Johannesburg, 19 Sep 2017
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, says Greg Morris, Chief Executive Officer, MICROmega Holdings.
While several factors determine whether sustainability and scalability exist in a market and in a business, an important one is intellectual property (IP). Specifically: does the business have the ability to develop proprietary IP or can its IP be owned via acquisition or origination?
IP 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, IP 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 IP 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 IP 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' IP can impact your price point, this can significantly erode your margins.
Another negative impact of not controlling your IP 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 IP 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 IP.
Owning this, as opposed to re-selling 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 IP 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.
Proven capability
Proven IP 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 IP that has proven capabilities, whether internally developed or acquired, and to build on those, so that the IP can be leveraged to serve the needs of the desired market.
4. Sustainable productivity
Some investment holding companies create separate investment holding IP companies, which retain IP centrally and license it to subsidiaries for deployment. Other holding companies retain IP at subsidiary level; allowing those with differing IP to compete with each other. Yet others take clusters of IP, 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 IP, and to create more IP 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:
1. Protect your IP 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.
2. 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 IP to compete; you want to be building IP to differentiate yourself and to enhance your position as a price-maker in your market. Be a 'price-maker'.
3. MICROmega generally brings IP to market through its 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 IP to the next level.
4. 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 IP.
The bottom line is this: Investing in your own IP 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 IP 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.
Share