IP Valuations - a tricky issue

My prediction is that buying and selling IPs is an area where America may still lead the world. We live in a new America where there is price pressures on everything from private jets and yachts to a bar of soap. So, we need to ask ourselves, in which sector would there be better price discovery, a good real return and a marketplace where smart investors can make money. I am not so sure about trading in the green energy certificates as I still dont know where the spread would come from, but I am more optimistic on buying and selling intellectual property (IP). IP is a tricky area - unlike commodities, it does not have a form or a shape - it is an idea and essentially we are looking at how much an idea is worth now and how much will it be worth a few years from now. We trade on those premises. While IP trading is not exactly new, valuation methods that help value these intangible assets are subject to plenty of government and legal interference -  a trend that should be avoided but nevertheless exists. In an IP world, a new IP that is patentable is always substantially different from anything existing right now. Ergo, by its very nature, the new IP poses a valuation issue. In the absence of public and financially deep trading markets, there is no market pricing to use. We, at Accuserve, think a lot on how to use various techniques to narrow in on a range but we've seen that calculation methods return a wide range of results. How does one determine that an IP right now will be useful, say, 10 years down the line? That is the tricky question. 

Small business M&A transactions drop precipitously

According to the State of the M&A Markets, First Quarter 2009 Update, compared to 4Q08, transaction levels decreased in all valuation segments except deals with values above $250 million. The most dramatic decrease was in the $50 to $100 million-valuation range, which dropped 52.1%. When 1Q09 is compared to 1Q08, deal activity is down at all levels, with the most significant decrease [again] taking place in the $50 to $100 million-valuation segment. During this period, the number of transactions dropped by 70.4%. 

Health Care reforms - cuts in R&D budget?

We are entering a very interesting phase in the history of governance in America. The democratic federal government is all set to usher in health care reforms - the core of which is offering a public option for insurance and playing an increased role in setting price limits for various medical services ala the NHS of the UK or the services in Japan. How will all this affect the flow of dollars to R&D grants for small companies? I believe that small companies will have to compete harder to get government grants and will have to operate under significantly reduced R&D budgets to achieve even break even revenue models. Generally speaking, despite active price controls in the Switzerland, their drug companies still lead the world in innovation. But, this was largely financed by revenues from markets such as the US. Will we see an outsourcing of R&D to places outside of the US and more outsourcing of clinical studies to outside the country? Time will tell but all indications are that a public option for health insurance will put a serious dent in the R&D budgets of the small drug discovery and biomedical devices companies. We for one will increase the discount rates when valuing such companies as there is a greater risk of achieving break even cash flows.

Wi-Fi in Virgin America planes

I am traveling from NYC to San Francisco right now and I wanted to test the Wi-Fi service that Virgin offers on its planes. My idea is to stream a movie - Red Rock starring Nicholas Cage -  from Netflix that I have been wanting to watch for some time now on my laptop. Everything started out hunky dory as we hovered over JFK and I actually got to watch about 15 minutes of the movie at regular speeds. But after a while, the speed started to dive. I had just finished telling a steward that the speeds were good enough for me to stream movies. That jinxed it I guess. I am going around the plane and seeing that plenty of people are on their lap tops. I can bet that a significant portion of them are accessing the Internet through the onboard Wi-Fi service. The onboard Wi-Fi service, called GoGo, costs $12.50 and hopefully will go down as the technology matures. I wonder if there just isnt enough bandwidth for all of us to access the Wi-Fi or its just that the W-Fi is faster when passing over cities and drops as we fly over unpopulated areas. But I believe the days are not far off when steady Internet speeds onboard a plane are a reality.

Venture financing poll

I have created a poll in LinkedIn to measure the impact of the economy on the recent post-money valuations secured by venture-financed firms. Please vote. It will help us summarize a general understanding of the conditions in the VC/PE financing market. Follow the link below to vote.

http://polls.linkedin.com/p/24709/rxkjs

The Age of App Platforms

Internet businesses seem to set new management paradigms than their offline counterparts. Revenues are earned by sharing them with each other and costs are apportioned between competitors in innovative ways through clever use of hardware and software solutions. An important way of doing business currently is the App Platform. The App platforms are application servers that companies such as SalesForce.com, FaceBook, Apple, Amazon.com and others make available to people who want to target their audiences not through their products and services but through their own applications. App developers have a variety of business models to monetize including sharing application download fees with app platform providers and supplying advertising revenues and traffic. If you are a start-up seeking to build a large subscriber based business, then app platforms are a MUST as a component, if you wish to see better valuations for your business. Just as with other businesses, there are certain Internet-based businesses such as retailing where revenues may become stagnant in the new American "savings" era. Innovative revenue sharing and growth models may become a necessity now.

Biotechnology Financing

I was recently at the MIT-Harvard Health Program information session where I met a few folks who are active participants in the Biomedical/Biotechnology/health care start-up industry. When I queried them about the state of the health care start-ups and the financing trends, the majority response was that getting financing for new ventures is going to be a very difficult task during the next year and a half. Folks were of the view that established start-up firms have a much better chance of getting follow-on financing than new entrants. When I asked them about what areas of health care research are emerging, most pointed to medical devices/technologies that addressed nerve-related diseases and efficient localized delivery of drugs. Prosthetic body parts is another biomedical area where a lot of development is being financed by venture capital. Overall, it was an interesting session where I got to learn about the latest advances in immunology and biomedical devices.