For many investment holding companies, the all-critical decision about whether or not to pursue an investment opportunity rests on the evidence of two things: sustainability and scalability. If those characteristics are there, the investor is often very interested.
While several factors determine whether sustainability and scalability exist in a market and in a business, an important one is intellectual property. Specifically: does the business have the ability to develop proprietary intellectual property or can its intellectual property be owned via acquisition or origination?
Intellectual property is an embryo of true wealth creation, and here’s why:
1. Competitive edge
You’ll agree that the modern corporate environment no longer relies as heavily on physical assets as it did in the past. Corporate “know how” and methodologies are becoming increasingly important in the way companies operate. For instance, we live in a world where the most important travel and accommodation companies don’t hold the assets that make up their market, while mining has moved from the ground into data warehouses.
As we become increasingly dependent on knowledge and information to generate competitive advantage, intellectual property becomes more important; going so far as to represent a huge chunk of the wealth and assets of most businesses today.
2. Better control
If a business does not own the intellectual property of the solutions it delivers to market, it runs the risk of not controlling its pricing relative to that market. In South Africa, exchange rate issues can also arise when leasing intellectual property from international companies; very often, to the detriment of the lessor, because the negative effects of exchange rate fluctuations can’t be passed on to the consumer.
What happens then? Well, if your dependence on others’ intellectual property can impact your price point, this can significantly erode your margins.
Another negative impact of not controlling your intellectual property is that you cannot efficiently and effectively serve the needs of your customers, because you are unable to customise your solution to clients’ needs. Flexibility is significantly hamstrung when the intellectual property sits outside your specific environment.
3. Enhanced profit
Taking a controlling stake in a business gives the investment holding company ownership of the intellectual capital, as well as control over the use and licensing of the business’s proprietary intellectual property.
Owning this, as opposed to reselling it as a value-added reseller, unlocks more wealth and higher returns. This is largely due to the fact that, if you are using third-party intellectual property you become a “price-taker” rather than a “price-maker”. As a “price-maker” you are able to protect your margins and, often, solutions that can be customised to clients’ needs lead to enhanced margins.
4. Proven capability
Proven intellectual property tends to be more attractive than disruptive innovation, which demands significant funds be channelled into research and development. This is why many investors seek to own intellectual property that has proven capabilities, whether internally developed or acquired, and to build on those, so that the intellectual property can be leveraged to serve the needs of the desired market.
5. Sustainable productivity
Some investment holding companies create separate investment holding intellectual property companies, which retain intellectual property centrally and license it to subsidiaries for deployment. Other holding companies retain intellectual property at subsidiary level; allowing those with differing intellectual property to compete with each other. Yet others take clusters of intellectual property, unite them at group subsidiary level or within the subsidiaries themselves, and redeploy them to market through their channels.
This provides the flexibility to package the intellectual property, and to create more intellectual property through innovation in the clusters. The holding company can accurately value its asset groups for shareholders, and determine ROI and return on intellectual capital.
Advice for holding companies
If you represent an investment holding company, here are four tips for you:
- Protect your intellectual property and retain your intellectual capital at all costs, because this is where capitalisation capability, good revenue generation and margin protection will vest. You will also be afforded the relative indulgence of entering new markets, going on to own further intellectual capital, and so on.
- Focus on niche markets where you can clearly define your target audience and develop solutions that are difficult to mimic. You don’t want to be building intellectual property to compete; you want to be building intellectual property to differentiate yourself and to enhance your position as a price-maker in your market. Be a “price-maker”.
- At MICROmega we generally bring intellectual property to market through our own distribution channels. If you don’t have this luxury, know that not all licensing agreements lead to desirable outcomes for the investor. Before signing any agreement, ensure that the party you are working with has the resources and commitment to take your intellectual property to the next level.
- Invest in well-written, sound non-disclosure agreements when dealing with other parties. Ensure that your employment agreements, licences, sales contracts, and technology licence agreements all protect your own intellectual property.
The bottom line is this: Investing in your own intellectual property is a model that ties up significantly more cash than the reseller model, which is why it’s not the most common path to choose. But proprietary intellectual property is absolutely critical to the success of many investment holding companies, because it allows them to remain at the forefront of market and pricing control, customer satisfaction, solution development and advancement, and therefore sustainability and scalability.
Greg Morris is CEO of MICROmega Holdings.
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