Michael D. Moberly   August 23, 2010

For management teams, boards, entreprenuers, and others operating in knowledge intensive (IP, intangible asset, intellectual capital) sectors, it’s not particularly noteworthy to point out there are significant differences between the accounting and intellectual property - intangible asset communities. 

Those differences are largely conceptual.  They evolve around accounting language and systems that tend to focus on production factors and very tangible assets.  The rigidity of accounting systems and language, and the growing universality of accounting standards does not allow - leave much room for reflection on (creative, alternative) business strategies that are lead - influenced by intangible assets and/or intellectual property.

Accounting is largely a mathematical language that allows companies to communicate about their respective business performance in a manner that is essentially free from cultural connotations, i.e., global universality of accounting standards.  Accounting language follows a code of officially sanctioned standards that are recognized by both the state as well as the international (accounting) community.  Without such language, admittedly, business perceptions and understandings could not be maintained.

Accounting language and systems are governed by U.S. (GAAP) and international (IFRS) standards wherein factors of production and performance are dominant and subsequently under-play, if not utterly ignore, the construction (evolution) and value of internally developed proprietary knowledge, i.e., IP and other intangibles that routinely contribute to the formulation and execution of business strategies.

Respectfully, today’s accounting language and systems do not do much either for communicating-advancing the economic fact that we’re literally in the midst of a knowledge, some say, intangible asset- based economy in which increasing percentages of company value, sources of revenue, sustainability, and foundations for future wealth creation lie in - directly evolve from intangible assets and IP. 

Rather, current accounting language and systems, quite literally, frame the context in which most  businesses function and also set the parameters for how and under what circumstances IP and intangibles can actually be applied.

How IP and intangibles are treated (by accountants) depends primarily on whether the assets were developed internally or acquired externally.  For example, internally generated/developed IP is immediately expensed and appears as a loss, rather than as revenue.  Thus internal R&D initiatives and investments in intellectual property-intangible assets constitute (are characterized as) costs to a company rather than drivers of value, revenue, and future wealth creation, etc.  This practice (accounting standard) makes it all-the-more challenging to trace (unravel) how such assets as IP-based R&D, design, and brand innovation, etc., are generated.

Thus, current accounting language and systems, essentially force businesses to speak about (address their) business performance in a standardized and ritualized manner with virtually no opportunity for inserting creative (alternative) language or expressions.

And, therein lies the basis for many of the current challenges between accountants and advocates of full and creative utilization of intangibles and IP; the inability to respectfully find common ground to converge both language and systems to improve opportunities for consistently putting those assets in play, along with monetization and commercialization.

(This post was adapted by Mr. Moberly from the work of Professor Roya Ghafele and her article titled ‘Accounting for IP?’ recently published in the Journal of Intellectual Property Law and Practice.)

The ‘Business IP and Intangible Asset Blog’ is researched and written by Mr. Moberly to provide insights and additional views for company management teams, boards, and employees to aid in identifying, assessing, valuing, protecting, and profiting from their intangible assets.  I welcome and respect your comments and perspectives at m.moberly@kpstrat.com.

Michael D. Moberly   August 19, 2010   (Part II)

This is the second of a two-part post to provide readers with insights into ’the 2008 Berkeley Patent Survey’ with respect to how software start-up firms (a.) perceive, (b.) use and (c.) are affected by patents. 

And, again, please trust me on this, if you are an entrepreneur, part of a tech company management team, board member, or part of the technology investment community, this post should be on your ’must read’ list.

The surveys principle investigators obviously wanted to know more about why some tech entrepreneurs choose to forgo patenting?  To obtain the necessary insight, they posed two sets of questions framed as follows; (1.) for the last innovation for which the (your) firm chose not to seek a patent, what factors influenced this decision?, and (2.) what was the most important factor in that decision?

The costs (expense) associated with actually obtaining and enforcing patents (their intellectual property rights) were cited as being both the first and second most frequent explanation (response).  While the ease of inventing around the innovation and satisfaction with trade secrecy were also cited as influencing factors for software start-up firms not to seek patents, seldom were they considered the most important factor.

Interestingly, 40+% of the software executive respondents cited the unpatentability of the invention as a factor in their decision to forgo patenting, with 25% (+/-) rating unpatentability as being the most important factor. 

However, the investigator’s remarked that it is difficult to know precisely how to interpret the ‘unpatentability finding’.  One possible explanation they said, may be that the software entrepreneur respondents believed that patent standards of novelty and non-obviousness, etc., are so rigorous which lead them to feel their innovation would not likely satisfy patent requirements.  Another possible, perhaps more esoteric, explanation offered by the investigators to this question is that a significant number of the entrepreneurs hold philosophical and/or practical objections to patents in their field, i.e., software.

Another important and very relevant question presented in the survey was how important are patents to achieving competitive advantages.  Interestingly, respondents ranked patents (literally) dead last among seven strategies for achieving competitive advantage.

It’s important for readers to recognize that the relative unimportance of patents for competitive advantage given by survey respondents in the software field contrasts sharply with the perceived importance of patents in the biotech industry, where patents are ranked as the most important means of achieving competitive advantage.

Instead, software start-ups regard ‘first-mover’ advantage as the single most important strategy for achieving competitive advantage, followed by ’complementary assets’ , e.g., providing services for licensed software or offering a proprietary complement to an open source program, etc, in other words, intangible assets.  Interestingly, these two strategies for achieving competitive advantage (i.e., first mover and complimentary assets) outweigh actual intellectual property rights. 

Among intellectual property rights though, the survey findings revealed copyrights and trademarks, followed closely by (trade) secrecy and difficulty in reverse engineering as outranking patents as an important strategy for achieving competitive advantage.

So, what incentive effects do patents have for tech entrepreneurs?  With respect to the four types of innovation, (1.) inventing new products, processes, or services, (2.) conducting initial R&D, (3.) creating internal tools or processes, and (4.) undertaking the risks and costs of commercializing innovation, the survey investigators applied a scale, where 0 = no incentive, 1 = weak incentive, 2 = moderate incentive, and 3 = strong incentive.

Somewhat surprisingly, the respondents reported that patents provide weak incentives for engaging in core activities, such as invention of new products and commercialization.  On the other hand, biotech and medical device firms reported that patents provided moderate incentives.

So, here’s the paradox.  If patents provide only a weak incentive for investing in innovation among software start-ups, why are two-thirds of the VX firms (largely VC-backed) and at least one-quarter of the D&B firms seeking patents?

The answer to this paradox, according to the survey investigator’s, may actually lie in the perception held among software entrepreneurs.  That perception is that patents may be perceived as important to potential - prospective funders, such as venture capitalists, angel investors, commercial banks, and friends and family. 

The investigator’s base this answer on the (survey) finding that sixty percent of software start-up respondents, who had actually negotiated with venture capitalist’s, reported that that they perceived patents to be an important factor in the VC’s invest - don’t invest decision.  Between 40% and 50% of the software respondents also reported that patents were perceived to be important to other types of investors, such as angels, investment banks, and other companies.

So, what’s the larger message from this surveys findings?  In my view, it’s that tech entrepreneurs ought not assume patents are the only, or necessarily the best strategy (option) for achieving success and competitive advantage.  Each form of intellectual property, i.e., patent, trademark, copyright, and trade secrecy carry upsides and downsides.  And, perhaps equally important, tech entrepreneurs ought not overlook or dismiss the complimentary (intangible) assets that routinely accompany and/or evolve from innovation to become valuable and competitive advantage driving assets!

(This post was adapted by Mr. Moberly from the work of Professor Pamela Samuelson’s article in ‘O’Reilly Radar’ and the recently published article, “High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey.” )

The ‘Business IP and Intangible Asset Blog’ is researched and written by Mr. Moberly to provide insights and additional views for company management teams, boards, and employees to aid in identifying, assessing, valuing, protecting, and profiting from their intangible assets.  I welcome and respect your comments and perspectives at m.moberly@kpstrat.com.

Michael D. Moberly   August 18, 2010   (Part I)

This post is about ’the 2008 Berkeley Patent Survey’ and how software start-up firms perceive, use and are affected by patents.  Trust me, if you are an entrepreneur, part of a management team, board member, or investor, this post is worth your time to review and reflect upon.

Respondents to the 2008 Berkeley Patent Survey consisted of 1,300 high technology entrepreneurs in the software, biotechnology, medical devices, and computer hardware fields. Each of the respondent firms had been started prior to 1998 with the respondent sample coming from software firms registered with Dun & Bradstreet (500+) and from the VentureXpert (less than 200).  Eighty percent of the respondents reported their position to be either CEO or CTO of their respective firm with most reporting experience in previous start-ups.

The survey reports that two-thirds of the software entrepreneur respondents have not, nor are they seeking patents for properties embedded in their innovation, i.e., products and/or services.

Interestingly, the respondents collectively rated patents as being the least important mechanism, among seven options, for achieving a competitive advantage in their particular market space.  Even software start-ups that already hold patents, the survey reported, regard them as providing only a slight incentive to prospective investor’s invest - don’t invest decision.

To be sure, there is nothing in the survey findings to suggest ‘a software patent abolitionist’ movement is afoot, e.g., a third of the software entrepreneurs (respondents) reported they already have or are seeking patents and perceive patents to be important to prospective investors, i.e., firms from whom they hope to obtain financing.

So why was this survey conducted?  According to the principal investigators, they were curious to know the extent to which high tech start-ups were utilizing the patent system and to learn their reasons for seeking a patent, or not.

Of course, as the investigators stated, the basic economic principle underlying the patent system is that technology innovations are often expensive, time-consuming, and risky to develop.  But, once developed, the innovations themselves often become relatively inexpensive to produce but easy to copy. 

But, absent intellectual property rights (IPRs), technology firms may have insufficient incentives to invest in innovation relative to recouping their R&D costs that would justify additional investments in innovation due in part to the illegal and inexpensive copies that can be readily produced - available to undermine a company’s investment recoupment strategy and most competitive advantages.

One conjecture of the investigators was that early-stage technology firms may be more sensitive to intellectual property rights than their more mature brethren.  This conjecture was based on the view that early-stage tech firms tend to lack complementary assets, i.e., marketing channels, access to credit, etc., in other words, intangible assets, that mature firms are more likely to have developed and are available to exploit.

With respect to the question ‘why start-ups decide to patent’, the survey respondents revealed the following as being ’moderately important’, i.e., to

1. prevent competitors from copying the innovation
2. enhance the firms’ reputation
3. secure investment and improve the likelihood of an IPO

The survey revealed differenences in the rate of patenting among the VX and the D&B software companies. Three-quarters of the D&B firms had no patents and were not seeking them.  In contrast, over two-thirds of the VX software start-up firm respondents, all of which were venture-backed, had or were seeking patents.  The investigators were not able to assess precisely why VC-backed firms were more likely to seek patents than the D&B firms.  Speculation was that VC’s urge the firms they fund to seek patents; or perhaps VC’s choose to fund the development of software technologies that they believe are more amenable to patenting.

(This post was adapted by Mr. Moberly from the work of Professor Pamela Samuelson’s article in ‘O’Reilly Radar’ and the recently published article, “High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey.” )

The ‘Business IP and Intangible Asset Blog’ is researched and written by Mr. Moberly to provide insights and additional views for company management teams, boards, and employees to aid in identifying, assessing, valuing, protecting, and profiting from their intangible assets.  I welcome and respect your comments and perspectives at m.moberly@kpstrat.com.

Michael D. Moberly   August 9, 2010

Figuratively speaking, but quite realistically, the ‘birth certificate’ of every patent should state that its origin exist in the form of a (trade) secret.  If that (patent) ‘birth certificate’ does not convey a clear and unequivocal portrait of asset (idea, innovation) secrecy, the inventor and/or entrepreneur can likely anticipate incurring significant, if not irreversible and costly bumps and challenges along the long and tedious road aiming toward the issuance of a patent.

It’s essential then, perhaps more so today that anytime before, that inventors and entrepreneurs fully recognize that the basis/foundation of what they’re seeking to patent, is frequently comprised of numerous ’pieces’ of human, structural, and relationship capital, ala intellectual capital, ala intangible assets! 

Credibility to the above message lies in the increasingly knowledge-based global economies, wherein 65+% of most companies value sources of revenue, and future wealth creation today are directly related to intangible assets, (that percentage is significantly higher for early stage, start-ups, and entreprenerial based companies).  

Thus, the view, which I advocate, is that all patents must literally start life as a (trade) secret and should be taken quite seriously, particularly in today’s increasingly aggressive, globally predatorial, and ‘winner-take-all’ business transaction environments in which the only real way ideas and innovation can be effectively protected, is by keeping the information secret and that secrecy begins at its point of conception. 

Management teams, boards, and certainly inventors and entrepreneurs must recognize that any type - form of disclosure, inadvertent or otherwise, in which key information is treated in other than a secret context, preferably in accordance with the six requisites of trade secrecy, can reduce and/or significantly impair the assets’ projected value, if not negate its trade secret status altogether and possibly adversely affect its patentability. 

Some additional key points to consider relative to trade secrecy are:

1. Trade secret protection extends only to confidential relationships and does not prevent independant development by a competitor, i.e., the ease and/or difficulty a competitor will likely encounter to ’reverse engineer’ (the secret) is a consideration in both achieving and sustaining trade secrecy status.

   a. If the protected information is not readily ascertainable and cannot be easily reverse engineered, then an ‘invention’ can generally be protected by trade secrecy, so long as, again, economic-competitive advantage is derived from (sustaining) the secrecy of the information.

2. Trade secrets, unlike patents, can be licensed forever and the trade secret licensee can be obligated to pay royalties for the (trade secret) license even if the information enters the public domain.

3. There are no subject matter constraints imposed on trade secret protection so long as the information provides an economic - competitive advantage derive (rooted) in its continued secrecy, in other words, both technical and non-technical information can constitute a trade secret.

   a. Trade secret protection in the U.S. can extend to most any information that can be (1.) used in the operation of a business, (2.) has sufficient value, (3.) can afford a company actual or potential economic (competitive) advantage over others, and (4.) providing it remains secret.

   b. Also, (1.) negative know how, i.e., what doesn’t work is protectable as a trade secret, and (2.) novelty, usefulness, and non-obviousness are not applicable to trade secret protection as they are in seeking patent protection.

Lastly, it important for inventors, management teams, and boards to recognize that if patent issuance - protection is uncertain, but a decision is made to pursue it anyway, once a patent application is published, trade secrecy rights (options) are lost. 

(This post was inspired by the work of R. Mark Halligan in an article published in the July/August 2010 issue of ABA’s Landslide, titled ‘Trade Secrets v. Patents: The New Calculus’.)

The ‘Business IP and Intangible Asset Blog’ is researched, written, and produced by Mr. Moberly to provide insights and additional and sometimes alternative views for company management teams, boards, and employees to aid in identifying, assessing, valuing, protecting, and profiting from their intangible assets.  I welcome and respect your comments and perspectives at m.moberly@kpstrat.com.

Michael D. Moberly   July 27, 2010

Increasingly important questions for entrepreneurs and SME’s is the extent to which their management teams and boards are (a.) familiar with and making effective use of the intellectual property system, and (b.) if not, are there particular barriers that either prevent or inhibit them from doing so?

The larger question perhaps, according to Bill Payne of the Kauffman Foundation, is how many SME’s elect to not pursue conventional intellectual property (IP) protections, i.e., patents particularly, because they recognize, in advance, that they do not have the (internal) resources to rigorously defend their patent position(s) should challenges or disputes arise, or pursue the infringers and/or misappropriators that are all but certain to evolve?

Operational familiarity with IP has become, in my view, an essential business management skill set particularly among SME’s in all industry sectors.  Though, while creating and capitalizing on - exploiting innovation to achieve a business (competitive) advantage can become a key differentiator for a company, it can materialize generally only if a company’s management team and board have the necessary foresight to put in place best practices to ensure control, use, and ownership of the assets can be sustained, but not solely through subjective assumptions about the deterrent affects of conventional IP.

Where does this leave the 20+ million entrepreneurs and SME management teams and boards who are essentially faced with many, if not most, of the same complexities and challenges as their larger Fortune 5000 brethern, in terms of being able to effectively safeguard, utilize, and exploit their IP?  The reality is that SME’s, are often without the resources compared to their larger counterparts and find themselves managerially, administratively, and fiscally stretched insofar as overseeing their IP and the ability to accommdate the complexities and expense associated with IP processes and procedures.

It’s important to recognize also that we’re operating in knowledge-based global economies, in which 65+% of most company’s value, sources of revenue, and future wealth creation lie in - are directly related to intangible assets.  This makes achieving a certain level of familiarity and competency in IP management (oversight and stewardship) matters a necessary underlier to not merely achieving success and profitability, but sustainability!

It’s useful then, for SME management teams and boards to frame their IP (and intangible assets) as strategic business assets, not merely the product of a research activity to remain stagnant or hidden, and otherwise not put to good efficient use.

Unfortunately however, most higher educational (business management) programs and academic units approach intellectual property, patents particularly, as a narrow legal specialization only to be acquired through law school.  I hardly believe that’s how we should proceed to build and sustain a strong and sustainable entrepreneurial and SME pipeline.

(This post was inspired by IBM’s The Inventors Forum, Global Innovation Outlook project.)

The ‘Business IP and Intangible Asset Blog’ is researched, written, and produced by Mr. Moberly to provide insights and additional and sometimes alternative views for company management teams, boards, and employees to aid in identifying, assessing, valuing, protecting, and profiting from their intangible assets.  I welcome and respect your comments and perspectives at m.moberly@kpstrat.com.

Michael D. Moberly   May 3, 2010

When I discuss trade secrets and trade secrecy, I am not necessarily talking about the Coca-Cola’s of the world that have literally built an incalculably valuable and global brand around its trade secret formula for ‘Coke’.

Instead, I focus on the literally millions of small and mid-size companies (SME’s) that have built their brand (reputation, image, and goodwill, etc.) albeit on a smaller scale, by utilizing information they have developed internally.  Often times, that distinctive information provides SME’s with significant competitive and economic advantages that should be, but generally have yet to be formally recognized or treated as being either proprietary or a trade secret.

I am an advocate of openness and transparency under most circumstances.  But, in today’s extraordinarily competitive, predatorial, and winner-take-all global business environment, declaring and treating certain information as proprietary or a trade secret is simply prudent and necessary, particularly when that information serves as an underlier and driver ro elevating a company’s market (brand) value, securing sources of revenue, contributing to its sustainability, and laying foundations for future growth and wealth creation.

Still, there remain misunderstandings among management teams, boards, and employees about trade secrets and trade secrecy which I see being manifested in various ways and on different levels in companies.  For example, (a.) what are the costs of declaring certain information a trade secret, (b.) what are the legal requisites of trade secrecy and what resources must be committed and/or procedural changes executed, etc., to meet those requisites, (c.) how will shareholders and consumers react to having certain information being declared a trade secret, and (d.) are there downsides to declaring certain information a trade secret, etc.

These questions are legitimate and should be thoroughly vetted:

1. By anagement teams, boards, and include the internal contributors and partners that will ultimately have a direct role in execution.

2. In the context of a companies overall operational, brand building, and marketing strategy. 

Make no mistake, there is business prudency, if not fiduciary responsibility, in taking affirmative steps to keep certain information, especially that which delivers economic returns and competitive advantages not merely out of the public domain, but out of the hands of and probable use by competitors and other (economic, competitive advantage seeking) adversaries.

In many instances, the challenge to companies to declare certain information proprietary or a trade secret lies in a commitment to devote the necessary time to quite literally conduct an inventory of their internally developed information-based (intangible) assets.  In many instances, such an inventory reveals that those valuable assets have become embedded in operational processes, procedures, and practices that directly contribute to (underlie) efficiencies, competitive advantages, and customer/client goodwill, reputation, and image, etc., which, in turn, deliver value and revenue.  That information, along with the knowledge how to use that information competitively, should at minimum, be declared and treated as being proprietary!

I look forward to learning your thoughts and perspectives.

Michael D. Moberly   January 15, 2010

In a 2008, UK-based study titled ‘The Hidden Marketplace’ it was reported, to no particular surprise, that there’s quite strong agreement among company management teams that intellectual property  and probably intangible assets as well, are (1.) valuable assets, that, (2.) warrant protection.  

A reality though, as reported in the study, again, no surprise here, is that those dual perspectives of value and protection, are more reflective of managerial aspirations than reality.  That is, management teams seldom translate (execute) their espoused perspectives about IP into concrete actions such as (a.) registering their IP, (b.) engaging in employee IP awareness training, and/or (c.) pursuing - taking action against (internal, external) IP infringers.

Admittedly, this (study) research project focused predominatly on the demand side - consumptive aspects of the larger counterfeit market.  Specifically, the research sought to get a better picture of what is happening in those so-called ’hidden marketplaces’, i.e., places of employment wherein employees routinely purchase counterfeit and/or pirated goods.  A very worthy objective for the principle investigators of this study (as an outgrowth of the project as whole) was to develop relevant tools and assistance for employers and enforcement agencies to help address the (IP theft-infringement) problem from the inside.

This study also examined three (other) issues relevant to the principles of the Business IP and Intangible Asset blog, i.e.,

1. employee attitudes regarding the value of IP

2.  a company’s (management team) approach to protecting its own IP, and

3. what levels of awareness exist among employers - management teams about the problems associated with IP theft in their workplace. 

These issues, in my view, would be better framed in a normative context, i.e., (a.) what should management team attitudes be about protecting their company’s IP, and (b.) what is the necessary (appropriate) level of awareness management teams should possess regarding IP protection to effectively benefit their company?

The answer to these questions lie in management team recognition that it’s quite likely, 65+% of their company’s value, sources of revenue, and building blocks for future wealth creation and sustainability are directly related to (their) intangible assets and IP.  Underpinning that recognition is management teams’ ability and committment for sustaining (managing) control, use, ownership, and monitoring the value and materiality of its IP and intangible assets.  Absent those requisites, its unlikely progress will occur!

Michael D. Moberly   October 22, 2009

There’s little question that intellectual property (IP) and intangible assets are now key, foundational tenents for successful business management, primarily because both IP and intangible assets can, if stewarded and overseen effectively, become potential sources of substantial/domiant (company) value, revenue, sustainability, profit, growth, and competitive advantage. 

To be sure, management teams, boards, and D&O’s who still consider IP and intangibles as merely constituting service functions and/or cost centers are well behind ‘the curve’ especially when most (prospective) investors view the presence and quality of a company’s IP and intangible asset strategy to be crucial enhancers of (a.) profit, (b.) share price, (c.) market position, and (d.) competitive advantage.  In fact, most respondents to the Howery Survey of Investor Attitudes on IP Protection assert that company’s that lack an effective IP (intangible asset) strategy can have a detrimental effect on company performance. 

In today’s increasingly know-how based business environment (economy) in which IP and intangibles are conservatively comprising 65+% of most company’s value, investors and financial analysts are giving much more weight to IP (and intangibles) when making their invest - don’t invest decisions.  In fact, one in four of the Howery Survey respondents state they have actually turned down investment opportunities due to a company’s inadequate approach to IP.  Fully 95% of the Howery survey respondents report that it is no  longer sufficient, in the context of their investment decision, for a target company to merely own IP with no (aligned, integrated) protection, managerial, or competitive advantage peripheals.

Instead, the Howrey survey respondents believe, in substantial numbers, that before a favorable investment decision is made, the target company must have specific strategies (best practices) in place to not only exploit those assets, but also, have an IP and intangible asset protection program aligned with the target company’s competitive strategies.

The proverbial bottom line (in conjunction with the Howery Survey’s findings) is this; companies that presume, solely, that conventional IP enforcement protections are adequate to attract investors are finding instead, they’re no longer sufficient (standing alone) to favorably satisfy prospective investor demands vis-a-vis their investment decision criteria.  To consistently attract serious investors, companies should also have in place (a.) comprehensive and on-going strategies to effectively safeguard those assets to reflect todays increasingly aggressive, predatorial, and winner-take-all business transaction environment, and (b.) seamlessly integrate same into a viable competitive strategy for utilizing and exploiting those assets.

(Adapted by Michael D. Moberly from the work of Howery, Simon, Arnold & White’s Survey Of Investor Attitudes on IP Protection)