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By Michael Kenward
Originally Published: June, 2001
By: Real Business Magazine
The lone inventor's days are numbered.
There's a new and better way of settingup small, technology
and ideas-led businesses. And Britain, for the
moment,appears to be ahead of the game.
You are about to meet a new kind of business...
In large companies, government departments and academic
institutions the worldover, lie thousands of unused bits of
intellectual property. These could befully filed patents,
the first rough outlines from a research lab, or justlightly
chewed ideas. But they share two things in common: they are
outside themain activity of BigCo; and they spell juicy
opportunities for a growing army of ambitious
entrepreneurs.
It costs up to £50,000 to file a patent. But that doesn't
mean that they always get used. BT exploits only about 25
per cent of its 14,000 patents, says Graham Davies, general
manager of international development and technical
exploitation at BT's research centre Adastral Park (formerly
known as Martlesham Heath). You may think that's a high
wastage rate, but few tech businesses do better.
What this means is a booming British "brain trade." Take a
piece of promising intellectual property, build a team
around it, raise some venture money, and watch it fly.
There's lots of evidence that this is a much stronger way of
building a technology company than the old
two-men-in-a-garage route. The performance of the likes of
Venation and ZBD Displays provides a counterblast to the
depression in the technology sector.
The brain trade works in two ways: sometimes the IPR is
generated by a team within a large company or government
department, before being unleashed on the world with a
ready-made team; or there are intellectual magpies such as
fSona on the lookout for neglected ideas. Both ways, the
logic is the same: why spend a fortune on an R&D punt when
you can snaffle the output of a major-league player? You
never know, you may even be able to hijack the inventor,
too.
This is big business, growing ever bigger. And the UK is at
the forefront. Ian Harvey, chief executive of BTG, the UK's
grand old man of licensing businesses, says "there aren't
many lookalikes" in the US. It helps that the City seems to
have got the plot. In the US, he explains, fund managers
"still don't know which box to put us in." On the other
hand, he says, "in the UK, analysts and shareholders have
given us the time of day. It says a lot, positively, about
the City of London."
One of the City's watchers is Paul Yau, technology analyst
at Credit Suisse First Boston (CSFB) and chief lid-lifter on
this new business phenomenon. In his recent report
Technology Licensing Update: Life after the bull run? he
says: "rather than using IP licensing as a defensive
mechanism to protect the company's technology position,
there has been a new breed of company using IP to generate
novel revenue streams and opportunities." Intellectual
property, he says, "has become a new business driver."
IP has driven Theresa Carbonneau's business. She worked at
BT in the nineties and knew all about Martlesham Heath's
wall-to-wall brainboxes. Now in Vancouver, Canada, her
nascent broadband business faced a problem: the wavelength
licences she needed were all allocated. Her only solution?
Lasers. She started truffling.
And, sure enough, on Martlesham's web site she found details
of a five-year R&D programme on free-space laser
communications, begun in 1991 and carried out in association
with Imperial College, London.
"If we had not chanced upon it, quite by accident," says
Carbonneau, "it would have got shelved, like thousands of
Martlesham projects." Right place, right time. "We were
quite lucky that we found it, but at the same time they did
not know what to do with it. It worked out really well." It
took a year to negotiate a licence agreement, finally signed
in 1997. It took two years to secure funding. Today, fSona
is a venture-backed ($27m: $4m in debt, the rest in equity)
market leader in the field of laser telecoms.
Another central figure in the brain trade is Ralph Cochrane.
The 27-year-old went straight into BT's research labs after
university. But, he says, "I always wanted to change
something." His research into internet protocols dovetailed
with fellow BT man, Paul Evans. Soon Cochrane was hassling
the BT board. "I wrote numerous board papers on the
potential of our work," he says. Three years on, the two men
run Venation, an independent "content networking" company
(BT is a minority shareholder, alongside SoftBank and
management) with enormous potential.
Will this brain trade grow? Definitely, says Cochrane.
Market conditions make it ever more difficult to go the
lone-inventor route. "The further up the curve you are, the
more likely you are to survive," he says. And large
companies generate an enormous amount of speculative
technology. "Sometimes it's no good, sometimes it's
misunderstood, or non-core. And sometimes it's so good that
you need to develop it really quickly." In those
circumstances, the best place to do that is "outside the
fence."
Riding the wave
The computer giant IBM made more than $1.5bn last year by
"giving away" what other companies might consider to be
trade secrets. It regularly tops the annual league tables
for the number of patents taken out. Up to one-ninth of
IBM's annual pre-tax profits may come from patent licensing
royalties. That figure comes from an evocatively titled
book, Rembrandts in the Attic* by Kevin G Rivette and David
Kline.
Huge organisations such as British Telecom and the Defence
Evaluation and Research Agency (DERA) are eyeing start-ups
as a way of unlocking knowledge. And then there are the
large, and well-funded, research labs.
Some businesses exist purely to acquire and trade
intellectual properties rights (IPR). Take QED, the
licensing division of Scipher Group, which itself started
life as the R&D labs of Thorn EMI. Scipher is now a quoted
IPR business with a growing portfolio of techie-based
smaller companies. Scipher and partners jointly foot the
bill to take IPR to a point where there are real products.
The drugs giant AstraZeneca, for example, has contributed
IPR, no less than 23 key patents and patent applications,
and money to create SpectraProbe, a 50/50 joint venture to
develop and sell to the chemical industry monitoring
instruments based on advanced sensors.
Stockmarket high-fliers ARM and ARC Cores both use the
licensing model to turn brainpower — mainly chip design —
into mega-profits.
At Imagination Technologies, Hossein Yassaie saw the
licensing light to dramatic effect. After what he describes
as a "period of painful attempts at competing in the
mainstream board business" on the part of its Videologic
subsidiary, Yassaie rewrote the game plan. Imagination now
develops the skills needed to bring multimedia applications
to electronic devices. It designs chips, and licences them
to the people who make arcade games, games consoles and, in
the future, mobile phones, set top boxes and any other bit
of kit with whizzy graphics.
The idea is to license the technology to firms that want to
incorporate multimedia capabilities in their devices.
Surround the technology with patents, the logic goes, and
Imagination could, says Yassaie, "achieve targets far in
excess of its size."
"It is all about patenting the skill set," he says.
Nowadays, the silicon companies have to integrate all sorts
of functions on chips. They know they can't do it all
themselves. Enter Imagination.
Smart thinking. Multimedia applications gobble up computer
power like nobody's business. So chip-makers have to give
over ever-larger chunks of silicon to these tasks. With
licence fees linked to the area of the chip your bit needs,
Imagination is onto a nice number.
The City approves
The UK is well-placed to ride the IPR wave. "In the UK, we
like to be research-focused, and that is more consistent
with an IP model," says Yassaie.
Investors are catching on. "The City certainly understands
IP," he continues. (So do potential employees. "Young
engineers are keen to come to companies that are active in
these areas," says Yassaie.)
The City has put nice valuations on businesses whose role in
life is to turn protected knowledge into money. And there
are signs that these have been hit less hard than many of
their pure-technology peers.
The grand-daddy of them all is BTG. Floated in 1995, BTG
says that it "acquires, develops and licenses intellectual
property rights covering innovative products and processes
in the diverse fields of life sciences and high technology."
At the time of its float, BTG was worth £44m. It's been as
high as £1.5bn. At the last count, on 3 May 2001, the value
was £1.3bn.
Having raised lots of lolly, BTG is now in a position to
start up businesses that can take forward some of its IPR.
One company with huge potential is Provensis (see "The
Magpies have landed").
Its origins are classic brain-trade. The existing industry
couldn't work out how to handle something that wasn't quite
a new drug or a medical instrument. So BTG shipped it
outside. "Licensing is just one element," says Ian Harvey.
The big one is finding the best route for that bit of IPR.
The investment bank Beeson Gregory is unusually excited
about intellectual property. It has 40 companies in its
portfolio. (It was an early investor in ARC.) Every one,
says CEO David Norwood, is fortified by a big slab of IP.
"If you back companies without IP," says Norwood, "you will
lose every time."
Beeson Gregory recently signed a deal with the chemistry
department at Oxford University. In return for an investment
of £20m over the next 15 years, Beeson Gregory gets a 50 per
cent share of any spin-out company that builds on the
department's IPR. Interesting.
A ray of light in BT
Amid the furore over its chairman, chief executive, share
price, debt mountain bla bla bla, BT's new in-house
incubator BT Brightstar has been rather overlooked.
BT Brightstar identifies clever-clogs from within its own
ranks, places inventor+idea+someone with business nous into
its Adastral Park incubator, and sees if the plan has legs.
If it gets the thumbs-up from the incubator board, BT
effects intros with its partner team of venture capitalists
(while keeping a stake for itself, naturally).
"What we do is to create a company, not only with IP but
with an engineer who is world class," says Chris Winter,
chief technologist and co-founder of Brightstar.
Brightstar, a part of BTexaCT, the company's R&D operation,
is deliberately situated away from the laboratory. "It has
to feel like this is the entrepreneurial dynamic atmosphere
you would expect start ups to work in," says Winter. Output
is prolific. Some ten new ideas come forward each week.
Brightstar looks for £2m-£10m investments; partner VCs
include 3i. To get around restrictions on being owned by a
quoted company, BT is looking for 45 per cent of new
businesses, tops. Each business, says Winter, should be able
to achieve a market value of £100m in four years. That way,
he says, "there is a chance for us to exit in VC-like
timescales." Time will tell.
Enter the public
sector
Over to the Defence Evaluation and Research Agency (DERA).
Most of its work is for the Ministry of Defence. It's got an
annual turnover of £1bn-plus. And it's stuffed with IPR.
No wonder it's got a "director of new ventures, electronics
and sensors." Graham Brown (for that is he) reckons that the
agency has a portfolio of around 4,000 patents in 800
families of technology.
Two years ago, the government gave DERA the ability to hold
equity stakes in companies. This has switched DERA's focus
from large defence corporates to smaller, technical-based
companies.
Such companies, says Brown, can be the best way of getting a
new technology into the market. They offer the right sort of
environment. Having IPR is all very well, he explains, but
you need the right kind of focus to take that technology
forward. One of DERA's first spin-outs was ZBD Displays, set
up with an initial injection of £750,000 from Prelude Trust.
The initials - you'll see why they use the initials - stand
for Zenithal Bistable Display. These electronic displays are
readable even after you've turned off the power supply,
great for things such as "electronic books."
When it set up ZBD, DERA provided staff as well as
technology. Moving people out of a large defence-oriented
public body into a small dynamic company has been a
revelation. "It is astonishing to me how well people have
adapted to that environment," says Brown.
Earlier this year, DERA and the University of Strathclyde
set up another company, The Crystal Consortium, to develop
the technologies needed to make the fancy crystals that are
the starting point for all those chips and sensors that go
on to become equipment for telecommunications, medical
imaging etc.
Next?
BT, IBM, Xerox, DERA... these are the early movers in this
market. But there will surely be more. "Corporates are
becoming much more astute about the value of their
intellectual property," says Robin Winning of 3i, who led
the PsyTechnics deal. He has worked closely with BT
Brightstar in funding spin-out ventures. "Three key issues
have emerged," he says. "The relationship with the corporate
is key. There is also often a need to bring in strong
commercial management. And there is the opportunity to get
to market very quickly because the technology is well
advanced." So will 3i be striking further similar
relationships with UK corporates? Yes indeed, says Winning.
"Based on our experience with BT, it's now an active 3i
policy to identify other corporates who want to spin out
companies on the Brightstar model." And when the venture
capitalists start talking like that...
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