Financing Bioeconomy Ventures: Part 5, Competitive Technology & Market Assessment: IP & Patent Analysis

By Terry Mazanec, Bob Kodrzycki, and Lorenz Bauer, Lee Enterprises Consulting

Special to The Digest

(Note: This is Part 5 of an 11-part series. Part 1 is here. Part 2 is here. Part 3 is here. Part 4 is here.)

What are: Ali vs Frazier, Red Sox vs Yankees, and Gevo vs Butamax?

If you said what are the greatest rivalries in boxing, baseball, and bio-butanol you would be right. While it’s risky to step into the ring or on the diamond unprepared, it can be calamitous in an Intellectual Property (IP) dispute. At one point upstart Gevo was spending “30 to 40 percent or more” of their $38 million in yearly cash flow on the legal battle. The 5-year, 10-lawsuit dispute has been estimated to have cost each party upwards of $30 million. That’s enough to KO most startups and bleed even heavyweights like BP-DuPont JV Butamax enough to throw in the towel on a new technology. Happily, this fight ended amicably with Gevo and Butamax hugging in the center of the ring with a cross-license agreement to their respective patents.

This story illustrates the enormous value of patents to a company, as well as the possible costs of court battles. In the “bio” sectors of our economy in particular – whether it be fuels and chemicals, manufacturing and sensors, or health and pharma – the value of intellectual property is increasing. Safeguarding the initial investment as well as controlling expenses for product and market development requires the security offered by intellectual property protection, especially patents. Evaluating the risks and rewards of IP is as important as evaluating a company’s balance sheet. The level of sophistication in biotechnology and bio-based products is such that proper evaluation of IP involves at least as much analysis as evaluating financials, and the participation of technical experts.

What IP Means to Investors

In evaluating an investment opportunity in the Bioeconomy sector, intellectual property is a critical factor to consider in addition to the quality of the management team, robustness of the technology, and the market opportunity.

Many, if not the majority, of early stage companies do not have active sales as they are still in the technology development stage. Thus, establishing an intellectual property foundation can be critical to protecting ownership of the technology in the future. Especially for start-ups, intellectual property can account for 80 to 90 percent of a company’s valuation.

The time to start thinking about a strong intellectual property portfolio is at the beginning of the business. Delaying development and implementation of an effective intellectual property policy until one approaches potential funding sources is often too late. Investors need to understand whether intellectual property protection is in place, or at least applied for, before making an investment.

Investors should ask themselves several critical questions about IP:

1. Does the company have clear ownership or license to use the technology?
2. Is the IP exclusive or shared with another party?
3. Is the IP owned by or assigned to the company rather than a founder?
4. How many years of protection remain?
5. How strong is the IP portfolio within the competitive landscape?
6. Is the IP currently generating income through licensing?
7. Is there a process in place to evaluate new inventions and protect them?
8. Is IP protection available in chosen markets?

Types of Intellectual Property

Intellectual property includes four basic types: patents, trademarks, copyrights, and trade secrets. With our focus on technology for the bio-economy, we need only consider patents and trade secrets in this discussion. Please note that this article is not meant to be an exhaustive treatise on the types of intellectual property or the process to be followed in obtaining IP.

Briefly, a patent is a grant of rights to the patent owner, allowing them to exclude others from making, selling, or using an invention for a set period of time. Three types of patents are granted: utility, for a novel and useful invention; design, for new and original ornamental designs of an article of manufacture; and plant, for a new variety of asexually produced plant. In the US, utility and plant patents are granted for 20 years from the filing date while a design patent lasts 14 years. Utility patents are the most common type for inventions in the bio-economy space, although genetic engineering is rapidly increasing the number of plant patents.

While utility patents require public disclosure of the invention, the protection granted, essentially a 20-year monopoly on the technology or process, can be very valuable in establishing a market for a product and subsequent improvements. Patents can also generate income directly through licensing and can be of great value in highly competitive fields at the exit of an investment.

A trade secret is any type of business information that is intentionally kept private, like the formula for Coca-Cola, a customer list, or information subject to a non-disclosure agreement. Trade secrets require no filing fees, can be implemented immediately, and can last in perpetuity, as long as the secret can be kept. Some industries routinely choose to use trade secrets rather than patents to protect information, especially if the life cycle of a product is short, like a computer algorithm, where the cost of patent protection may not be justified due to the quick product replacement cycle.

The decision to patent or maintain an invention as a trade secret, or to make the information public, depends on the competitive situation. The likelihood that competitors could independently make the same discovery within a meaningful time frame needs to be balanced with the potential value of the invention. Keeping information as a trade secret does not prevent a competitor from obtaining a patent on the same invention, as a patent is granted to the first to file, not first to invent.

Company Value is Closely Tied to its IP Portfolio

The protection of inventions, processes, and products is the lifeblood of companies in the innovation sector and bioeconomy companies are no exception. A robust IP portfolio can protect the valuable technology as well as the cost and effort expended in developing a market for the technology.

Beyond protecting technology, a strong IP portfolio is critical in enabling business growth by opening up potential partnerships and providing an advantageous position in contract and license negotiations. A strong patent portfolio may pay off in a company’s ability to recruit and retain highly skilled and motivated employees, as a strong IP position confirms that a company is healthy and well positioned competitively.

A strong IP portfolio builds on itself as not only does it grant a 20-year monopoly on a particular invention, it also limits the ability of competitors to produce closely related competing products without obtaining a license or spending considerable effort to develop independent products.

IP can also add to company value when a patented invention is not essential to the main business. These non-critical assets can be sold to generate cash or licensed to others to create a revenue stream.

Plan to Fail if You Fail to Plan

While the creation of potential IP happens with every new idea, the creation of actual IP, that is, a protected process or piece of information, does not happen without considerable effort. Obtaining patents can be a lengthy and expensive process. Thus, every company needs a process to evaluate each potential invention and decide whether to seek patent protection or to maintain as a trade secret.

The lack of an IP policy can lead to some very negative consequences when an exit event is sought. More than one company, when faced with a short-sighted IP plan and intimidated by the high cost of patenting, has failed to create new IP as inventions arose or to file for improvements upon existing IP. Not only does this reduce the overall value of the company going forward, if existing patents have short remaining lifetimes it can serve as a disincentive for potential investors or buyers.

An effective IP policy should be demanded by investors in order to capture all the value of the creative process and potential products that arise. The following components of such a plan should be in place:

• Initial evaluation of the competitive patent landscape prior to starting projects that involve new technology. This analysis will help avoid the inconvenience of learning that a “new invention” is actually covered by a competitor’s existing patent. Before commercialization of the newly developed technology, a Freedom to Operate (FTO) analysis will be needed as well.
• Continuing, active competitive intelligence (CI) program employing a thorough literature and patent search. Coupled with analytics, a robust CI program will provide key insights by identifying new developments of competitors in the same space as your potential investments. This can help to benchmark technology, identify potential infringements, and prevent duplication of effort.
• An internal process to stimulate, identify, and evaluate new inventions. An IP development process will not only insure continued flow of potential IP but also encourage communication among employees, often leading to more valuable inventions and better business decisions.

What to do

Evaluating IP is best accomplished by professionals who have been following the development of the technology and closely related technologies. It requires knowledge of patents, academic publications, industrial developments, and grey literature (i.e. government reports and conference proceedings). Searches done by machine methods and reviewed by non-experts frequently miss key references or fail to make significant connections.

The resulting searches can be evaluated using modern analytics to prepare a map showing key areas of overlap and gaps which are opportunities for IP development. Some technology may be open art due to patent expiration or abandonment.   Thus, the search can serve as a critical strategic tool to advance a project.

Conclusions

IP evaluation and development are critical to be successful in the bioeconomy. Technical expertise and legal know-how are both required to properly compile and evaluate technical literature from an IP perspective. At Lee Enterprises we have a number of highly qualified experts with substantial IP experience across all key bio-economy sectors who are well positioned to perform IP reviews for due diligence evaluations as well as for ongoing investment purposes.

Don’t get KO’d in the first round by letting your IP defenses down, contact us at Lee Enterprises.

While the authors are experienced technology developers, they are not patent attorneys and this is not legal advice.

Next up, Financing Bioeconomy Ventures: 6 – Pilot Plant Site Assessment and Validation of Experimental Data.

About the Authors

Terry Mazanec, Ph.D., is the Executive Vice President of Emerging Technologies, Biomass Power, Biogas/AD, and Investor Services for Lee Enterprises Consulting. Dr. Mazanec has been involved in the renewable fuels and chemicals area for much of his 35 years in R&D. Terry worked 21 years at BP in alternate energy R&D, and then as Chief Scientist at Velocys for 9 years where he led the team developing microchannel processes for natural gas upgrading and chemicals production, including catalyst development, corrosion resistance, and metals coating. He has been an independent consultant for the past 5 years serving clients in the USA, Europe, and Asia. He has authored 20 refereed publications and has been granted more than 60 US patents as well as numerous international patents. He has experience in biomass upgrading, natural gas conversion, solid oxide fuel cells, algae production, chemicals process development, homogeneous and heterogeneous catalysis, FEMA/risk analysis, and intellectual property protection.

Bob Kodrzycki, Ph.D., a member of Lee Enterprises Consulting, has over 27 years of experience in industrial R&D and consulting with a focus on commercialization of biotechnology, including renewable energy project development (torrefaction, wood pellets, cellulosic diesel, biomass energy), metabolic engineering for bio-based products, and creating non-destructive testing methods.

Lorenz Bauer, Ph.D., is a chemist with over 30 years of experience in catalysis, oil refining, chemical production and biomass conversion. He is an independent consultant affiliated with Lee Enterprises Consulting. An inventor of 25 patents and author of over 20 publications, he is Six-sigma black belt trained in project management and analytics. Larry’s projects have ranged from food additives, off gas treatment, upgrading unconventional feeds and waste recycling.   Most recently he worked on fast pyrolysis of biomass and upgrading products to fuels and chemicals.