Financing IP firms

Over the past number of years I’ve noticed a trend that appears to have settled in to become the status quo: VCs back private firms trying to build an intellectual property portfolio, but they shy away from public companies with an established lead in a particular area.

This shouldn’t come as a surprise, as VCs as a rule focus on starting and building private firms with new technologies. But does it make sense to ignore if there are underfunded public IP-based firms with a proven niche?

Off the top of my head, a medley of private VC-backed intellectual property-heavy firms come to mind: D-Wave, Liquid, RedMere, Sige, Sirific Wireless, TenXc, and ViXS. Some VCs, such as Celtic House and VenGrowth, show a real affinity for these types of deals.

But why not the publicly traded versions? Rather than build a firm in the hopes that the patents and products will eventually matter to customers, why not be a bit more opportunistic? Limited Partners (and unit holders) want performance, and don’t necessarily need that performance to come exclusively from the business-plan-on-a-napkin to IPO/sale process of building a business.

The usual excuse is a combination of return expectations (IRR and multiples of capital) and an inability to control the direction of the business, in light of the governance issues of any public company. Fair enough, but these are not issues of Everest proportions.

As discussed yesterday, during the past few years there have been a multitude of times when Mosaid (MSD:TSX), Certicom (CIC:TSX), Wi-LAN (WIN:TSX) and Diversinet (DVNTF:OTC BB) (to name a few) needed capital. In my experience, the public markets are not a reliable place to finance IP stories, particularly when the timelines for licence revenue or customer traction aren’t met.

Institutional mutual and pension funds are not traditionally designed to do the primary due diligence on Certicom’s patents, for example, and retail investors can rarely be expected to know what the benefits of Mosaid’s DRAM memory opportunity might be. While investment bankers and equity research analysts can attempt to validate the “opportunity”, it just isn’t the same role that a VC would play if he/she were to invest $5 or $15 million dollars into a story.

As for returns, there have been plenty of times over the past five years when these firms needed capital, and in each case it appears that a VC would have made a superlative return. And unlike a private company investment, this deal can be easily marked-to-market; the company is already public, after all. No need to worry about the IPO window.

Whether a VC made a eight bagger on Wi-Lan over the past two years, or a ten time return on ViXS over 3 years, I’m confident that their LPs will herald the success. As a former OMERS fund boss once said: “I don’t care how [he] makes his returns”, when referring to the multitude of structures that a VC can utilize when investing in an opportunity.

The benefits of VC-support for a public company don’t end with money, either. The mere validation of the business plan that comes with VC sponsorship can only help the company raise money from other, non-specialist investors. And for the patent infringers out there, the knowledge that a deeped-pocketed VC is on the board will make them think twice about ignoring a lawyers’ letter. One can only imagine how Nokia or Cisco might act if they knew that the complainant in question had the resources to wage a drawn out legal battle in patent court, should they choose to ignore the first few warning letters.

Rather than sheperd a team with a few good ideas and maybe a filed patent or two, why not bring your VC expertise (and capital) to bear on a proven IP story? It has been the buyside that’s had to back these stories, and they don’t all necesarily have the training in tech trends that the VC firms have.

Investment capital is all that often stands between success and failure for these firms. Had the OTPPB not backed Mosaid at a crucial time, it might not be here today. In Wi-LAN’s case, the buyside has been very supportive at times (but not others), providing dribs of equity at dexterious times. Same for Certicom.

But, just imagine what could have been had a real pro shown up, cheque book in hand. Would Cisco or Nokia, et al, been dismissive if the firm pursuing them had a board member (and large shareholder) that could put more capital should the need arise. Is that the type of IP company to ignore when they threaten to sue you? For years, most of these firms were capital constrained at very important junctures.

And while these firms may no longer need that profile of investor, there will undoubtedly be others along the way with similar profiles.

Public tech IP company boards need to reach out more, and the VCs might benefit from changing their frame of investing reference. Each would have done well by the other.

MRM