdowns or missed commitments in complex collaborative tasks, it's not particularly helpful to start totting up who made the biggest number of screw-ups.
Upadhyay argues that start-ups need to approach the outsourced business relationship on the basis of building a single team - and this has some radical implications. To begin with, he believes entrepreneurs need to treat outsourced contractors in the same way they do their own employees. If you give your in-house technical people an unscheduled bonus when things go well, count the outsourced staff in as well. In fact, he says, some customers go as far as taking part in joint performance appraisals of GlobalLogic employees, and one or two of them have even handed over stock options to outsourced staff.
This kind of collaborative model isn't going to work for everybody, of course, but it may be one more indication of how working patterns are shifting - and of the opportunities and challenges that lie ahead as they evolve. Entrepreneurial companies of all sizes are having to work out how to partner and collaborate with independent individuals and third party organizations as they bring together the different skills they need. Treating outsourcers as collaborative partners rather than mere service providers is just one more piece of that puzzle.
By Keith Rodgers, Webster Buchanan Research
If you're wondering how to tap into the Indian skills markets and take advantage of the huge IT talent pool in Eastern Europe, it may be worth taking a quick trip to Richmond. Just along the Sheen Road you'll find the UK sales offices of GlobalLogic, a software engineering services company. With a global HQ in the US and development centres in India, China and Ukraine, it provides early and mid-stage software developers with a range of outsourced services, from help with initial design through to usability testing.
Given that the ratio of people costs to infrastructure has become so heavily-weighted in favour of the employee in the UK and US, it's no surprise that the idea of outsourcing parts of the product development cycle is becoming such an attractive option. Finding the right skills at a reasonable price can be a real challenge in some sectors, both geographically and in particular specialities - and finding the right combination of talent, price and personality can be even tougher, particularly in start-ups where team dynamics matter so much. Tapping into offshore skills, where the cost base is so much lower, definitely has a lot going for it.
One of the many challenges with offshoring, though, is that you have to know where to start. You might have a vague idea where Kiev is - you might even have an in-depth understanding of the nuances behind the explosive economic growth of India. But it's not as if you can just turn up in a hotel and start interviewing the locals. Companies like GlobalLogic, which has a bank of recruiters in India and clams to be the largest IT employer in Kiev, do have something of an edge in terms of brand, reach and hiring clout.
GlobalLogic operates as an offshore partner, working closely with client teams and handling the heavyweight coding and management of software development projects. Providing these kinds of services takes you several steps higher up the value stack than traditional infrastructure outsourcing, which tends to focus on providing infrastructure and tools to work with - these types of services, by contrast, are core to your business proposition. But ultimately, the principles underpinning any kind of outsourcing arrangement are the same. It's all about drawing a line to work out where you're comfortable collaborating with third parties, and where you feel functions are so critical that you have to run them in-house.
The problem start-ups face, of course, is that working in this kind of partnership is often unfamiliar territory. Many entrepreneurs have limited experience working alongside third party suppliers, and there's inevitably some level of friction as they muddle through the business processes and communications issues. In the future, this gap in experience may well broaden, because service providers' own expectations are now evolving.
Take GlobalLogic itself. When I met Tarun Upadhyay, the company's chief software architect, at a recent conference in San Francisco, he argued that what GlobalLogic offers is 'second generation' outsourcing. Early forms of outsourcing, particularly in the IT sector, tended to be characterised by arms-length relationships - put crudely, the idea from the customer's perspective was to get rid of a problem and wait to get the results. But that's not a particularly strong basis for a business relationship. For one thing, it's adversarial - so when problems crop up, they tend to erupt in bouts of finger-pointing rather than a combined effort to put things right. Given that blame usually lies on both sides of the fence when things go wrong, especially when it comes to communications breakdowns or missed commitments in complex collaborative tasks, it's not particularly helpful to start totting up who made the biggest number of screw-ups.
Upadhyay argues that start-ups need to approach the outsourced business relationship on the basis of building a single team - and this has some radical implications. To begin with, he believes entrepreneurs need to treat outsourced contractors in the same way they do their own employees. If you give your in-house technical people an unscheduled bonus when things go well, count the outsourced staff in as well. In fact, he says, some customers go as far as taking part in joint performance appraisals of GlobalLogic employees, and one or two of them have even handed over stock options to outsourced staff.
This kind of collaborative model isn't going to work for everybody, of course, but it may be one more indication of how working patterns are shifting - and of the opportunities and challenges that lie ahead as they evolve. Entrepreneurial companies of all sizes are having to work out how to partner and collaborate with independent individuals and third party organizations as they bring together the different skills they need. Treating outsourcers as collaborative partners rather than mere service providers is just one more piece of that puzzle.
By Keith Rodgers, Webster Buchanan Research
Saturday, February 24, 2007
The Problem with Investors
Everyone works hard to ensure that investment deals get completed once they're agreed in principle - but a surprising number don't. What are the most common problems, and how can you head them off?
If you're worried about going through due diligence, spare a thought for some of the world's less mature entrepreneurial environments. A staggering 70 per cent of deals in emerging markets fall through after investors have conducted background checks, according to a survey of foreign investment executives by Deloitte - often, it seems, because company founders lack the necessary 'integrity' for their investment. In the UK, start-ups tend to feature more reputable management teams, but - depending on whose figures you believe - anywhere up to a third of deals can fall apart after the initial terms sheet has been issued.
It's the last thing anyone wants to happen after all the hard work that's put into pitching for deals, but the final negotiations in any investment can be a fraught time. Either side can get cold feet when they're confronted with the reality of the deal. So what are the most common causes of deals falling down after they've been agreed in principle?
The first cause is when due diligence turns up something unexpected. 'In our experience of working with one of the early-stage investment funds, one in four deals have fallen through in the past two years,' says John Foundling, head of corporate finance at chartered accountancy firm Morley and Scott. 'But our whole approach to due diligence on behalf of investors is about driving into any issues that emerge as soon as possible, getting prompt responses and feedback and suggesting how we believe a potential risk area can be mitigated against in some way.'
This approach is reflected in the due diligence report it produces, which the investee company may be shown and asked to vouchsafe as to its factual accuracy. Foundling says it's like an 'exception report', drilling into any potential issues that may arise.
Foundling gives the example of financial projections, which can cause problems but are usually not a deal breaker. 'We look at the mechanics and the structure, the assumptions behind them and check all the basics, and if we find a problem, in conjunction with the investor we may ask for a new set of projections.' Problems usually revolve around technical issues - such as a creditor or debtor not being factored in correctly, or some other discrepancy between the cash flow and the balance sheet. Morley and Scott may even recommend that a new management accounting system be introduced - it's that practical.
It will also look at the credibility of projections, running what Foundling calls a 'sensitivity test', and will flag up if they seem over-optimistic, although the ultimate say on believability rests with the investment manager themselves. A set of projections was highlighted in a recent deal because they appeared to be too linear, for example. 'That's not necessarily a problem, but it implies a simplistic approach. It depends how bullish they've been as to whether it's an issue or not.'
More likely to emerge as a problem in due diligence is the issue of Intellectual Property (IP) ownership, according to Ted Dewhurst, an associate at legal firm Nabarro. 'The area where most early-stage high-tech companies encounter problems is to do with IP, and the most common thing we find is they don't own their technology. If it's owned by the founders, that's quite simple to sort out. But if it's licensed from somebody else that can be a problem.'
Dewhurst says once you look into the licence, alarm bells start ringing if it's capable of being revoked at short notice, or if it's non-exclusive or ambiguous. 'If the business is built on licensed software you want that licence to be perpetual and irrevocable. If it can be terminated or it's not exclusive, then that's not good news.'
A third reason for a deal falling through - and probably the most common - is that the two parties fail to agree a price, or the entrepreneur has a better offer, otherwise known as gazumping. Dewhurst says this was more common last year and the year before when there were a lot of funds looking to invest in a relatively small pool of investment-ready companies.
It's not necessarily a bad strategy for a start-up to get to an advanced stage with a couple of investors - in fact, it can help push a deal through if you let it be known that another investor is waiting to step in. But the investment community is relatively small and deals that are done on trust can be soured if you don't play the game with a straight bat. 'We always assume that having got that far, the investee company will complete the deal,' says Dewhurst. 'But over the last two years there has been sufficient competition for good deals for gazumping to happen.'
Time, of course, is of the essence, and advisors are all too aware of the need for speed. Dewhurst says Nabarro is typically asked to have its draft assessment documents with the client within 48 hours and to complete the assessment in two to three weeks. Foundling, however, points out that for smaller deals, early-stage investors will be unlikely to want to expend too much time on a complex due diligence, given the associated opportunity costs. 'I would say that investors tend to be relatively risk averse,' he adds, 'by which I mean that if by waiting a few more weeks the risk in the investment becomes clearer, then they will wait. It's much easier to wait for the circumstances to change than decline an investment or rush forward with an investment they're not comfortable with.'
Which helps explain the next reason - a downturn in the company's fortunes. 'Poor results in terms of the current trading falling short of projections is a reason deals fall through,' says Dewhurst. 'It could be that trading has taken a turn for the worse or perhaps it's never picked up in the way they were projecting.'
The final reason is perhaps the hardest to guard against - the human factor. Dewhurst says that if an entrepreneur isn't used to dealing with VCs, they can be intimidated by the documents when they first see them. 'When they start talking to investors it's all very friendly, but when they see what they're asked to give in the way of warrants and assurances, restrictions on employment, service contracts, share transfers, putting in place share option schemes - they sometimes think it's outrageous. We can usually calm them down and it won't throw the deal.
'When VCs invest millions in a company, it's their duty to protect their clients' investment and they really have no power other than what's in the investment document.'
Foundling, whose firm also acts as a lead advisor to companies seeking investment, adds that it's important to think about the deal in the round from the very start. 'At the beginning, the focus in nine out of ten cases is on the percentage [of equity they are giving away]. It's only later, as they take legal advice and tie up the legal documents, that they understand the warranties they have to give - that the business plan is accurate and complete and not misleading, for example. What I try to impress on companies as a lead advisor is that they shouldn't be afraid to give warranties, because if they're asked to give a warranty they're not happy about, then there's already a potential problem between them and the investor.'
He concludes: 'At the end of the day it's about the convergence of interests between the investee and the investor. It's important that you choose the right investor, and what the deal means for you is often hidden in the terms and conditions and the details.'
By David Longworth, Webster Buchanan Research
For South African Business Invetment Opportunities and Capital check out SA Investors Network
If you're worried about going through due diligence, spare a thought for some of the world's less mature entrepreneurial environments. A staggering 70 per cent of deals in emerging markets fall through after investors have conducted background checks, according to a survey of foreign investment executives by Deloitte - often, it seems, because company founders lack the necessary 'integrity' for their investment. In the UK, start-ups tend to feature more reputable management teams, but - depending on whose figures you believe - anywhere up to a third of deals can fall apart after the initial terms sheet has been issued.
It's the last thing anyone wants to happen after all the hard work that's put into pitching for deals, but the final negotiations in any investment can be a fraught time. Either side can get cold feet when they're confronted with the reality of the deal. So what are the most common causes of deals falling down after they've been agreed in principle?
The first cause is when due diligence turns up something unexpected. 'In our experience of working with one of the early-stage investment funds, one in four deals have fallen through in the past two years,' says John Foundling, head of corporate finance at chartered accountancy firm Morley and Scott. 'But our whole approach to due diligence on behalf of investors is about driving into any issues that emerge as soon as possible, getting prompt responses and feedback and suggesting how we believe a potential risk area can be mitigated against in some way.'
This approach is reflected in the due diligence report it produces, which the investee company may be shown and asked to vouchsafe as to its factual accuracy. Foundling says it's like an 'exception report', drilling into any potential issues that may arise.
Foundling gives the example of financial projections, which can cause problems but are usually not a deal breaker. 'We look at the mechanics and the structure, the assumptions behind them and check all the basics, and if we find a problem, in conjunction with the investor we may ask for a new set of projections.' Problems usually revolve around technical issues - such as a creditor or debtor not being factored in correctly, or some other discrepancy between the cash flow and the balance sheet. Morley and Scott may even recommend that a new management accounting system be introduced - it's that practical.
It will also look at the credibility of projections, running what Foundling calls a 'sensitivity test', and will flag up if they seem over-optimistic, although the ultimate say on believability rests with the investment manager themselves. A set of projections was highlighted in a recent deal because they appeared to be too linear, for example. 'That's not necessarily a problem, but it implies a simplistic approach. It depends how bullish they've been as to whether it's an issue or not.'
More likely to emerge as a problem in due diligence is the issue of Intellectual Property (IP) ownership, according to Ted Dewhurst, an associate at legal firm Nabarro. 'The area where most early-stage high-tech companies encounter problems is to do with IP, and the most common thing we find is they don't own their technology. If it's owned by the founders, that's quite simple to sort out. But if it's licensed from somebody else that can be a problem.'
Dewhurst says once you look into the licence, alarm bells start ringing if it's capable of being revoked at short notice, or if it's non-exclusive or ambiguous. 'If the business is built on licensed software you want that licence to be perpetual and irrevocable. If it can be terminated or it's not exclusive, then that's not good news.'
A third reason for a deal falling through - and probably the most common - is that the two parties fail to agree a price, or the entrepreneur has a better offer, otherwise known as gazumping. Dewhurst says this was more common last year and the year before when there were a lot of funds looking to invest in a relatively small pool of investment-ready companies.
It's not necessarily a bad strategy for a start-up to get to an advanced stage with a couple of investors - in fact, it can help push a deal through if you let it be known that another investor is waiting to step in. But the investment community is relatively small and deals that are done on trust can be soured if you don't play the game with a straight bat. 'We always assume that having got that far, the investee company will complete the deal,' says Dewhurst. 'But over the last two years there has been sufficient competition for good deals for gazumping to happen.'
Time, of course, is of the essence, and advisors are all too aware of the need for speed. Dewhurst says Nabarro is typically asked to have its draft assessment documents with the client within 48 hours and to complete the assessment in two to three weeks. Foundling, however, points out that for smaller deals, early-stage investors will be unlikely to want to expend too much time on a complex due diligence, given the associated opportunity costs. 'I would say that investors tend to be relatively risk averse,' he adds, 'by which I mean that if by waiting a few more weeks the risk in the investment becomes clearer, then they will wait. It's much easier to wait for the circumstances to change than decline an investment or rush forward with an investment they're not comfortable with.'
Which helps explain the next reason - a downturn in the company's fortunes. 'Poor results in terms of the current trading falling short of projections is a reason deals fall through,' says Dewhurst. 'It could be that trading has taken a turn for the worse or perhaps it's never picked up in the way they were projecting.'
The final reason is perhaps the hardest to guard against - the human factor. Dewhurst says that if an entrepreneur isn't used to dealing with VCs, they can be intimidated by the documents when they first see them. 'When they start talking to investors it's all very friendly, but when they see what they're asked to give in the way of warrants and assurances, restrictions on employment, service contracts, share transfers, putting in place share option schemes - they sometimes think it's outrageous. We can usually calm them down and it won't throw the deal.
'When VCs invest millions in a company, it's their duty to protect their clients' investment and they really have no power other than what's in the investment document.'
Foundling, whose firm also acts as a lead advisor to companies seeking investment, adds that it's important to think about the deal in the round from the very start. 'At the beginning, the focus in nine out of ten cases is on the percentage [of equity they are giving away]. It's only later, as they take legal advice and tie up the legal documents, that they understand the warranties they have to give - that the business plan is accurate and complete and not misleading, for example. What I try to impress on companies as a lead advisor is that they shouldn't be afraid to give warranties, because if they're asked to give a warranty they're not happy about, then there's already a potential problem between them and the investor.'
He concludes: 'At the end of the day it's about the convergence of interests between the investee and the investor. It's important that you choose the right investor, and what the deal means for you is often hidden in the terms and conditions and the details.'
By David Longworth, Webster Buchanan Research
For South African Business Invetment Opportunities and Capital check out SA Investors Network
Saturday, February 10, 2007
Entrepreneurs & Technology
Most technology entrepreneurs are creative by nature - but they don't always know how to hire the other innovators they need. Management guru Dr John Sullivan has strong views on how to get that right
Dr John Sullivan isn't known for holding back on his opinions. A professor at San Francisco State University and a well-known authority on people management issues, he's a frequent fixture at conferences and in the media expounding his views on how poorly most companies handle their employees. And talking to him a couple of weeks ago, one thing that's particularly irking him today is how companies mismanage their innovators.
While some of his views will be largely academic to smaller companies - his complaints about the inadequacies of many HR professionals make for entertaining reading, for example, but don't really matter if your workforce isn't big enough to hire one - much of his agenda drives to the heart of what makes a business succeed. Firstly, like a growing number of experts in the people management arena, Dr Sullivan believes recruitment is a sales and marketing activity rather than an HR discipline (see 'Candidate or Customer?' [TECHNICAL; 220035]). Good quality people are in high demand, and you need to adopt the same techniques to sign them up as you apply to winning a customer. While old school recruitment philosophy says candidates need to convince you to hire them, securing good people today is as much about convincing them that you're the best place for them to work.
So how exactly do you do that? To begin with, argues Dr Sullivan, you need to find out what factors they'll take into account when they decide on a job - what he calls their acceptance criteria. You can ask them direct when they put in an application or during the job interview - or you can be a little more circumspect and simply ask them to describe their dream job. Either way, it's unlikely that their goal is going to correspond exactly with the role you've created, so you need to adjust your sales pitch to hone in on areas where the two do cross over. In fact, if you've found a really good candidate, you might even change the role you'd mapped out - better to have a great person in a slightly different job than a mediocre operator who ticks all the boxes.
Secondly, you need to stand out from the rest of the people fighting for talent - so you've got to have what Dr Sullivan calls the 'wow' factor. In the technology field, companies like Google and Genentech have long attracted applicants by doing things differently. Google in particular has ripped up much of the employee rule book, famously shipping its Bay Area employees into work in limousine shuttles and providing free gourmet food at its campus restaurants. It also encourages engineers to work on their own projects one day a week, a policy that has helped spawn a huge number of its inventions. Likewise, biotech giant Genentech owes much of the success of one of its most successful therapies, Herceptin, to the 'underground' research culture it fostered, where scientists were encouraged to research their own projects. Breaking the rules to foster creativity creates a buzz and gets people talking.
Of course, 'wow recruiting' is easier to pull off when it's backed by the resource of an industry giant like Google, but that's not to say Dr Sullivan's philosophy can't be adopted by entrepreneurs. One advantage smaller businesses have, in fact, is that they can rewrite job roles much more easily than their large counterparts, which have to steer through internal politics and adapt complex hierarchies. Another is that, by their very nature, entrepreneurs tend to be trying something different - so if you're looking for an experienced software engineer, your ground-breaking technology concept could be the thing that woos them. The flipside, of course, is that new ideas don't do it for everybody - a great salesperson won't be excited by new technology, they'll be excited by new technology that looks like it will generate big dollars.
Thirdly, if you're going to 'wow' people, you need to target the right ones, and be clear about how to handle them. Dr Sullivan argues that companies need to distinguish between high performers, who've traditionally been the target for recruiters, and innovators, who are more likely to be the people driving today's companies forward. 'In a world that changes so fast, you have to innovate consistently,' he says. 'You've got top performers and innovators - the innovators are the critical ones. The top performer will make the wired phone better - the innovator will say 'Let's not have the wire'.'
The challenge with innovators, however, is that they're not just unconventional in their thinking - they also tend to be unconventional in their work habits. So you'll probably need to reciprocate by being flexible about your working practices. The reason Google offers employees breakfast, lunch and dinner on campus isn't just to keep them in the office for longer - it also knows that creative people work odd hours. In fact, some innovators won't want to be tied down to an office at all. Innovation has never been a nine-to-five job - so if you want to tap into someone's creativity, you might need to grab it wherever you can get it.
By Keith Rodgers, Webster Buchanan Research
Dr John Sullivan isn't known for holding back on his opinions. A professor at San Francisco State University and a well-known authority on people management issues, he's a frequent fixture at conferences and in the media expounding his views on how poorly most companies handle their employees. And talking to him a couple of weeks ago, one thing that's particularly irking him today is how companies mismanage their innovators.
While some of his views will be largely academic to smaller companies - his complaints about the inadequacies of many HR professionals make for entertaining reading, for example, but don't really matter if your workforce isn't big enough to hire one - much of his agenda drives to the heart of what makes a business succeed. Firstly, like a growing number of experts in the people management arena, Dr Sullivan believes recruitment is a sales and marketing activity rather than an HR discipline (see 'Candidate or Customer?' [TECHNICAL; 220035]). Good quality people are in high demand, and you need to adopt the same techniques to sign them up as you apply to winning a customer. While old school recruitment philosophy says candidates need to convince you to hire them, securing good people today is as much about convincing them that you're the best place for them to work.
So how exactly do you do that? To begin with, argues Dr Sullivan, you need to find out what factors they'll take into account when they decide on a job - what he calls their acceptance criteria. You can ask them direct when they put in an application or during the job interview - or you can be a little more circumspect and simply ask them to describe their dream job. Either way, it's unlikely that their goal is going to correspond exactly with the role you've created, so you need to adjust your sales pitch to hone in on areas where the two do cross over. In fact, if you've found a really good candidate, you might even change the role you'd mapped out - better to have a great person in a slightly different job than a mediocre operator who ticks all the boxes.
Secondly, you need to stand out from the rest of the people fighting for talent - so you've got to have what Dr Sullivan calls the 'wow' factor. In the technology field, companies like Google and Genentech have long attracted applicants by doing things differently. Google in particular has ripped up much of the employee rule book, famously shipping its Bay Area employees into work in limousine shuttles and providing free gourmet food at its campus restaurants. It also encourages engineers to work on their own projects one day a week, a policy that has helped spawn a huge number of its inventions. Likewise, biotech giant Genentech owes much of the success of one of its most successful therapies, Herceptin, to the 'underground' research culture it fostered, where scientists were encouraged to research their own projects. Breaking the rules to foster creativity creates a buzz and gets people talking.
Of course, 'wow recruiting' is easier to pull off when it's backed by the resource of an industry giant like Google, but that's not to say Dr Sullivan's philosophy can't be adopted by entrepreneurs. One advantage smaller businesses have, in fact, is that they can rewrite job roles much more easily than their large counterparts, which have to steer through internal politics and adapt complex hierarchies. Another is that, by their very nature, entrepreneurs tend to be trying something different - so if you're looking for an experienced software engineer, your ground-breaking technology concept could be the thing that woos them. The flipside, of course, is that new ideas don't do it for everybody - a great salesperson won't be excited by new technology, they'll be excited by new technology that looks like it will generate big dollars.
Thirdly, if you're going to 'wow' people, you need to target the right ones, and be clear about how to handle them. Dr Sullivan argues that companies need to distinguish between high performers, who've traditionally been the target for recruiters, and innovators, who are more likely to be the people driving today's companies forward. 'In a world that changes so fast, you have to innovate consistently,' he says. 'You've got top performers and innovators - the innovators are the critical ones. The top performer will make the wired phone better - the innovator will say 'Let's not have the wire'.'
The challenge with innovators, however, is that they're not just unconventional in their thinking - they also tend to be unconventional in their work habits. So you'll probably need to reciprocate by being flexible about your working practices. The reason Google offers employees breakfast, lunch and dinner on campus isn't just to keep them in the office for longer - it also knows that creative people work odd hours. In fact, some innovators won't want to be tied down to an office at all. Innovation has never been a nine-to-five job - so if you want to tap into someone's creativity, you might need to grab it wherever you can get it.
By Keith Rodgers, Webster Buchanan Research
Sunday, September 10, 2006
The Value of Patents
Technology patents have huge potential value - but how do you turn them into cash? As Keith Rodgers reports, San Francisco's first large-scale patent auction may provide a model for the future.
Despised by the conservative right and revered elsewhere as one of the centres of liberal thinking in the US, San Francisco has long had a reputation for breaking new ground. Home to the Beat Generation in the '50s, a stop-off for hippies in the '60s and the centre of the gay liberation movement from the '70s, the city has never been afraid of fighting the status quo. From the lawlessness of the Gold Rush years to Silicon Valley's heyday during the technology boom years, it's a place where the entrepreneurial spirit thrives, and where the experience of two devastating earthquakes in the last century gives everything an extra edge.
All in all, then, not the kind of place where you'd expect people to get too excited about technology patents.
That, however, is exactly what seems to be stirring among those who care about these things in the run up to what's billed as the world's 'first-ever live, large scale auction of technology patents'. Hosted by Ocean Tomo, a merchant bank based in Chicago that specialises in intellectual property, the auction is an attempt to bring greater liquidity to a class of assets that until now have been frustratingly hard to monetise. Sure, on the Richter scale of life-transforming events in San Francisco, it barely registers a murmur - but for tech entrepreneurs who want to extract some value out of their inventions, it's a model that's definitely worth keeping an eye on.
In their own right, technology patent auctions are nothing new. Along with physical assets, patents occasionally come under the hammer after company bankruptcies - most famously in December 2004, when a mystery bidder sent shivers down the spines of leading industry players by spending millions of dollars securing a clutch of significant e-commerce patents owned by Commerce One. (Rather than being an aggressive patent asserter, the purchaser later turned out to be Novell, which has put the patents to benign use in the open source community).
What's different about the Ocean Tomo event, however, is that it's an attempt to create an institutionalised marketplace where inventors of any description can put their patents up for sale. The event, due to be hosted at the San Francisco Ritz Carlton in April and broadcast over the Internet, is expected to bring together large corporations, early-stage companies, academics, and investors, all looking either to buy or sell. Qualified bidders will be able to carry out some degree of due diligence before the event and to contact sellers anonymously via the bank, while sellers can protect the value that they perceive in their inventions by setting a minimum sale price.
While it will be important to see how closely reality matches the hype, the event has been generating some positive feedback. Although unwilling to comment on the specific event, Dan McCurdy, chief executive of IP licensing and advisory firm Thinkfire, likes the concept, arguing that investors and inventors need new, convenient mechanisms to extract value from their IP. Too many companies, he says, are falling victim to patent 'trolls', the independent assertors who buy patents and then aggressively enforce them. The best way to see them off is by cutting off their source of supply - and patent auctions might be one way of doing that.
That said, McCurdy warns would-be sellers to bear a few salient points in mind. While it's great to be able to flag the fact that you've invented or possess something unique, the real purpose of a patent is to exclude others from using your invention without your permission. Whether you put it to offensive use by pursuing others, or secure the patent for defensive purposes to guarantee your own freedom to operate, its ultimate value is economic - so buyers will want to know:
� Is the patent valid? Are there any issues now, or during the prosecution of the patent, that could invalidate it?
� What's the current or future impact of the patent - or in other words, who's infringing the patent today, and who's likely to do so in the future?
� Assuming it's valid and infringed, who's already licensed it and on what terms? If the bulk of the potential population has already paid for a licence - or if licenses have been given away cheaply in the past - it's a less attractive option for those looking to assert it
If you can answer those three concerns, it'll be worth keeping an eye on how the institutionalised auction model pans out. The Ocean Tomo event may not be to everyone's taste - this is San Francisco, after all - but what's pioneered in Silicon Valley has a habit of being replicated elsewhere.
Despised by the conservative right and revered elsewhere as one of the centres of liberal thinking in the US, San Francisco has long had a reputation for breaking new ground. Home to the Beat Generation in the '50s, a stop-off for hippies in the '60s and the centre of the gay liberation movement from the '70s, the city has never been afraid of fighting the status quo. From the lawlessness of the Gold Rush years to Silicon Valley's heyday during the technology boom years, it's a place where the entrepreneurial spirit thrives, and where the experience of two devastating earthquakes in the last century gives everything an extra edge.
All in all, then, not the kind of place where you'd expect people to get too excited about technology patents.
That, however, is exactly what seems to be stirring among those who care about these things in the run up to what's billed as the world's 'first-ever live, large scale auction of technology patents'. Hosted by Ocean Tomo, a merchant bank based in Chicago that specialises in intellectual property, the auction is an attempt to bring greater liquidity to a class of assets that until now have been frustratingly hard to monetise. Sure, on the Richter scale of life-transforming events in San Francisco, it barely registers a murmur - but for tech entrepreneurs who want to extract some value out of their inventions, it's a model that's definitely worth keeping an eye on.
In their own right, technology patent auctions are nothing new. Along with physical assets, patents occasionally come under the hammer after company bankruptcies - most famously in December 2004, when a mystery bidder sent shivers down the spines of leading industry players by spending millions of dollars securing a clutch of significant e-commerce patents owned by Commerce One. (Rather than being an aggressive patent asserter, the purchaser later turned out to be Novell, which has put the patents to benign use in the open source community).
What's different about the Ocean Tomo event, however, is that it's an attempt to create an institutionalised marketplace where inventors of any description can put their patents up for sale. The event, due to be hosted at the San Francisco Ritz Carlton in April and broadcast over the Internet, is expected to bring together large corporations, early-stage companies, academics, and investors, all looking either to buy or sell. Qualified bidders will be able to carry out some degree of due diligence before the event and to contact sellers anonymously via the bank, while sellers can protect the value that they perceive in their inventions by setting a minimum sale price.
While it will be important to see how closely reality matches the hype, the event has been generating some positive feedback. Although unwilling to comment on the specific event, Dan McCurdy, chief executive of IP licensing and advisory firm Thinkfire, likes the concept, arguing that investors and inventors need new, convenient mechanisms to extract value from their IP. Too many companies, he says, are falling victim to patent 'trolls', the independent assertors who buy patents and then aggressively enforce them. The best way to see them off is by cutting off their source of supply - and patent auctions might be one way of doing that.
That said, McCurdy warns would-be sellers to bear a few salient points in mind. While it's great to be able to flag the fact that you've invented or possess something unique, the real purpose of a patent is to exclude others from using your invention without your permission. Whether you put it to offensive use by pursuing others, or secure the patent for defensive purposes to guarantee your own freedom to operate, its ultimate value is economic - so buyers will want to know:
� Is the patent valid? Are there any issues now, or during the prosecution of the patent, that could invalidate it?
� What's the current or future impact of the patent - or in other words, who's infringing the patent today, and who's likely to do so in the future?
� Assuming it's valid and infringed, who's already licensed it and on what terms? If the bulk of the potential population has already paid for a licence - or if licenses have been given away cheaply in the past - it's a less attractive option for those looking to assert it
If you can answer those three concerns, it'll be worth keeping an eye on how the institutionalised auction model pans out. The Ocean Tomo event may not be to everyone's taste - this is San Francisco, after all - but what's pioneered in Silicon Valley has a habit of being replicated elsewhere.
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