LES High Tech Sector Webinar
By Renee McMullen
IP In IPO: Lessons Learned From Recent Unicorn Public Exits
T
he High Tech Sector recently presented an interesting and informative webinar on Intellectual Property (IP) and its presence, or lack thereof, in the Initial Public Offerings (IPOs) of high-valuation companies known as Unicorns (startup with valuations over $1 billion). Stanford University Lecturer and LES High Tech Sector Chair, Efrat Kasznik, shared data and insights from a study of several Unicorns prior to and following their IPO. There are some lessons and trends that can be drawn from the study and how these Unicorns develop and protect their IP (including their intangible assets and the legal rights protecting them).
The Unicorns studied in 2015 shared a few characteristics. Many of them, 75% of all the studied companies, were from software-related companies. Most of these companies (over 60%) held fewer than 10 assets (i.e. patents or patent applications).
7 | September 2019
One of the aspects of the study Kasznik noted was the difficulty involved with finding the appropriate data to determine the value and assets (intangible or otherwise) of the Unicorns prior to their IPO. As privately-owned companies, little information has to be disclosed about their sources of revenue, assets, or operations. Two types of information help to answer the question of the role IP plays in the valuation of start-ups: financial statements and proxy information. The issue with financial statements is that IP assets generated within the organization are not reported on the financial statements of any company (private or public), only those which are the result of a merger and acquisition (M&A) transaction. This creates an IP financial reporting “gap” according to Kasznik, thereby making it challenging, dare we say nearly impossible, to effectively assess the intangible assets of a Unicorn pre-IPO. Additionally, proxy information also has its barriers to information because the associated metrics may not reveal the entire picture, even with the data available in the public domain. These include legal metrics, or IP rights to the company’s intangible assets, most notably patents and trademarks. A mapping of three main intangible assets (data, technology, and brand) to the various types of IP rights (patents, trade secrets, copyrights, and trademarks) reveals that the various types of IP require one or more different types of legal protection. It is therefore imperative for anyone doing valuation of a pre-IPO company to review multiple sources to more accurately determine the value of the intangible assets. For example: technology intangibles can be protected by patents, trade secrets or even Copyrights (in the case of software)
Kasznik and her firm, Foresight Valuation Group, studied the low patent counts and developed three potential explanations for the trend. First, it could be that technology is not the main intangible asset and therefore the companies have protection for their data or brand assets. It is also possible that patent protection is not the preferred mode of protection for the companies’ technology assets. Perhaps these companies have opted to leverage trade secrets or copyrights instead of patents due to ease of implementation and/or cost. A final possibility is the age of the companies in question. They are relatively young organizations and therefore the focus has been on acquiring customers and users versus a concentration on patent protection (typical for software companies in the early years). However, Kasznik noted that the importance of patent protection tends to grow over time. Further study of the same class of Unicorns from 2015 noted that, of the 12 Unicorns who have since gone public, most increased the number of patents owned in the 4 years since the original study, either through organic means (organically filed assets) or through acquisition (inorganic assets). The data further highlighted that several of the software-company Unicorns who went public since 2015 have purchased patents in the four years since the original study so that their patent portfolio has grown proportionally to the increase in valuation. This group includes companies like Uber, Snap, DropBox and Lyft. This indicates that as companies mature, the importance of patent protection and acquisition grows in importance and priority. However, it was concluded that there seems to be no direct correlation between Unicorn valuations and patent counts. It could be the number of customers, users, and overall following (mostly attributed to the operating metrics of the organization) that most determines the pre-IPO value of a private company, especially one that is software-based. As more Unicorns continue to make their exits, either through merger & acquisition or IPO, additional data will be available to examine the theories behind low patent counts among start-up software companies (and other industry types), thereby increasing the understanding of valuation for privately-owned firms. What remains to be seen is the true impact of intellectual property on the post-IPO bottom line, and as companies are shoring up their IP portfolios as they approach an IPO event, there’s no question that a stronger IP position is anticipated to have a positive impact on performance and valuation. For a list of recent webinar recordings visit: www.lesusacanada.org/page/WebinarRecordings.
