Valuation, investment and IP

As I mentioned in my introductory post, I come from a research background, so I’ve been learning more about the business side of IP through both formal and informal training here at ipVA and through just shadowing others and asking questions.  But being the blogger that I am, I’ve also started regularly reading  VC blogs (see my full VC blogroll here).

I came across a post on Venture Blog discussing valuation: Raising Venture Capital: How Much Money Matters. In it David Hornik talks about raising money from the VC perspective.

For me, the right question isn’t “how much money do you want to raise?” The right question is “how much money should you raise?”

His answer:

The right amount of money to bring into the company is enough to reach sufficient milestones to raise more money at a higher price at a future date (or, in some rare cases, enough to get to cash flow positive). If all goes well, the money I invest will be used to drive all sorts of risk out of the business, enabling the Company to raise the next round at a much higher valuation.

Part of looking for investment naturally means arriving on an overall valuation of a company, and then asking for a certain amount of money to be invested in return for a chunk of the business. From my perspective, I naturally think about intellectual property (and more broadly all the intangibles) and how it plays into the overall valuation of a company (mostly because I’m an IP anorak). This would be factors relating to patents filed, threat of IP litigation, strength of licensing agreements, and numerous other things about the company and how it operates.

Since I’ve started in July, I’ve already been exposed to several projects involving using IP as a way to attract or increase investment, and I’m already beginning to see how in practice valuation in this area is both an art and a science. It seems to me that oftentimes it may be more salesmanship than anything that can drive a valuation – purely about how well you can get your point across (but of course you do have to have some substance to back it up).

David mentions how one company’s unexpectedly high valuation changed the conversation during a pitch (emphasis mine):

From where I sat, it seemed to me that the company could use single digit millions to take the technology to the next step. Yet, when we got to the slide that stated how much the company was raising, I learned that they were hoping to raise more than $50M. By my assessment, $50M would buy the vast majority of the company. Clearly the company felt differently — they were hoping to sell closer to 20% of the company. It certainly refocused the conversation on what the company felt was the justification for such a high valuation and led to a very interesting discussion of the underlying economics of the company’s business.

I wonder how much the IP of the company was a part of their own high valuation and how they presented it. Being a VC of course means that you get to sit in on lots of pitches, and so get a broad perspective on what works, what doesn’t, and trends in how people pitch. If you are a VC (or from a private equity firm) and read this blog, I would be interested to do some research on how much companies looking for investment tout their intangibles.

Also, please suggest what VC blogs I should be reading!

Tagged as: pitch, private equity, valuation, vc