Valuation and Pricing of Technology

© Copyright 2004-2005 ABI, LLC . ALL RIGHTS RESERVED

We talked about the product, but pricing is absolutely the most important thing.
With a technology license you’re talking about patents, commercial design and know how. You only have estimated NPV (net present value), so the risk perception is higher. You need to establish a true value and the question now is how to calculate a price. 
There are established valuation methods for licensing. There is the high scenario, which points to a maximum justifiable price. That is royalty estimated from the revenue projection over residual patent lifetime and extrapolated comparable industry standard royalty rates. For example, in the pharmaceutical industry a pre-commercial design of a possible future drug will get you up to 10% in royalty income. The low scenario, the minimum acceptable price, comes from considering what the risk would be. You need to determine the "net present value" with a risk-adjusted hurdle rate to come to such a number. You can get these numbers for business licenses and product licenses. The problem is that you can’t apply this, per definition, to early-stage technology.

 In Pricing Early-Stage Technology you must approach this problem by determining the link between royalty rates for business and product licenses and applying that link to early-stage technology. We coined the name "Technology Maturity Factor," which is determined by IP Value, design for "manufacturability," and product benefits. If you can agree on one specific license rate; for instance in pharmaceuticals it’s 10% -- you will be able then to calculate a rate. For example, for a pharmaceutical technology with 60% maturity, the licensing rate would be 6%. 
The second point, to determine the commercial risk, is much more difficult, because people tend to say "it will fail," which would mean a risk of 100%. Or they are enthusiastic and say "it will never fail," and then your risk would be zero. This obviously doesn't mean anything. A big help would be to get market information and determine the terms of amortization. That will provide you with the IP Value. There you compile information on the status of the patent and the previous development costs.

I agree completely with Ada Nielsen´s statement (Commercial Development and Licensing Manager, BP Amoco Chemicals) that nobody cares how much money you have put in; because that is the" lottery ticket from last week, and it didn’t win the prize." If you can sell the technology to someone, you have to make it very clear what he's getting, and that will determine the market price, not what you invested in it.

   Price= Revenue projection, risk, Technology Maturity Factor, market growth, timing, application, novelty and not sunk cost. In terms of the market analysis, you want to determine the market and industry maturity, the growth rate of the target market, and also the estimated market potential. Usually we get information like "This will be a $500 million market." Wow, great...but the question is "when?" From this point of view, you can determine the potential. You have data behind it from your Marketing people, but the question is how long it will take.

 For example, you need a pre-qualification of five years for an automotive coating. If you don’t show up with data proving five-year durability in climate conditions like those in Arizona and California, they will not take it. So you have five years before you reach the $500 million market, but you will also need two or three years to develop it so now you are looking at eight years. You can see what amortization starts to look like. The next step, even before you post the technology for sale or before you address your buyer, be sure that you know what you want: cash, a royalty agreement, or an equity investment. As with anything in life, there is an upside and a downside to any of these options. Most people prefer cash at closing because they have no obligation to maintain the patents any longer. But if you think the technology is valuable and not too risky and could be expanded upon by the licensee, then choose the royalty agreement. If it’s a high-risk technology, but it is valuable and there is a good market opportunity, use your IP as an equity investment.

THE METHOD TO CALCULATE MAX JUSTIFIABLE PRICE, ACCORDING TO ABOVE DATA:

*EXAMPLE

20 YRS X $5MM / YR=$100MM X 10%ROYALTY= $10MM ASKING PRICE “NPV”

TO ADJUST FOR RISK AND MATURITY FACTOR = DEDUCT (?%)= $/npv

*NOTE

 If a product is ready for market the maturity factor= 0% deduct, and the sum of the above combined risk factors =?%( failure factor), then the asking price (NPV) is correct….

(ACCORDING TO INDUSTRY EXPERTS.)

WITH HIGH RISK FACTORS AND FAVORABLE REVENUE PROJECTIONS, MATURITY FACTORS, MARKET GROWTH, TIMING, APPLICATION AND NOVELTY…THE PREFERED METHOD OF EXCHANGE FOR THE PATENT, WOULD BE TO CONVERT TO EQUITY, IN THE ABOVE EXAMPLE.

 HOWEVER…

THE RISK FACTOR WOULD BE MUCH LOWER (60 – 75%) WITH AN EXPERIENCED MANAGEMENT TEAM, AN ESTABLISHED NETWORK AND SUFFICIENT RESOURCES TO DRIVE THE PROJECT.

 IN THIS CASE, A COMBINATION OF UP FRONT CASH, EQUITY AND ROYALTIES COULD POSSIBLY BE NEGOTIATED.