A Primer on Commercialization

So you have made an invention in the laboratory and are now wondering if it can be commercialized. You have heard the hype on technology transfer as the driving force for economic growth in knowledge-based economies. Whether you are interested in deriving some economic benefits from your invention or just want to see your invention developed into a product or service for the public good, you will need to understand the various issues and strategies in technology transfer. This article will examine some of the things that you must consider when commercializing your invention.

Who Owns Your Invention?

Before you do anything, you need to determine if the invention rightfully belongs to you. Even if you are the inventor, it is possible that you might have given your ownership away when you signed your employment contract. Your employer, whether it is a university, a research institute, or a company, usually requires that you assign all rights to any inventions that you might create during your term of employment. So check your contract and determine if it is you or your employer who is the owner of your invention. If you own the invention, you can commercialize it any way you wish. Otherwise, you will have to talk to the technology transfer office at your university/institute, or the business development/legal people at your company regarding commercialization. Most organizations will have in place established procedures for invention disclosure, the goal being to make it easy for you to disclose the details of your invention to them. From then onward, the technology transfer professionals will take over the process of commercializing your invention. However, you may still be required to assist to different degrees particularly in the patenting process.

To Patent or Not to Patent?

Intellectual property protection is a legal mechanism for protecting your intellectual assets. If your novel idea is a process/method or composition of matter, you can apply for patent protection. What you need to understand about patents is that a patent is a legal right to keep others from making, using, or selling your invention. A patent issued to you does not give you the rights to practice your own invention. You merely have the rights to sue others who are infringing on your patent. This is an important point to remember as it has a major impact on the patent filing decision.

To qualify for patent protection, your invention must be novel, nonobvious, and have commercial utility. Your patent application (or specification, as it is known in the legal context) must explain how to make and use your invention. Patent law requires that the specification is enabling (so anyone can make and use your invention by following the description in your specification) and that it describes the best mode of your invention. A patent, besides securing a proprietary position, must also have commercial value. Because the patent process is long and expensive, the rationale to file a patent is often based more on business reasons than scientific merits of the invention. If there is no business reason for a patent, the invention might just be defined and kept as a trade secret.

Extracting Value From Your Invention

The financial risks of commercially exploiting early-stage technologies are generally very high. It is necessary, therefore, to obtain intellectual property protection so that you (or your employer) can induce/protect investment spent on developing the products or services. Applying for patent protection is only the first step toward ensuring that your invention realizes its commercial potential; you will also need to determine the best way to extract value from your patent. For example, your invention could be commercialized through routes including selling the patent, licensing it, creating a start-up or spin-off company, or entering a strategic alliance.

When you sell your invention, you are assigning the rights of your patent invention to the buyer in return for cash or equity payments. The original patent owner will lose all rights to the patent because its title is given to the buyer. In licensing, you are giving the licensee the rights to utilize your patented invention in return for cash or equity payments in the forms of royalty, an up-front payment, and/or ongoing milestone payments. The owner of the patent retains title to the patent. If the license is exclusive, the patent owner will no longer have any rights to commercially exploit the patented invention. If the license is nonexclusive, the patent owner can license the patent/invention to another party or exploit the patented invention himself or herself.

If you, the inventor, have the necessary entrepreneurial spirit and talent, you might consider starting up a company to exploit your invention. But you must consider the viability of a company with just one invention. If your invention is a platform technology that you believe can be used to derive multiple products or services, then you have a potential high-tech start-up on your hands. Most of the universities and research institutes that are currently involved in technology transfer have different programs to assist their staffs in setting up new companies. If you are working for a company, your company might allow you to spin off the new invention into a new company. This will most often be the case when the new invention is not part of the company?s main business. In either start-up or spin-off modes, the owner (i.e., the university or the company) will most likely take an equity stake in the new company and/or a cash payment as consideration for letting you independently exploit the new technology.

In highly competitive and resource-intensive industries (e.g., biotechnology and pharmaceuticals), it might make better business sense to enter an alliance through research and development agreements, cross-licensing agreements, or joint ventures. For example, two companies that have complementary strengths might decide to utilize their patented technologies to achieve common goals through R&D agreements. Or they might just decide to cross-license each other?s technologies for independent commercial exploitation. If both companies see a business potential in putting their technologies and know-how together, they might decide to form a joint venture company.

Valuing Your Invention

To arrive at a reasonable value for your early-stage technology is difficult. With the current interest in intellectual assets, valuation of intellectual capital has become a hot topic among technology transfer practitioners. Technology or intellectual property valuation provides the foundation for developing a logical and defensible licensing payment structure. And if you?re starting a new company, technology valuation also offers a starting point for negotiation of equity structures with your investors.

There are a number of valuation models for early-stage technologies, including cost-based valuation, market-based valuation, and economic analysis.

Cost-based valuation is based on the cost spent on the development of the project from which the invention was derived. It is the simplest approach, because the project cost is usually known. But the challenge in this approach lies in determining how much of a premium to ask in addition to the actual cost to date in order to reflect the true value of the invention.

Market-based valuation methods are usually based on industry benchmarks. For example, data on royalties for licensing drugs may be collected along with other market information (e.g., market sizes, estimated drug price, patent life) and used to develop a ranking system based on a certain set of market parameters. Your new drug is then compared to these parameters and a royalty rate is estimated. If you have a number of parties interested in your invention, you can arrive at a market value for your invention by auctioning your technology to the interested parties.

Economic analysis has been the traditional tool to value corporations in the accounting field, where financial statements reflecting the economic affairs of the corporation are available. With early-stage technologies or patents, the types of product or services that can be derived from the invention are not usually known, let alone projected cash flows that might come from the invention. Nevertheless, discounted cash flow analysis has been used with pro forma cash flow statements to estimate value of patents and technologies. More recently, real options have been applied to value patents and high-tech companies with mainly intangible assets. It has been argued that the owner of the technology has the option to do different things at different stages. Thus option theory can be applied to technology valuation.

The bottom line for valuation at the moment is that it is more an art than a science--there is no proscriptive formula for valuing inventions. Because of this, it is a good idea to use at least two different methods to value your new technology so that you can check that both methods arrive at more or less the same figures. You have to keep in mind that coming up with a value for your technology/invention is only the starting point for negotiation. How you ultimately price your invention is more important than coming up with its "true" value. After all, it is the price for which you can sell your invention that will count in the end.

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