Business Forum: Can there ever be an objective valuation of technology?

Q. How can we make our university’s tech transfer office more willing to patent our inventions? It has been a constant battle.

A. The good news is that you both share one objective: Generate revenue for your university. Royalty income can be significant; The Chronicle of Higher Education reported on Aug. 28, 2012, in “Universities Report $1.8 Billion in Earnings on Inventions in 2011” (http://bit.ly/WZNoXL) that Northwestern University was #1, with $191 million in licensing revenue ($829 million in 2009). Applying to patent a good invention is making an investment!

No doubt you want your invention patented whereas the tech transfer office is administrative, is tasked with staying within a budget, and is expected to achieve financial goals. “Patentability” is definitely a consideration, but tech transfer folks may place greater weight on potential financial returns than you do. You are likely to get a positive reaction by building a strong case for the business potential when submitting your disclosure. Why wouldn’t they patent it if they see big dollar signs? Making a business case may not be something you are naturally inclined to do, but it is not difficult if you are routinely engaged with companies. Get in touch with a few knowledgeable individuals to fine-tune your pitch and introduce you to potential licensees who are willing to build a strong case on your behalf.

You can take this objective a step further by being an advocate for improving the operation of your tech transfer office to benefit those who come after you. For example, urge them to set up a committee comprising industrial experts to evaluate the technology and use lawyers who are willing to get paid on a contingent basis, based on royalty income. That not only lowers initial expenditures but also provides an evaluation by a third party who could have a vested interest. You can also encourage your university to help its professors by conducting entrepreneurial workshops and by providing templates to help researchers self-evaluate commercial viability of their endeavors.

Q. I am regretting that I turned down the offer of a $1 million investment to start my company in return for 20% ownership. Do you think I did the right thing?

A. You must have a very good idea and a fine reputation, as well as being very persuasive to convince an investor to write a check based on a business plan.

There is not enough data for me to determine whether you have made a sound decision. That would depend upon on whether this investor has a good reputation, whether 20% is too aggressive on the part of the investor relative to the potential of your business, or whether you have other investors lined up who are willing to offer you an even more attractive deal. So I will only address valuation as a topic for the benefit of my readers.

Determining the valuation during the embryonic stage is more art than science; it is ultimately based on what an investor is will to pay and you are willing to accept—a fair deal by definition. Valuation can be determined professionally by gathering data and analyzing the risk vs. reward to justify the valuation, or it can be determined emotionally without due consideration. I suspect both you and that investor have made an emotional decision.

A positive way of looking at this offer is that the investor is putting a valuation of $4 million on your idea, instead of the negative view that you are giving up 20% of the company—either way, you would get the capital you need to launch the business. This is not a bad deal in the current investment environment. Given that you are now having second thoughts, my suggestion is to get back to that investor quickly, hopefully catching that individual before emotion swings in the other direction and the investor has second thoughts, too.