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From Innovation to Cash Flows: Value Creation by Structuring High Technology Alliances

ISBN: 978-0-470-11809-2
618 pages
July 2009
From Innovation to Cash Flows: Value Creation by Structuring High Technology Alliances (0470118091) cover image
Praise for From Innovation to Cash Flows

"Critically important topics for all entrepreneurs, new and experienced. Collaboration, intellectual property, and funding are described with depth and thoughtfulness. From Innovation to Cash Flows provides both the theoretical structure and the rich examples to serve as a great reference. Not to be missed!"
Cheryl A. Fragiadakis, Head of Technology Transfer and Intellectual Property Management, Lawrence Berkeley National Laboratory

"From Innovation to Cash Flows is a unique book that covers many of the essentials to be successful as a biotechnology or high-tech entrepreneur. The combination of theory and practical examples adds direct business value. This comprehensive work will prevent any starting venture from making costly mistakes."
Jeroen Nieuwenhuis, PhD, MBA, Corporate Entrepreneur, Magnotech Venture, Philips Healthcare Incubator

"Truly exhaustive in its coverage of all the different aspects of managing high-technology innovations, this book constitutes an invaluable resource for technology entrepreneurs."
Juhana Rauramo, Partner, Bio Fund Management Ltd.

"From Innovation to Cash Flows is a wellspring of insights and inspiration for anyone with a desire to start up a high-tech venture. The reader is guided step by step through the twists and turns of strategy, contract law, intellectual property rights management, and strategic partnering. A global team of experts from law, science, and business collaborated to write this book; their pooled know-how and collective experiences shine through. The result is highly recommended. Every aspiring entrepreneur with a scientific bent will want to own this book for his or her own library."
Laura Cha, Deputy Chairman, The Hongkong and Shanghai Banking Corporation Ltd.

"Alliances often are a vital component of successful high-tech ventures. Through its unique blend of sound management theory and wise business and legal advice, this book shows high-tech entrepreneurs how to build innovative business models based on strategic collaboration with other firms."
Xavier Mendoza, Deputy Director General, ESADE, Ramon Llull University, and former Dean, ESADE Business School, Spain

"This book is distinctive because it tells you how to turn your idea into a profitable business—a combination of savvy business advice and extensive legal documents that is original. This is a book to be read, and then revisited. You will want to come back to it time and again for references, for sample documents, and for sage advice on how to take the next step."
From the Foreword by Henry Chesbrough, Adjunct Professor and Executive Director, Center for Open Innovation, Haas School of Business, UC Berkeley, and Karl S. Pister, Dean and Roy W. Carlson Professor of Engineering Emeritus, UC Berkeley

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Foreword.

Preface.

Acknowledgments.

PART ONE Creativity and the Roles of the Inventor, Innovator, and Entrepreneur.

CHAPTER 1 Creativity and the Entrepreneurial Process.

Getting That Bright Idea.

From Idea to Invention.

Distinct Roles of Inventor, Innovator, and Entrepreneur.

Closing Thoughts.

CHAPTER 2 Protecting Your Invention.

What Is Intellectual Property?

How Intellectual Property Law Works.

Basic Forms of Intellectual Property.

International Treatment of Intellectual Property Law.

Innovation Process: Diffusion and Adoption.

Appropriating the Profits of Innovation.

How to Decide Which Intellectual Property Tools to Apply.

How to Identify Intellectual Property in Your Organization.

Developing an Effective Invention Disclosure Process.

Chapter Takeaways.

Appendix 2.1 Remmey’s Granted Patent.

PART TWO Building Business Models.

CHAPTER 3 Understanding Strategy Basics.

From Strategy as Plan to Strategy as Direction.

Introduction to the Strategic Management Process.

Why Is Strategy Important for Any Enterprise?

Strategy in a Rapidly Changing High-Technology Environment.

How Often Should You Change Your Venture’s Strategy?

How Do Managers Formulate a Strategy?

Three Levels of Strategy and How They Interrelate.

Basic Tools for External Analysis.

Internal Analysis and Organizational Design.

Understanding Organizations and Their Cultures.

Challenges of Organizational Design.

How Organizations Survive Turbulence and Change.

Reflections on Strategy in the Entrepreneurial Context.

Chapter Takeaways.

CHAPTER 4 Strategies to Grow, Restructure, or Harvest Your Business.

Growing.

Restructuring.

Harvesting.

Diagnosing the Situational Context of the Industry.

Closing Thoughts.

Chapter Takeaways.

CHAPTER 5 Key Elements of a Business Model.

What Is Your Business Model?

Creating the Business Model Step by Step.

Chapter Takeaways.

PART THREE Crafting Strategic Alliances.

CHAPTER 6 Introduction to Strategic Alliances.

What Is an Alliance?

Strategic Alliances.

Forces of Deconstruction on the Value Chain.

Vertical Integration Decisions.

Strategic Alliances with a High Component of Technology.

Chapter Takeaways.

Appendix 6.1 Comparison of Main Alliance Modes and Their Contractual Features.

CHAPTER 7 Managing Alliances.

Filling the Strategic Gaps.

Doing It Better.

Step 1: Decide on the Strategic Logic for the Collaboration.

Step 2: Select the Right Partnering Candidates.

Step 3: Design, Structure, and Negotiate the Alliance.

Step 4: Managing the Alliance.

Step 5: Measure and Assess Performance.

Step 6: Check the Merits of Continuing the Alliance, Either Adjust or Exit.

Step 7: Start the Cycle Anew: Strive to Create a Connected Network of Alliances.

Closing Thoughts.

Chapter Takeaways.

CHAPTER 8 How Alliances Complete the Value Chain in Biotechnology and Pharmaceutical Business Models.

Risks and Uncertainty Associated with Drug Development.

Value Chains in Pharmaceuticals and (Bio)Pharmaceuticals.

Completion of the Biotechnology and Pharmaceutical Value Chain through Alliance Formation.

Business Models in Pharmaceuticals and (Bio)Pharmaceuticals.

Recent Trends and Emerging Business Models in Healthcare.

Alliance Formation Crucial to Biotechnology and Pharmaceutical Business Models.

Chapter Takeaways.

PART FOUR Understanding Legal Agreements.

CHAPTER 9 Contract Law, Key Legal Agreements for Business, and Incorporation Issues.

Elements Constituting a Contract.

Form of the Contract.

Cross-Cultural Differences in Contractual Agreements.

Nondisclosure Agreements.

Shareholders’ Agreements.

Incorporation Issues: Choosing the Appropriate Legal Structure.

Sole Trader (Sole Proprietorship).

Corporations.

Partnerships.

What Is the Right Choice of Vehicle?

Intellectual Property Issues Pertaining to Incorporation.

Chapter Takeaways.

CHAPTER 10 Investment Agreements.

Investment and Finance.

Preferred Shares.

Transferability of Shares and Exit.

Other Terms of the Investment Agreement.

Chapter Takeaways.

Appendix 10.1 Investment Term Sheet.

CHAPTER 11 The Intellectual Property Landscape.

IP Perspective.

Copyright.

Designs.

Know-How or Trade Secrets.

Trademarks.

Closing Thoughts.

Chapter Takeaways.

CHAPTER 12 The Basics about Patents.

Patent Facts.

Filing Patents—Overview of International Patent Treaties.

Patent Application Processes.

Trends in Global Patenting Activity.

Closing Thoughts.

Chapter Takeaways.

CHAPTER 13 General Patenting Strategies in High-Technology Industries.

Developing a Patent Strategy for Early-Stage Businesses.

Questions to Ask When Devising a Patenting Strategy.

Defensive and Offensive Patent Strategies.

Real-Life Examples.

Strategic Patenting—Claiming First to Win the Battle.

Strategic Patent Considerations for Generics Drug Companies.

Chapter Takeaways.

CHAPTER 14 Navigating Technology License Agreements.

Structure of a Basic Technology Transfer Agreement.

Outline of the Agreement.

Competition Law and Antitrust Provisions.

Heads of Terms or Memorandum of Understanding.

Chapter Takeaways.

Appendix 14.1 Sample Heads of Terms or Memorandum of Understanding.

PART FIVE Competitive Intelligence and Due Diligence.

CHAPTER 15 Competitive Intelligence and Patent Searching.

Asking the Right Questions—Doing Various Patent Searches.

Business Intelligence for Benchmarking.

Competitive Intelligence.

Carrying Out Information and Patent Searches.

Searching for Technical and Business Information.

Going from Patent Data toward Technology Intelligence.

Chapter Takeaways.

CHAPTER 16 Due Diligence.

What Is Due Diligence?

Preliminary Issues Before Commencing Due Diligence.

How Legal Due Diligence Works.

Nonlegal Due Diligence.

Issues in Cross-Border Due Diligence.

What If Due Diligence Uncovers a Problem?

From Innovation to Cash Flows and Beyond: Due Diligence during the Business Life Cycle.

Closing Thoughts.

Chapter Takeaways.

PART SIX Valuing Company Cash Flows.

CHAPTER 17 Valuation Using Discounted Cash Flow.

Why Valuation Is an Important Skill to Learn.

Compounding and Discounting Money: Present Value Techniques.

Definition of Net Present Value.

Internal Rate of Return.

Meaning of Intrinsic Value.

Valuing Young Growth Companies with No Dividends.

Overview of Discounted Cash Flow Methods.

Present Value of an Infinite Stream of Dividends.

Zero-Growth Perpetuity Model.

Constant-Growth Model.

Multiple-Period Dividend Growth Model.

Introduction to the Cost of Equity.

Capital Asset Pricing Model.

Enterprise Valuation Method.

Defining the Weighted Average Cost of Capital.

Applying the Enterprise Valuation Approach by Discounting Free Cash Flows.

Practical Advice on Selecting the Proper Discount Rate.

Establish an Estimated Range of Valuation Values.

Next Steps for Testing Your Key Assumptions.

Next Steps for Practicing Valuations.

Chapter Takeaways.

Appendix 17.1 Using the Enterprise Valuation Method to Value a High-Technology Company.

CHAPTER 18 Valuation Using Market Multiples and Comparable Deal Transactions.

Enterprise Value of the Firm Is a Market Value.

Putting the Money to Work in the Business.

Why Accounting Values Are Not the Same Thing as Market Values.

Economic Balance Sheet Reflects the Capital Market’s View.

Financing the Business: The Pecking Order of Finance.

Important Characteristics of Equity Markets.

Who Sets the Market Price of a Stock?

Measures of Value Used in Appraisals under a Variety of Circumstances.

Relative Valuation by Comparing Similar Companies and Transactions.

Typical Ratios and Multiples Used in Relative Valuation.

Case Study: Determining the Technology Value of a Sample of Comparable Biotechnology Firms.

Selecting the Right Multiple for a Given Situation.

Chapter Takeaways.

CHAPTER 19 Venture Capital Method of Valuation.

Activities of Private Equity Investors: An Overview of the Industry.

Financial Intermediaries versus Principal Investors.

Buyout Funds.

Megafunds.

Venture Capital Funds.

Typical Venture’s Life Cycle of Development.

Typical Approach to Creating a Venture Capital or Private Equity Fund.

How Venture Capitalists Improve Their Chances for Success.

Special Case of Life Science Ventures: Recent Exit Trends.

Venture Capital Method of Valuing Young Fledgling Firms.

Case Study: TSP Enterprises Seeks Venture Financing.

Applying the Venture Capital Valuation Method.

Adjusting the VC Method for Multiple Rounds of Financing.

Summary of Two Financing Rounds for TSP Enterprises.

Multiple-Round versus Single-Round Financing.

Questions When Applying the Venture Capital Method.

Closing Thoughts.

Chapter Takeaways.

CHAPTER 20 Valuing and Structuring High Technology Strategic Alliances.

Valuing Licenses as the Present Value of the Future Benefits of Ownership and Development.

Basic Licensing Model—Sharing the Economic Pie.

Case Study: Advanced Dermal Delivery, Inc. and the Launch of the New Transdermal Patch.

New Product Opportunity.

Licensing Deal.

Upcoming Licensing Negotiations.

Constructing the Financial Forecasts and Licensing Model.

Comparing Spreadsheet Results.

Next Step: Sensitivity Analysis.

Next Step: Developing Scenarios to Quantify the Risks of New Product Failure.

Developing Other Likely Scenarios and Negotiating Points.

Final Tips on Negotiation Preparations for Structuring the Deal.

Chapter Takeaways.

CHAPTER 21 Conclusion.

The Basic Broth of Business.

Building the High-Technology Business Venture.

Notes.

References.

About the Authors.

About the Contributors.

About the Web Site.

Index.

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Constance Lütolf-Carroll is an equity investor, entrepreneur, and educator in strategy and finance. She graduated with a BS in civil engineering from UC Berkeley, where she was a Regent's Scholar. She earned her MBA at Stanford University Graduate School of Business. Lütolf-Carroll is Lecturer at ESADE Business School, Ramon Llull University, Spain, and is concurrently Visiting Professor at RSM Erasmus University, the Netherlands, Helsinki School of Economics Executive Education, Finland, and SDA Bocconi, Italy. She is cofounder of Netspan AG, a technology company, in Switzerland, and has worked in a number of entrepreneurial start-ups.

Antti Pirnes is a patent analyst, entrepreneur, and experienced biotech researcher. He earned his MSc in biotechnology from the University of Helsinki, Finland. Pirnes is Chairman of Patiq Ltd., a patent and business intelligence company. He has worked for a biomedicine company and as a patent analyst at VTT Technical Research Centre of Finland.

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