David Martin’s statement at U.S. Senate’s Roundtable Meeting and Discussing of “Accounting for Goodwill”

Date:  Wed, 2000-06-14

Statement of David Martin CEO of M·CAM, Inc. 10:00 a.m., Wednesday, June 14, 2000 Mr. Chairman, distinguished committee members, fellow panelists and guests, I would like to thank you for your invitation to discuss with you the increasingly important issues surrounding the use of intangible assets in domestic and international finance and business. My name is David Martin and I am the founder and chief executive officer of M·CAM Inc. M·CAM is the first company which built heuristics to reproducibly and auditably determine secondary market monetized value for intellectual property and intangible assets. Two miles from our offices in downtown Charlottesville, Virginia one of this country’s greatest statesman defined a fundamental doctrine which conveyed to each American the right to the ownership of thought and ingenuity. When, in 1790, Thomas Jefferson lobbied Congress to refine the Crown’s historical practice of conveying statutory limited monopolies for the protection of innovation, he and his visionary colleagues realized that empires of the future would be built on intellectual property, not simply on the annexation of the globe. However, for the past 210 years, this right has languished in the ether — relegated to the conveniently flat-earth term — intangible. In the midst of an unprecedented economic renaissance this Committee and many of its distinguished affiliates have begun to tackle one of the single greatest economic challenges facing today’s economy. From whence does value come and how can it be represented? We’ve been inundated with “pool-of-interest” talk on the one hand and “one-click-shopping” clichi on the other. The FASB together with countless industry, academic and professional interests have identified an accountability deficiency in current accounting practices which allows, through the use of strategic reporting methods, incorrect representation of business combinations — both on the part of the acquiring and the acquired. An effort to bring discipline into chaos is a laudable effort. However, to lay antiquated methodology over a knowledge-based economy is inappropriate. To tax, through the amortization of the ill-conceived term “goodwill”, those entities conducting business in the high technology and intellectual property rich markets is an egregious error. For to do so, one must make the assumption that prior to business combinations, the assets of both companies have been faithfully represented. This we know is not the case. Accountants, and the businesses they attempt to represent, have never appropriately taken into consideration the value of intellectual property and intangible assets. Let us take a moment to review why we are here. Over the past three decades, an increasing proportion of our Gross Domestic Product and our gross exports have taken the form of knowledge and technology products. In a recent study by PricewaterhouseCoopers LLP, a trend analysis of intellectual asset management revealed that, in 1998, intellectual assets accounted for more than 78% of the total value of the S&P 500. 1 However, if one tunnels beneath the surface of this report, it is more accurate to state that over 75% of the value of the S&P 500 is not captured by the notion of “book value”. This is not to say that all of that value should be described as an asset. This report taken together with numerous other studies and articles, highlights a fundamental limitation in the recent efforts taken by this Committee and the FASB to clarify the concepts embedded in what has been nefariously dubbed “goodwill”. As a practical matter, the words “intangible assets and intellectual property” and “goodwill” should not be used in the same breath. To do so is to state a lack of understanding of the U.S. Code, the Uniform Commercial Code, and most state property statutes. Assets including patents, copyrights, databases, trademarks (with some limitations), licenses, and business documents exist as property, are conveyed by right, can be severable through the exercise of a lien or sale, and enjoy protective rights to the same degree as other forms of personal and commercial property. Failure to understand them does not mean that they simply don’t exist. The inability for present accounting practices to place them reliably on the balance sheets of America should not penalize the burgeoning majority of corporations for whom these serve as the chief assets of the enterprise. Book value, value investing, and new economy business do not have to be polar opposites. They are viewed as such, solely based on the insufficiency of present market metrics. It is my intent to illuminate two general areas of concern — asset definition and valuation — and then make recommendations on how this Committee and other interested parties may elect to add dimension to the historically flat 15th century horizon. Asset Definition Current federal and state law is largely adequate to accommodate the use of intellectual property and intangible assets in the same way “bricks and mortar” assets have been used. The title to, assignment of interest in, and sale of patents, copyrights, databases, licenses and other executory contracts are covered adequately in statute. The absence of these assets from the balance sheet is unconscionable. Consider the recent bankruptcy of an internationally known U.S. corporation which is best known for underwear and sports attire. While looms, inventory, and mills were listed as assets of the corporation, no value inured to the benefit of the creditors for the naming rights to a professional sports complex. No value was on the books for the right to place the likeness of sports teams and cartoon characters on t-shirts and under shorts. As a creditor, I certainly would rather have the naming rights for ProPlayer Stadium than a cotton mill! Yet, given current accounting standards, that option for value attributed to that real property interest didn’t exist. An example of the confusion surrounding the deployment of intellectual property assets on the balance sheets of U.S. companies is an ambiguity that exists in the U.S. Patent and Trademark Office. In an effort to meet the increasing demands of the innovative 90’s, the USPTO hired more, specially trained examiners. On the surface, this sounds like a good idea. However, patents embody two realities which make the hiring of experts antithetical to the very purpose for which it was done. First, a patent needs to be novel. That is to say that, within reason, the idea is a new one. Second, a patent needs to be non-obvious. In an effort to meet market demands, patent examiners have been meticulously combing referenced prior art to make determinations on allowance. Highly trained examiners have neither the systems or, in many cases, the knowledge to examine prior art from other business sectors. This focus has led to an unfortunate and unintentional myopia with devastating import. Many patents issued today fail to cite all relevant prior art — a reality which could lead to the re-examination and ultimate disallowance of countless properties. In a recent study our company did on electronic banking and finance, we found that, searching through patents issued over the past 23 years alone, over 2,363 patents have been issued. Using a process we call Innovation Extraction Analysis, we were able to identify over 50% of the properties in this space which failed to cite prior art. Additionally, over 15% of the innovations happened concurrently. In these cases, near identical patents issued providing statutory monopoly rights to both or neither party. Our data is not alone in identifying this exemplary problem. Marc Pearl, general counsel for the Information Technology Association of America stated, “Educating patent examiners on what techniques and technologies exist can help boost the credibility of patents and, in the process, create a body of documentation examiners can refer to when considering patent applications.” 2 Any statement suggesting that one needs to “boost the credibility” of intellectual property should serve as a wake up call to Congress and Corporate America. When major corporations donate patent portfolios to non-profits for tax deductions and when the patents embedded in those donations are soon expired or likely targets for disallowance, one can see a multi-billion dollar accounting problem that transcends simple business combination debates. In short, clarifying that an asset even exists is a concern which must be addressed prior to figuring out how it is accounted. Asset Valuation Title 15 of the U.S. Code, the Uniform Commercial Code and Bankruptcy law all presume that businesses and financial institutions use intellectual property and intangible assets. However, failure to account for these assets under uniform accounting practices goes on. Why? I would like to propose two hypotheses. First, much of today’s economy has no traditional basis. By this I mean that one cannot, under any stretch of the imagination, cost account the value of an asset that cures cancer, facilitates wireless transmission of data, and models the buying profile of the on-line baby boomers. One of my greatest innovations was the development of a technology which allowed for the surgical removal of tumors from the spinal cord using multi-axial laser guidance. This technology and the underlying patent cost $11,089. The patent filing cost was $11,000 — the device manufacturing cost was $89 and I built it in my apartment. While an accountant could correctly amortize this property — valued at $11,089 — over a period of 20 years, would that be correct? When this property was incorporated into 5 international corporations’ diagnostic equipment products, what was the basis for the value of the asset? Do you suppose, that after over $250 million in procedures have been billed, using this technology, one would concur with an accountant booking the value of this IP at barely $11,000? No. In point of fact, this asset, to three corporations was worth over $15 million of saved R&D expense. This enabling technology revolutionized a market. The correlation between the value of innovation and its cost is diminutive. Value determined by multiple historically relevant transactions, not by hypothecating future earnings, can be reliably and conservatively measured. A second reason for this failure is the lack of specificity surrounding the amortization of assets. In an effort to build a manageable universe, depreciation is lumped into arbitrary time intervals which have no relation to the asset. The concept of asset specific amortization is technically attainable with present technology; it simply requires leadership in its deployment — something that the accounting industry has not yet done. A biopharmaceutical patent may have value for 20 years, but an integrated circuit may retain value 15 months. Hundreds of millions of dollars placed into the construction of the center fuel tank of the Space Shuttle are invested for less than 3 minutes of effective life. An innovation which enables voice to coexist with wireless data transmission may have value only until its life as proof-of-concept technology bridges the chasm to metacomputer-based routers. The fact is that historical data — even that extracted from yesterday — can be used to appropriately amortize assets. In short, given the inability to cost account from whence an asset came and the vexing problem of the duration of its use, the flat-earth solution is to simply punt and purchase account “goodwill”. The appraisal industry has been equally unable to clarify the notion of intangible assets and intellectual property. Two schools of thought have been vocal in the value attribution debate. On the one hand, numerous economists and accounts have developed valuation methodologies driven largely from royalty or infringement damages matrices. On the other, investment bankers and consulting firms have tried to divine value from measuring prospective market trajectories. Neither of these provide the basis for the FASB’s proposed guidance for “reliably measured” asset characterizations. 3 The inherent flaw in the appraisal methodologies is the same that is endemic to other hypothecated prospective systems — namely, the systems do not capture the dynamics associated with the collapse of the modeled sector. As evidenced by the banking industry’s recent recoiling from enterprise lending and subordinated debt, when one links value attribution directly to an enterprise or a sector, the collapse of either implodes the model and its resultant predictions. This has led innovative institutions like Bank of America, SunTrust, CS First Boston, Ernst & Young and others to explore new collateralization concepts to find equity alternatives in today’s market. I would like to reiterate the fact that monetized value for intellectual property and intangible assets can be measured based on historical transactions when they are taken in context of the full underlying asset conveyance. Using licensing and sales precedents, the ability to characterize the transaction value associated with present and prospective innovation is modelable — not using prospective equity models but rather relying on historical data. Hybridizing pro forma revenue assumptions and building models of what value the future might hold cannot be reduced to a standard with any level of reliability in the face of wildly fluctuating equity markets. Recommendations 1. Inform the Debate While numerous parties have risen to defend or assault pooling of interest accounting practices thereby catching intellectual property and intangible assets in the “goodwill crossfire”, I believe that it is imperative for Congress to publicly reinforce the fact that intangible assets and intellectual property exist by statute in all debates. Failure to put these assets onto the books and therefore, failing to adequately measure the gross domestic product, while a great national concern, should not confuse the fact that these assets do and will exist as severable property. No recommendation in any direction by the FASB or any other body alters this fact. For America to correctly support the basis of its economy and its currency, the ever-overlooked assets upon which our future rests, need to “count” in the GDP. 2. Applaud Efforts for Accountability The FASB has addressed a significant problem facing corporate America’s financial reporting. Technically, purchase method accounting can be embraced if two realities are addressed. Prior to implementing purchase method accounting, the FASB needs to provide guidance on how to place IP and intangibles on ALL corporate books. While this sounds simple, it isn’t. Contemplate for a moment the following: conservatively assume that 45% of the U.S. economy is built on a “knowledge based” reality. Assume that an entire asset class, which has always existed but has never been accounted, shows up on the books. How do companies handle the earnings and tax consequences? Do we provide a restatement amnesty period so that, in one single moment, all companies get to appropriately audit and place on the books, their IP? While one day, I believe purchase method accounting will enjoy its role as THE standard, that day can only come when ALL assets are counted. Additionally intellectual property, intangible assets, and other assets for that matter, need to be amortized with greater specificity. Anyone who would recommend that Microsoft amortize the code for Windows NT over 20 years should encounter appropriate resistance. Why? Because the asset doesn’t last that long. The laptop upon which this testimony is typed will exist on my company’s books 5 years after I’ve finished using it. If CISCO purchases an enterprise for 500 times “book value” and integrates the resultant technology into the global market with great success, then 20-year amortized goodwill is wrong. Incorrect use of amortization will continue to force companies to inappropriately expense into oblivion the very assets upon which their value lies. The FASB can immediately solve a significant portion of the pooling problem immediately by enacting asset specific amortization. Failure to do so will encourage active and passive misstatement of financials. The Federal government should not allow this error to persist. 3. Vigorously Oppose Short-Term Solutions With Sweeping Ramifications Pooling-of-interest accounting is prone to error. Purchase accounting without proper statement of assets is guaranteed to error. Fixing the pooling problem cannot be done by passively allowing it to persist in an M&A frenzied equity market. The FASB, this Committee, and in fact, the national interest is served by reliably putting into play an entire asset class built by Constitutional Right and Congressional acts 200 years ago. When our economy rises and falls on the emotions of the equity markets rather than anchoring itself to the fortitude of the assets underpinning our constituent enterprises, we should unite to jettison those flat-earth concepts which keep us from exploring a round globe. We can account ex nihilo. I view, as a distinct pleasure, the ability to invite this Committee and all today’s participants to explore the perspectives that our enterprise has aggregated. Our voice will join the chorus of those who strive to accurately represent the value existant in the business of today while capturing the systems necessary to adapt to the inevitable organic changes of tomorrow. Mr. Chairman and distinguished colleagues, let us not inadvertently regress — let us all move forward. 1 – BusinessWire. Intellectual Assets Account for 78 Percent of Total Value of S&P 500, PricewaterhouseCoopers Analysis Finds. April 17, 2000. 2 – Tillet, L. Scott. Patent Office Takes a Fresh Look at the Net. Internet Week, May 15, 2000. 3 – Jenkins, Edmund L. Testimony before the Subcommittee on Finance and Hazardous Materials of

Roundtable Meeting and Discussion of “Accounting for Goodwill”

Gramm Announces Roundtable Discussion of Accounting for Goodwill

Date:  Fri, 2000-06-02

Accounting Ex Nihilo

Financing the Internet — Legal Issues: Conference 06 15-16 in Portland

Date:  Thu, 2000-06-01

University of Southern Maine June 1, 2000 Portland–The legal environment for equity and debt financing of “dot com” companies. Placing a dollar value on intellectual property and using it as collateral for a loan. “Financing the Enterprises of the Internet,” a conference sponsored by the Technology Law Center of the University of Maine School of Law on June 15-16 at the DoubleTree Hotel in Portland, will explore these issues. The conference is designed to benefit attorneys, bankers, accountants, and individuals and businesses who want to learn about the legal environment for financing technology-based companies. Among the many prominent presenters are: Professor of Law Raymond Nimmer, author of The Law of Computer Technology and co-director of the Houston Intellectual Property and Information Law Program; Nancy Funkhouser from Silicon Valley Bank, who will discuss financing alternatives from a bank

Charlotte banks courting tech firms

Date:  Fri, 2000-05-26

By: John Downey The Business Journal May 26, 2000 CHARLOTTE

M·CAM: Finding Value in Ideas and Innovation

Date:  Mon, 2000-05-01

By: Dr. David E. Martin May 2000 Wells Fargo bank didn’t know it was starting e-commerce in 1864. What it did know was that the stagecoach was a risky way to send money from the gold fields of the West to the depositories in the East. Time to market and corporate security — hallmarks of our present, highly evolved business — fostered the notion that the “singing wires” of the telegraph could be used to transfer funds. Happy birthday B-2-B e-commerce! You look marvelous at 136 years of age! Innovation is not new. Neither is the need to manage it in a sensible way. When a patent for stained glass manufacturing was awarded in 1449, the Crown acknowledged that one of the foundations of any successful economy was the notion that limited monopolies — the ability for an innovator to enjoy the fruits of innovation — were necessary to foster entrepreneurial activity which would sustain the realm. In the United States, the framers of the Constitution and the Congress realized that valuing innovation was required to fuel an economy built by fledgling immigrants and therefore afforded to all Americans the right of Intellectual Property. Two hundred and ten years later, the world has awakened to the notion that IP (patents, copyrights, trademarks and knowledge assets) has value and is rushing to figure out how to rectify 500 years of laws and accounting standards in opposition to that notion with the .com universe of today. M·CAM has built a powerful analytic system that serves as the first auditable, ubiquitous intellectual property evaluation system used to calculate the asset liquidation value — the residual value — of all forms of IP and IA. Using over 200 discreet data components, this system allows commercial lenders to use intellectual property and intangible assets as collateral for conventional debt financing. No more does an innovator have to hear the words, “But all you have is a patent, What real asset do you have?” How did it come about? Beginning in 1992, we began experimentation with a simple premise. What would the world look like if value of innovation were viewed based on secondary market value, not primary market application? In an economy where the “B” team tanked the “A” opportunity, is there any possibility that “A” still retains value? Many times the highest and best use for an innovation is a use that was not contemplated by the innovator. When the transcontinental cables linked the Atlantic and Pacific, the “singing wires” were designed to deliver data. However, broad-minded entrepreneurial bankers discovered a use which, in aggregate, has resulted in the single largest liquidity transit process ever conceived — wire transfers. The question to answer then is, how would one model a world where value was what someone would pay for an asset, not what an enterprise built thereon would be “worth?” M·CAM answered it by creating a systematic asset analysis heuristic that asks two relatively simple questions: Do you own an asset? And does anybody care? Ownership Asset ownership is an arena largely ignored by the myriad of “invention.com” businesses that have proliferated over the past year and a half. Presumption that, because someone says they have a patent (and can produce a patent #), there is a property there to leverage is fallacious. The Commissioner of the USPTO’s acknowledging that the examination process has not kept pace with innovations contained in applications, coupled with the blossoming of infringement litigation, makes it clear that the assumption of de facto property rights is fundamentally flawed. To determine title, M·CAM’s system reviews classic title considerations and then evaluates disallowance probability based on an interrogation of other patent claims and international data archives. Frequently patent prosecutors and examiners search conveniently available data rather than going to improbable data sources. Failure to research and examine a world filled with prior art undermines presumptions of novelty, non-obviousness, and timely reduction to practice. Consider the implications of a major U.S. corporation donating patent portfolios to a university, thereby taking a tax-deductible donation based on an estimated valuation. If the “property” claim is disallowed, how does one handle the tax liability created by the basis-less donation? What happens when the Picasso in the parlor is a forgery? Our method uses patent references and claim language to interrogate international databases in order to rate the uniqueness of an asset. Who Cares? To answer the second question, and derive “asset liquidation value” or ALV, it is necessary to determine the value of property apart from the going concern in which it resides. Methodology employed by M·CAM does not predict future value or securitization value for royalty streams; rather, it identifies three integrated variables that serve as the basis for value determinations. Much like the auto industry’s Blue Book, we perform unimproved asset characterization that defines an asset-specific:

• Effective life and depreciation;
• Transaction characterization; and,
• Non-aligned sector application value.

Effective Life and Depreciation Each form of IP has a statutory life during which the limited monopoly right is afforded. However, statutory life and effective life are not correlated. A biopharmaceutical patent may have value for 20 years but an integrated circuit may be antiquated in 18 months. Because statutory life and useful life are not correlated, M·CAM tracks three elements in determining depreciation characteristics. First, velocity measurements are made based on the frequency of innovation in IP claims. This is integrated with velocity measurements in the application of innovation in commercial products and the adoption thereof. All of this is characterized by the resultant innovation curve, which identifies the uniqueness of an asset, and the true novelty it represents. Transaction Characterization In a risk transfer business model, our analysis allows one to rate the desirability of currency denominated asset transfers in any sector. Some IP secondary market opportunities result in cash sales or licenses. Others are denominated in equity and still others are derived from alliances between going concerns. M·CAM provides secured asset purchase contracts to lenders, guaranteeing the purchase of IP by M·CAM in the event of default. This establishes a liquidity-backed collateral enhancement program for patents, copyrights, trademarks, databases, and other forms of intangible assets. Therefore, in M·CAM’s determination of ALV, cash is rewarded and alliance-reliant liquidations are penalized, because the mechanism whereby M·CAM may take title to an asset (e.g. bankruptcy or winding-up of a going concern) precludes a B-2-B immediate liquidation. This weighting can be adjusted for applications of the model which are looking at present day, fair market value determinations. When the telegraph was invented, it made no claims to be the information super-highway upon which e-commerce would happen. Wells Fargo figured that out. The Kennicot Mining Company reversed alchemy when the California and Yukon gold rushes required the manufacturing of thousands of miles of copper wire. Gold had its luster but copper connected the world and resulted in phenomenal wealth creation. In fact, innovation to solve one problem often solves many more, unwittingly. When 3M’s adhesive doesn’t work for the desired application, make Post-It notes. In M·CAM’s Innovation Extraction Analysis, non-aligned sector application is characterized in three orthogonal opportunities. Successful IP management strategies may build complex asset management recommendations. However, potentially greater value can be appreciated when one looks first at the asset and then the enterprises that are enabled thereby. Viewing the asset first, and then the enterprise, yields value that is not correlated to market caps, because it is measuring fundamentally different characteristics. Using the three “relevance adjustment” filters described above, M·CAM calculates asset transfer value, which is expressed as a Certified Asset Purchase Price (CAPPcharacteri) with an affiliated depreciation index score. Being used by banks, accounting firms and public and private institutions, this methodology has the additional value of being 100% auditable. Enlightenment is often born out of a disciplined leveraging of a chance discovery. The printing press democratized literacy; the gold rush democratized entrepreneurialism. By analyzing and calculating the “value” of ideas and innovations, M·CAM’s system seeks to democratize critical capital markets long inaccessible to the most creative in our society. In the examination of the role of innovation in our economy and the appropriate management thereof, it is important to realize that we have a great responsibility to allow our minds to open, breaking apart the conventions that long have sequestered the great opportunities afforded by the innovation process. Ideas do indeed have value.

UVa alum lauds tech boom as Jeffersonian at conference

Date:  Wed, 2000-04-19

By: Reed Williams Daily Progress Staff Writer April 19, 2000 Halsey Minor, founder of a San Francisco-based news-media company, CNET, once spent $1,200 in toll calls to close a business deal — on his honeymoon. It’s no coincidence that a man with Minor’s remarkable dedication to entrepreneurial pursuits was selected by the Virginia Piedmont Technology Council as its Tech Awards 2000 keynote speaker. Speaking to more than 280 tech enthusiasts in the ballroom of the Boar’s Head Inn & Sports Club, the Charlottesville native and University of Virginia graduate stressed that Thomas Jefferson would have been a ferverent supporter of technology and distance education in the 21st century. “I think he would have actually, in this day and age, cared far less about the physical qualities of the university and would have cared a lot more about the connectedness of the university to the global community,” he said of the founder and architect of UVa. “And I think [Jefferson] would have been obsessive over students being able to participate in classrooms with students all around the world,” Minor, also CNET’s chairman and chief executive officer, told scores of beaming spectators. The second annual awards dinner honored individuals and organizations that the VPTC felt have profoundly affected Central Virginia’s technology community. The Spotlight Award for the company shedding the most positive attention on the region was given to M·CAM Inc., which is developing methods to value intellectual property. The award was sponsored by Virginia Gateway. Broadslate Networks Inc., a start-up company that provides high-speed Internet access through digital subscriber lines, won the Rocket Award. This award was sponsored by Working Weekly and given to Broadslate for its having moved quickly from business concept to commercialization. Adenosine Therapeutics, a biotechnology company that spun out of UVa, won the Breakthrough Award for achieving a noteworthy advance. Virginia’s Center for Innovative Technology presented this award. The Red Apple Award was presented to the K-12 science or technology teacher who most efficiently uses technological resources to excite and prepare students. Dave Matt, technology coordinator for Orange County’s public schools, received this award from UVa’s Office of the Vice President for Research. Delegate Paul C. Harris, R – Albemarle, clinched the Navigator Award, which was given by Woods, Rogers & Hazelgrove, for the politician most responsible for promoting technology start-ups. Adelphia Business Solutions sponsored the Community Award, which was won by City Councilor Meredith Richards for founding the Computers 4 Kids initiative. With City Council elections just around the corner, the Democratic incumbent, who blew a kiss to the audience and then planted one on the cheek of David Kalergis, executive director of Virginia Gateway, on her way to the podium, took the opportunity to laud the VPTC and local initiatives that have bridged the yawning “digital-divide. “I think we’re all investing in the future of our children,” she said.

From the Slide-rule to the Spreadsheet – David Martin’s Keynote address at NASA

Date:  Fri, 2000-03-10

David E. Martin

M·CAM, Marsh USA in program development pact

Date:  Tue, 2000-02-29

Bridge News February 29, 2000 M·CAM and Marsh USA entered a strategic relationship to develop a program to enhance the value of intellectual property as collateral so it can be used to secure commercial debt. The companies will work to develop liquidity sufficient to support the mid-year introduction of a program based on M·CAM’s Certified Asset Purchase Price contracts. “This collaboration with Marsh will enable us to roll out our domestic U.S. collateral enhancement program rapidly,” said David Martin, M·CAM’s founder and chief executive. “This relationship will create a new type of debt financing that we believe has the potential to significantly alter the way that certain kinds of organizations finance themselves and certain kinds of lenders look at the universe of borrowers.” In practice, the CAPP contract would depreciate based upon asset specific parameters. CAPP provides the lender with information about the depreciation schedule for the asset’s life and also identifies critical covenant considerations that preserve the value of the asset and the integrity of the lien. The lender is not obligated to sell the asset to M·CAM and may seek other buyers limited only by M·CAM’s right of first refusal to purchase the asset. The core business of M·CAM is the monetization of intellectual property and other intangible assets for three primary sectors: banking and commercial finance, under-utilized asset liquidation and actuarial asset accounting. Initially formed to provide a mechanism for lenders to use intellectual property and intangible assets as collateral for lending by providing liquidity-backed puts to attribute value to these assets, M·CAM has applied its analysis and marketing expertise to broaden its markets horizontally. M·CAM’s proprietary analytic systems are the first to standardize the determination of enterprise-independent value for properties such as patents, copyrights, licenses, trademarks and other intangible assets. Additionally, these systems allow business and regulators to corroborate the validity of property claims by conducting innovation audits on international intellectual property and publication databases.

Workshop to Focus on Value of Intellectual Property

Date:  Mon, 2000-02-28

Carol Litchti Inside Business February 28, 2000 NASA Langley Research Center’s scientists invent new technology for the aerospace industry. Jefferson Laboratory’s researchers race electrons to study nuclear physics. Local universities conduct their own research, coming up with ideas that could have commercial potential. But each institution has its own way of recording information and attempting to commercialize the technology, inventions and patents it generates. Those ideas, known as intellectual property, could be a greater asset to Hampton Roads if the information gathered and processed used were consistent. That’s why NASA’s technology commercialization department and the Hampton Roads Technology Incubator are holding a works session on March 10 to start development of a uniform method of assessing intellectual property. “It will be the first time some of these people have been in the same room,” said Marty Kaszubowski, director of the incubator. The goal is to develop a regional approach to intellectual property after studying the best examples of what research institutions and corporations do. “We want a sense of the best practices of other government labs and universities and we want to be aware of the best practices of all the organizations and use that to build a region-wide capability of gathering intellectual property information and reporting it,” Kaszubowski said. David Martin, founder of M·CAM, a Charlottesville company that assesses intellectual property as collateral, is scheduled to speak at the workshop. His company has developed software to assess intellectual property. Attendance at the workshop is by invitation only, but Kaszubowski said he could see the event growing into an annual conference. Sam Morello, director of NASA’s technology commercialization program, and his staff are helping Kaszubowski arrange the workshop. NASA Langley works with the Research Triangle Institute, a North Carolina-based nonprofit research agency with an office in Hampton, on commercializing technology NASA has developed. “That’s a process that is not just beneficial to NASA, but also would be helpful if it was available to others in the region,” said Terry Riley, director of the Hampton Roads Technology Council, which oversees the incubator. “It’s a great thing and I’m all for stealing an idea and broadening it to make it available to the region.” Developing a regional technology assessment program has been a goal of the Hampton Roads Partnership, a group of public and private leaders from the region. Having a regional method for assessing intellectual property should help promote the start of new businesses and new product lines for existing companies. “That’s how a region becomes more than the sum of its parts,” Kaszubowski said.

Entrepreneur gets Nationwide Attention

Date:  Mon, 2000-02-28

By: Lori Montgomery Inside Business February 28, 2000 David Martin predicted last June that his newest company, M·CAM, was on the verge of big things. Although his concept was unusual — using intellectual property as collateral for new business loans — Martin, the company’s CEO and founder, believed that once word got out it would be embraced. Well, word is out. Martin was the subject of a long feature story in the January issue of Inc. magazine, which has a print circulation of 660,000. “I think David Martin would characterize the response as spectacular,” said David Winer, M·CAM’s COO. “We’ve received e-mails from across the world, from Australia and everywhere. And the response has been pretty much split between those on the business-development side and those interested in using the product.” Inc. reporter Phaedra Hise said she, too, has received numerous inquires about Martin’s business plan. “The interest has been pretty remarkable,” she said from her Richmond office. As word has spread, the company has grown, Winer said. Since June, M·CAM, which is based in Charlottesville and is an offshoot of Mosaic Technologies Inc., has grown from five employees to 13 and has moved to a new office space. “We predict that within the next 18 months we will grow to about 40 employees,” Winer said. Martin has been collaborating for nearly a year with several Richmond and Hampton Roads businesspeople who are working to introduce his software product to this area. The software, called First Dollar, allows banks to accurately estimate the value of intellectual property such as trademarks, patents, software codes and formulas, which will open the door for companies to secure loans using that information as collateral. Martin also is talking to several banks in and out of the state, including the Bank of Silicon Valley, and is about to wrap up negotiations to establish M·CAM’s contingency liability funds, which will underwrite the loans. “There’s a lot going on, and we will have more news in coming weeks,” Winer said.

Venture Capitalists urged to invest in local start-ups

Date:  Wed, 2000-02-16

By: Reed Williams Daily Progress Staff Writer February 16, 2000 Last year, Charlottesville-area businesses received a total of $60 million in private equity investments from venture capitalists. Yet that money is not coming from local investors. The reason: Local investors do not appreciate the fundamental potential driving technology start-up companies, yet string entrepreneurs along with their neighborly politeness. This was the message David Martin hammered home Tuesday morning during the Charlottesville Venture Group’s annual membership meeting at the Comdial Corp. conference center. “One of the things we need to do better is to stop pretending to be polite and start being reasonable,” Martin, chairman of the group and president of M·CAM, told an audience of several dozen people, including group members, entrepreneurs and at least 20 venture capitalists. “If you talk to the people that aggregated the [$60 million] that I just described, their chief complaint about this region from an economic development standpoint, and from an investment standpoint, is everbody hugged them to death,” he said. Martin, who also serves as chairman of Mosaic technologies, Inc., underscored that local investors must tell the entrepreneurs “yes” or “no” when discussing often high-stakes start-up investments, instead of waiting weeks, or even months, to give an answer. This “sobering wake-up call” followed comments by Martin and others lauding the area’s “staggering” economic successes in 1999. Terry Woodworth, regional director of Virginia’s Center of Innovative Technology, mentioned the partnership of the University of Virginia, the city of Charlottesville and Virginia Piedmont Community College in creating the Biotechnology Training Center on West Main Street. Woodworth noted that the community’s stress on technical skills should be tempered by knowledge of the traditional liberal arts. “We need to be wise and not just tech savvy,” he said. Aubrey Watts, director of economic development for the city, said Charlottesville spent $57 million on new buildings in 1999 and is currently examining 80 economic development projects, including Gabe Silverman’s Union Station renovation. ‘I’m pleased to think some construction will occur on that point very soon,” he said of the Union Station site. Watts added that the number of business licenses issued was up 18 percent in 1999 and that the assessed value of commercial properties rose by as much as 8 percent. David Kalergis, director of University of Virginia Gateway, a program dedicated to bringing technology from the university into local commerce, mentioned the “evolution” that the UVa Patent Foundation has undergone toward working with the community. Robert S. MacWright, the foundation’s executive director, was one of five new group board members installed Tuesday. The Patent Foundation licenses UVa faculty and staff inventions to be brought to the commercial market. In his new role, MacWright said he plans to focus on the need to have experiences entrepreneurs – who have already been through the growth process – to aid start-up companies with each crucial step. He said the foundation also looks to be “tech enthusiasts,” encouraging venture capitalists to invest, although he said it is not in the foundation’s interests to engage in such financing. “We are in a high-risk business already,” he said. And he likened the buzz about forthcoming venture funds to a tornado, with a lot of enthusiasm and hype “swirling overhead.” “But exactly when that tornado is going to touch ground is uncertain,” he said.

There’s GOLD in them’dar hills! Technology Gold That Is

Date:  Tue, 2000-02-01

Like the Forty-Niners of California’s gold rush, CIT clients are pioneers who chart their way through undiscovered territory. Based in Charlottesville and the rolling hills of Virginia’s Piedmont, M·CAM is a CIT pioneer preparing to blaze new trails through the banking world. Utilizing an ingenious financial model, M·CAM’s software prodcut will set a new “gold standard” for technology financing. David Martin, the founder and chairman of Mosaic Technologies, Inc. (Mosaic), created M·CAM in January 1998. Shortly after M·CAM’s formation, Martin outlined his revolutionary concept to CIT’s regional director in Charlottesville, Terry Woodworth. “Extraordinary ideas and innovations are often based on an entrepreneur’s ability to view a concept or process from an angle that has never been contemplated before,” says Woodworth. Impressed with Martin’s visionary idea, Woodworth helped M·CAM apply and win a CIT Innovation award. The result was the development of software for M·CAM’s First Dollar product. M·CAM’s First Dollar service utilizes a software program that electronically standardizes the intellectual property valuation process. The revolutionary software allows lending institutions to use patents, trademarks, copyrights and trades secrets as collateral. In the simplest terms, the software provides a systematic process for evaluating intangible assets and the risk involved in financing that asset. The CIT Innovation Award that helped create the software system in partnership with M·CAM and the University of Virginia (UVA) will serve to benefit universities in the future as well. This strategic partnership between CIT, M·CAM and UVA also opens up the possibility for addressing the issue of how universities determine what technologies are or are not licensable. Martin firmly believes that CIT provided M·CAM with a great deal more than just financial assistance. “CIT opened up a relationship between the university system and private industry. Money would have been of little value without the development of that relationship.” With CIT’s assistance, M·CAM has transferred the detailed, complex and time-consuming process of asset evaluation to electronic form. Although the program provides absolute rules for valuing assets, it still allows human experience to intervene in the electronic process. “This isn’t about hunches,” says Martin, “it’s based on standardized processes. Everything about this product is risk management.” The strategic partnership with CIT has helped M·CAM hit the mother lode. With their unique software approach to risk management the company is projecting $14 million in productivity savings over the next three years, based on administrative cost reductions and man-hours saved. Additionally, in the same three-year period, M·CAM is projecting $47 million in competitiveness and approximately seven new jobs. M·CAM is this century’s leader of a new gold rush, and in the process of mapping unexplored territory, First Dollar has the capability to revolutionize the financial lending industry.

Value judgment: Firm places price tags on intangibles

Date:  Sun, 2000-01-23

By: Reed Williams Daily Progress Staff Writer January 23, 2000 Dave Martin looks at the world a little differently than most. He sees a sea of unrealized, undervalued intellectual property in businesses all over the world. And he wants to drag a net across this ocean, put a price tag on the catch and turn a profit on what he gets his hands on. Martin, the founder and chief executive officer of M·CAM Inc., has developed what may be the first systematic value-determination model for intellectual property. Martin’s prototype allows him to put a price on “intangibles” such as copyrights, patents, trademarks, formulas and processes and employ that appraised value as a “concrete” asset. His 2 year-old brainchild recently enjoyed international recognition. M·CAM was featured in the January issue of Inc. magazine, a business publication with circulation of 660,000. Martin, 32, told a monthly Charlottesville Venture Group meeting Tuesday that he had received between 80 and 90 e-mail from all over the world — including New Zealand, Switzerland and South Africa — since the Inc. article appeared. “The thrill is that people have latched onto the magnitude of the business,” Martin said later in an interview. “An awful lot of people get excited that it’s generating revenue and making money.” He said he has had several offers from organizations looking to take M·CAM public, but added that he’s waiting for the right time, that he’s in no hurry to ride into the public arena on excitement alone. M·CAM, based in downtown Charlottesville on East Market Street, was spun off from Martin’s Mosaic Technology, Inc., a firm that helps companies through their initial development process and taking their concept or technology into the commercial marketplace. The parent company, which is housed under the same roof as M·CAM, “is dwarfed by what M·CAM is doing,” Martin said. When an entrepreneur goes to a bank for a loan, the bank requires collateral — something of value that the bank can take if the borrower fails to repay the loan. If there appears to be no such guarantee, the bank typically refuses the application. This is where M·CAM comes in. The bank can turn to M·CAM, which, for a fee, establishes the value of the entrepreneur’s concept, design or model, and then recommends in favor of or against the loan. This way of thinking — putting a price on an abstraction — might draw puzzled looks from traditional bankers. “How does one value an intellectual asset?” said Gene Culligan, a vice president and commercial lending officer for First Virginia Bank — Blue Ridge in Charlottesville. “I don’t know how you value it. Whether that’s the reality, there’s no way of telling.” But bankers don’t have to, because M·CAM gives banks reassurance: It backs its appraisal with cash, agreeing to buy the asset from the bank if the entrepreneur defaults on loan payment. In such cases, M·CAM would seize the intellectual property and then look to license it, sell it, or otherwise cash in on its value. Martin told Inc. magazine that although M·CAM can make money on bank fees alone, bigger revenue will come from the assets it gains through loan defaults. M·CAM’s valuation process begins with a traditional appraisal, Martin said. The company then sends the asset through a “filtering process” to consider its potential performance in different markets and sectors over time. The process is currently 80 percent computerized, Martin said, adding that he hopes to have it 90 percent automated by April. By helping business people, bankers and investors better understand the value of intellectual property, M·CAM “is going to bring a whole new type of capital into this marketplace,” said J. Benjamin English, a partner of LeClair Ryan, a Richmond-based corporate law firm that is active in venture capital finance. M·CAM is a client of the law firm, which opened a Charlottesville office in October. Martin is looking to move deeper into the multibillion-dollar market of high-tech finance by increasing the volume of intellectual property deals M·CAM handles and by building strategic partnerships with insurance companies to help offset the risk associated with purchasing obligations. M·CAM has grown from four to 12 employees in the last month, Martin said. He anticipates hiring between 12 and 15 more people by mid-February. The company will be moving personnel into additional office space across the street in the first week of February, he said.

Smarts Money

Date:  Sat, 2000-01-01

By: Phaedra Hise Inc. Magazine January 1, 2000

Most banks give the cold shoulder to companies that have little more than a patent or a trademark to their names. A new company that assigns dollar figures to intellectual property could change that.

David New wasn’t asking for much: just a little bump to keep his root-beer company breathing until he could tweak the packaging and solidify regional distribution. He figured $50,000 would do the trick.

That was in 1997, three years after New had launched Roadside Beverage with $5,000 borrowed from family and friends and another $20,000 kicked in by a partner. He had tinkered with the soda’s formula in his kitchen until he perfected it and had signed contracts with outside bottlers. Now he needed the cash to take his start-up to the next level. But the venture capitalists dismissed his request as small potatoes. Just as well, figured New. (“You can never get rid of those guys.”) That left debt as the entrepreneur’s best option. Unfortunately, the dozen or so banks he approached didn’t bite. “They kept saying, ‘Nice business plan, but you don’t have any assets,'” New recalls.

But the banks were wrong. New did have an asset — albeit one he himself didn’t recognize. His golden ticket was the trademark “Root 66” on each bottle of his soft drink.

The potential value of “Root 66” was explained to New by David Martin, whose brother New had become acquainted with after a chance meeting in a coffee shop. Martin came by his expertise as CEO and founder of $3.2-million Mosaic Technologies, which like Roadside Beverage is based in Charlottesville, Va. Mosaic manages R&D projects for corporate and university labs and then commercializes the results, taking its share in equity or royalties. Pricing is relatively straightforward, since the customers for Mosaic’s “products” — patents, formulas, software code, even trademarks — are generally large corporations well versed in the value of their industries’ advancements. A biomedical company licensing the patent for a new medical device, for example, can make a pretty good guess at how much that particular piece of intellectual property will pay off over time.

But listening to New’s tale of rejection, Martin realized that such intangible assets don’t mean much to the lending community. Banks almost never weigh intellectual capital when considering loan applications, because lacking an intimate understanding of all the markets for such properties, they can’t assess their value. Yet start-ups, particularly high-tech start-ups, often have little to their name but a few thousand lines of ingenious code. Martin figured that if he could slap the same kind of dollar figures on patents, trademarks, and formulas that are routinely placed on real estate, revenues, and machinery, the banks would eat it up. Moreover, small businesses would have a better shot at getting the money they needed to grow.

What Martin envisioned was software that would place a dollar figure on a piece of intellectual property and then continue to recalculate that figure throughout the property’s lifetime. He spent the next four months developing such a program, drawing on expertise gained during his brief stint as an insurance-company actuary and from his graduate work in statistics. The product, First Dollar, was finished in January 1998. That same month Martin spun off a new company, which he called M·CAM, to market its services, and signed several small banks in Virginia as beta test sites.

Bankers and investors who have seen the product and understand Martin’s vision call it nothing sort of revolutionary. “This will potentially have a profound effect on the economy, banking, balance sheets, and how assets can be valued,” says Carlyle Eckstein, director of Next Generation Capital, a venture-capital fund in Fairfax, Va. “You’re creating value where the accounting profession has tried to insist there’s no value for years. Say the asset value of all of corporate America is $15 trillion. What would it be if you factored in intellectual property? Add 50%?”

A mechanism for quantifying intellectual capital could set off economic shock waves if whole niches of businesses that banks have ignored were suddenly to get financing, according to Dennis Ackerman, director of the Bank of America Entrepreneurial Center at Old Dominion University, in Norfolk, Va. “This changes the whole paradigm of how you look at corporate wealth, at national wealth,” says Ackerman. “I’ve never heard of any financial idea as big as this.”

M·CAM’s founder accepts the praise but insists that he was surprised by how swift and enthusiastic the reaction to the start-up was. “It’s a great idea, but I didn’t realize there was this much pent-up demand,” he says.

On a sunny day in August, David Martin is sitting in the conference room of a century-old brick building overlooking Charlottesville’s pedestrian mall, a cobblestone avenue framed by antiques shops and trendy restaurants. The building also houses Mosaic, but M·CAM, now a separate company, is quickly outgrowing its parent. That growth will likely continue, judging by the dozens of phone calls Martin has fielded from large U.S. and Asian banks.

With his natty suspenders and silver-rimmed glasses, Martin looks like the professor he once was. The 32-year-old earned his Ph.D. in sports medicine in 1995 from the University of Virginia, where he also taught radiology and orthopedic surgery. But the entrepreneurial urge was strong in him: while still studying for his master’s Martin began doing consulting work for large international companies interested in commercializing medical technology. In 1995 he incorporated as Mosaic, and within two years his consulting income had surged to five times his academic earnings, a state of affairs that scandalized his tweedy peers. So in 1997 he fled the ivory tower for a riskier business: specifically, the business of risk. “Risk is a funny thing,” says Martin. “It’s a business opportunity if you can model it, and a liability if you can’t. The insurance industry is proof that risk management is one of the most lucrative businesses anyone can be in.”

M·CAM itself is a strange hybrid of insurer, investor, and technology marketer, with the third role kicking in only if a borrower tanks. Here’s how it works: Each time a bank considers an intellectual-property-based loan, it pays M·CAM to run information on that asset through its proprietary software. M·CAM’s approach resembles the methods insurance companies use to predict how many of the houses they cover will burn down in the coming year. It compares 234 pieces of data about the borrower and its asset with aggregate data on market changes and comparable companies. M·CAM then uses those results to produce depreciation schedules that show, for example, how the value of a software program declines based on projected competition and obsolescence. “A long time ago people thought mortgages were discrete things — that you couldn’t model the risk on the aggregate,” Martin explains. “But now you can get mortgage insurance. That’s what we’ve done here.”

Once M·CAM has assigned a dollar value to the asset, the bank decides whether or not to grant the loan, and what percentage of the value’s asset to lend. In the case of a thumbs-up, M·CAM then guarantees that if the borrower defaults, it will purchase the property from the bank. Under those circumstances, M·CAM assumes control of the intellectual property, which it tries to sell into secondary markets untapped by the company that developed it. The property is all that remains in play. M·CAM slices the borrower’s management team — the wildest card in the pack — right out of the equation. “Our premise is to look at intellectual property not as a basis for a business but simply as an asset,” Martin says.

Since M·CAM may eventually try to succeed where the borrower has failed, the borrower never sees the evaluation process. “Then they’d be asking us how we plan to liquidate their assets, and they might try to do it themselves first if they got into trouble,” Martin says. “The chance of them screwing that up is high.”

What prevents M·CAM from screwing it up is the extraordinary tabs the company keeps on each asset during the life of the loan. Fluctuations in value are judged by constantly studying new applications and potential new markets. In the past a few lenders that worked with software companies have tried holding borrowers’ source code in escrow as collateral, but those efforts generally failed because the lender lacked the knowledge and imagination to exploit the code. “Venture capital has not been successful at technology licensing,” says John Jarve, a general partner and managing director at Menlo Ventures, in Menlo Park, Calif. “We make our money through big winners, so if a company does poorly, we generally spend our time on another deal that will have more return to investors, instead of getting back half a million on licensing.”

But as Martin points out, intellectual property “can be licensed, sold, commercialized, any number of things,” possibly all at the same time. Every quarter M·CAM runs new calculations to determine how all the assets it is backing will perform in every conceivable market, and shares the updated value information with the banks. To ensure that all possible stones are turned, a four-member team evaluates each asset, bringing to bear a wealth of experience in commercial lending, corporate funding, technology litigation, and sales and marketing. Martin also consults with Mosaic employees who are adept at envisioning new tricks for old dogs.

Although Martin claims he can make money on bank fees alone, the big profits will come from successful fire sales. M·CAM expects to generate 80% of its revenues from seized assets; margins, the founder says, will be as high as 60%. And if Martin’s experience selling and licensing intellectual property for Mosaic is anything to judge by, marketing those assets should earn M·CAM 170% more than it pays out to banks in foreclosures. Early last fall the company was finding new homes for more than 75 pieces of intellectual capital, and Martin expects that number to grow to about 150 by the end of this month.

Clearly, M·CAM flies only if it can guarantee hundreds of millions of dollars in loans. The company, financially backed by Martin and Mosaic, must set up the same kind of contingency fund that insurers have: essentially a pile of money that just sits there waiting to buy out loans while earning little for investors. Martin is currently talking with large insurance companies about strategic partnerships in which M·CAM would use their funds to guarantee its loans in return for a piece of the resale action, and his banking contacts are introducing him to other potential partners.

The lack of a contingency fund is the only thing standing between M·CAM and several substantial customers. After presenting a talk at a Small Business Administration conference last spring, Martin began fielding calls from leading high-technology lenders, including Silicon Valley Bank, Imperial Bank, and Japan’s Sakura Bank. “The most proactive banks want to become as familiar as they can with the product and do a little with the few guarantees they can get,” says Bank of America’s Ackerman. “But until there’s a large guarantee pool, banks can’t go out and make loans based on the product to a lot of customers.” Ackerman says Bank of America, for one, is “very interested” in working with M·CAM once the fund is in place, something Martin expects to happen this summer. Meanwhile, he’s doing deals ranging from $250,000 to $1.5 million with small regional and community banks such as Citizens & Farmers Bank in Williamsburg, Va.

Unfortunately, M·CAM wasn’t around to help Roadside Beverage, the company that gave Martin the idea in the first place. But Martin went to bat for New anyway. Flashing his intellectual-capital credentials, M·CAM’s founder assured a local bank that the “Root 66” trademark was worth more than the $50,000 New had requested. Martin’s guarantee that he would pay off the bank in return for that trademark won Roadside Beverage’s founder a loan of $300,000.

Thanks to Martin’s faith in the power of trademarks, New is now able to use his loan for operating capital and sit on his equity until he needs it for strategic moves or expansion. Just as important, he can devote his time to managing the company instead of dancing for investors. “We’re in a nice position because if it takes a while to find the right investment relationship, we don’t have to stop,” he says. “We have enough capital to keep moving.”

Phaedra Hise is a freelance journalist and author living in Richmond, Va.

The Formula: How M·CAM Gets Its Numbers

M·CAM’s methodology for affixing hard numbers to soft ideas is a complex amalgam of human-envisioned possibility and technologically calculated risk. Let’s say that a start-up called BioPlant has developed a gel that preserves donated organs for transplants. The company applies to its bank for a loan, and the bank turns to M·CAM, which embarks on a three-stage evaluation process.

Stage 1: The bank pays M·CAM $5,000 to evaluate BioPlant’s plans for the gel. First, M·CAM considers whether the asset (the gel formula) is owned or merely licensed. Second, it evaluates the product’s life cycle, using actuarial tables that it has built for each industry. Third, it rates the litigiousness of the industry, drawing on corporate lawsuits and settlements. Fourth, it uses a database to produce a “Transplant Survival Index” that determines how reliant the gel’s success is on the company’s management team and key suppliers. M·CAM then issues a report recommending for or against the loan.

Stage 2: The bank pays M·CAM points (similar to those on a mortgage) to calculate how much the gel is worth in the organ-donation market. At this point M·CAM’s staffers gather data about BioPlant’s direct and indirect competitors that include sales, profits, and market shares. The assembled information is then keyed in to M·CAM’s software, which spits out a suggested dollar amount for the asset, a figure that gets a reality check by Martin and his management team. The bank decides what percentage of that amount to offer. (M·CAM also creates what it calls a collateral-liquidation plan focusing on alternative applications and markets for the gel.)

Stage 3: The bank pays M·CAM from 1.5% to 3% of the loan’s principal to perform quarterly evaluations of the state of the asset. M·CAM ensures that the asset is being maintained (for example, that BioPlant is documenting any changes to the gel’s formula) and updates the asset’s value based on market changes, which it monitors through press releases, news stories, and new patents and copyrights. For example, the gel’s value might receive a boost from legislation that requires that organs go to the sickest patients regardless of their geographical proximity to the donor. “That becomes a really critical piece,” Martin says. “It tells us what to watch for as the asset sits there.”

Intellectual Assets: Know What You’ve Got

Companies that take an out-of-sight-out-of-mind approach to intellectual property are, well, out of their minds, business analysts agree. That’s because intellectual property — in the form of patents, trademarks, product designs, and even customer lists — has a profound effect on every aspect of business. It is the motivation behind a growing number of mergers and acquisitions. It is among the gaudiest feathers in the hats of investor-courting CEOs. It is the stuff of controversy, as high-wired contenders like Priceline.com and Microsoft, or Amazon.com and Barnesandnoble.com, duke it out over code-driven business models. And it is a boon to the bottom line: patent-licensing revenues exceeded $100 billion in 1998 and could top $500 billion by the middle of this decade, according to the recently published Rembrandts in the Attic: Unlocking the Hidden Value of Patents (Harvard Business School Press).

In this idea-stoked environment, organizations that have systems for identifying and exploiting their intellectual property and other intangible assets stand to enhance their revenues and competitive advantage, concludes a recent white paper from consulting, tax, and accounting firm KPMG LLP. Roger Carlile, KPMG’s national partner in charge of intellectual-property services, talked with Inc. senior editor Leigh Buchanan about the historically woeful management of intangibles and how it must change.

Inc.: Why is intellectual property underexploited?

Carlile: Intellectual property has historically been managed defensively. You had legal counsel protecting it from infringement and making sure that the patent-maintenance fees were paid. But there has not been this proactive approach where you have a strategy for identifying ways to get the most out of the intellectual property that you own. Most companies don’t even have a good understanding of how intellectual property generates value in their organizations, let alone methodologies for managing and measuring it.

One of the chief problems is that the financial systems in this country are based on historical cost accounting. As a result, the majority of intellectual property — unless it’s purchased from another company — doesn’t even show up on a balance sheet. Organizations tend to manage assets that are measured. Although there have been a number of attempts to uniformly quantify intellectual assets, there isn’t a generally accepted framework for placing their value on a company’s balance sheet.

Inc.: What has persuaded companies that this is important?

Carlile: There was a period when the most successful organizations were those that excelled at combining tangible resources. Getting raw materials at the best price. Producing a finished good with the greatest efficiency. But companies got better and better at those things, and consequently those skills have become less of a differentiator. Today it’s technology, brands, the trade name, and so forth that differentiate products and companies. At the same time consumers are much more attuned to changes in the marketplace and in products. You hear about somebody who has a great idea and creates a whole new industry or a great deal of value. As a result, people are becoming tuned in to the notion that ideas are worth a lot. And they’re starting to ask their boards of directors, “What are we doing with our intellectual property? What great ideas do we have for generating value that are going to show up in the stock price?”

Inc.: What’s the single toughest challenge to putting in place an intellectual-property strategy?

Carlile: One of the toughest challenges is that most companies, with the exception of a few industries, don’t know what intellectual property they have. There are several reasons for that. One is related to the great number of mergers and acquisitions that are taking place. When you’re buying a company, do you really know everything that it owns? Maybe it had one great idea that you wanted but you didn’t know that behind that, in the R&D labs, it had a hundred other ideas with potential. I was working with a company that told me, “We have 44,000 technologies, and we need to know what we have.” I asked, “How do you know you have 44,000 technologies?” And the response was, “Well, because we just think we do.”

Inc.: Are there some industries where the opportunities are greater?

Carlile: There are opportunities in every industry. IBM went from virtually no licensing revenues some years ago to approximately a billion dollars in licensing and royalty revenues today. And it’s expecting to double that in the year 2002. Defense contractors license plane designs to toy manufacturers. Companies like Coca-Cola are putting their trademarks on clothing, so they’re getting licensing revenues from that while at the same time extending their brand.

Inc.: Who should be in charge of a company’s intellectual-property strategy?

Carlile: You need somebody who has a good understanding of the intellectual property itself and is also a business-type person who can think more broadly in terms of applications and markets. In the case of small companies and start-ups, that’s going to be the very top management, because generally the company was formed around a single idea that drives the organization’s value in the marketplace. But as companies get larger and look for ways to extend their value, they’ll need someone with an understanding of licensing, marketing, and product issues. What companies need is someone who comes in every day and says, “What can I do to make this property more valuable?”

New company seeks to put price on the ‘intangible’

Date:  Wed, 1999-12-01

By: Reed Williams Observer Staff Writer December 1-7, 1999 An entire graveyard of assets exists, buried in banks all over the world. And there is a new scavenger right here in Charlottesville, hungry to scoop them all up — to buy the assets from banks and sell them. M·CAM, Inc., a progressive new Charlottesville corporation which spun out of Mosaic Technology, Inc., may have pioneered the first systematic value determination model for intellectual property (IP), to put a price on assets once characterized as “intangible.” “We look at the world a little differently than most people do,” said David V. Ferron, director of bank services for M·CAM, which launched in January, 1999. When an entrepreneur goes to a bank looking for a loan, the bank needs to know that the borrower has collateral that it can lend against. If there appears to be no such guarantee, a bank would typically refuse the loan request. This is where M·CAM comes in. The principals of the firm, who stress that their clients are banks, attempt to establish that the entrepreneur has valuable assets that the bank can lend against, even if it does not have conventional collateral. These assets could be patents, trademarks, copyrights, distribution rights or any other items that may be overlooked or given away if their values are not understood. “We’re creating the gold standard as we go,” said Chief Executive Officer Dave Martin in an interview at the firm’s downtown office. “There’s no one else doing it.” This method of thinking, creatively looking at ways to revitalize discarded or unrealized assets, is relatively new and is sure to draw puzzled looks and tickle the tense nerves of stiff-necked bankers, who know that if a loan goes bad they have to collect payback. “I think you’re talking about new territory,” said Mark Giles, president of Virginia National Bank and board member of the Virginia Piedmont Technology Council (VPTC). “Bankers are very used to having tires that they can kick and warehouses that they can walk into.” So M·CAM backs it “appraisal” with hard cash. The firm agrees to buy an asset if the company defaults on loan payment. The comprehensive process of valuation, Martin explained, begins with a classic appraisal. The firm then puts the asset through a filtering process to consider environmental effects on the IP in a specific sector of business and then predicts the possibilities of how the asset would work in other sectors. Every other appraisal model, said Martin, just looks in the rearview mirror. “We start with looking back — where every appraisal model stops,” he said. M·CAM must then predict what will happen tomorrow, by anticipating the “prospective passage of time”, explained Martin. The process is currently 80 percent automated and 20 percent manually done, Martin said, adding that he hopes to bring that number to 90 percent automated by April, 2000. The company looks to expand radically by increasing the number of IP sales it does, and in terms of forging strategic partnerships with insurance companies to help offset risk associated with purchase obligations. Martin said M·CAM looks to move into the multi-billion dollar market of high tech commercial lending. Tom McCrystal, founding chairman and board member of the VPTC, said that M·CAM offers a “great” service, as it addresses the “critical” problem that banks need to better measure their risk and know how to value collateral. “Some of the things that M·CAM is doing to address the valuation issue is going to have a significant impact in tech business, not just here, but all over the place,” said McCrystal. “Potentially M·CAM could end up with global impact. That’s exciting.” Barriers are coming down, he said, as we move into the next century. “The nature of banking is changing for evermore,” said McCrystal.

U.Va. Patent Foundation Steps Up Efforts For Inventors

Date:  Mon, 1999-09-13

The University of Virginia September 13, 1999 Sept. 13, 1999 — The University of Virginia Patent Foundation recently signed a marketing agreement with Mosaic Technologies, Inc., signaling a stronger effort to move U.Va. inventions out of the ivory tower and into the marketplace. Mosaic, a technology marketing and development firm in Charlottesville, will help the Patent Foundation find licensees for tough-to-market technologies. “Sometimes we feel sure that a technology is valuable, but just can’t find the right company to take it to market,” said Robert MacWright, executive director of the Patent Foundation. “We hope that Mosaic’s contacts, especially those in foreign markets, may lead to opportunities we otherwise would have missed.” Under the contract between the two organizations, Mosaic would receive part of the Patent Foundation’s share of royalties resulting from any license that it helps arrange. The agreement is similar to one the Patent Foundation signed earlier this year with the U.Va. Health System Development Office, which has developed an extensive network of corporate contacts as part of its efforts to support the U.Va. School of Medicine. “We have a long-standing relationship with U.Va. and are enthusiastic that we can help the Patent Foundation bring U.Va. technologies to the marketplace,” said David Martin, president of Mosaic. Martin, an alumnus of U.Va., is also the founder of the Charlottesville Venture Group, which helps bring small business owners together with financiers and local business service providers. Mosaic recently formed M·CAM, a company that helps banks develop a means by which patents can be valued and used as collateral in making business loans. The Patent Foundation is responsible for the evaluation, protection, and licensing of inventions made in the course of research at the University of Virginia. Established in 1977, the Patent Foundation funnels income from royalties and fees to U.Va. inventors, their research laboratories, and the University’s research enterprise. In just-ended fiscal 1999, the Patent Foundation handled 154 new technologies and generated nearly $4.2 million in royalties and fees. For more information, call Robert MacWright at 434·982·0378, or contact him at rsm7x@virginia.edu. David Martin may be reached at 434·979·7224 or dem@m-cam.com.

Venture Collateral

Date:  Wed, 1999-06-16

Virginia David Martin aims to revolutionize the world of commercial lending. By: Lorri Montgomery

David Martin sat in his Charlottesville office and listened to a conversation that would change his life — and may quite possibly change the world of banking.

In October 1997, Martin and two other businessmen — one a commercial credit lender and the other an entrepreneur holding an asset worth roughly $15 million — were discussing ways to get the entrepreneur’s business started.

“He had a request for a loan of around $300,000,” recalls Martin, the founder and president of Mosaic Technologies Inc. “The lending officer says, ‘Sorry, you don’t have anything I can lend against.’

“I was sitting there going, wait a minute. I heard that from bankers for so many years, that same thing — ‘Oh yeah, we see it has value, but we just don’t understand it.'”

What the lender didn’t understand was how to value the entrepreneur’s asset: a trademark.

In the days that followed, that conversation played over and over in Martin’s head as he began to work on Mosaic’s annual report.

“Mosaic had always been providing services to start-up companies, and we’ve got equity in these companies. We always wondered if this equity was ever going to have value,” Martin says. “So I thought to myself, ‘Gosh, this is a really lousy business model, because here Mosaic was always taking equity as payment, but I’ve got a file cabinet full of stock in companies that may or may not ever be in existence.'”

For the next three months, Martin worked day and night — “not breathing a word of this to anybody” — developing a new financial business model.

“I went through all kinds of scenarios. I tested it against every financial assumption I could come up with, and I did that because it seemed to big to be true. I said that before I embarrass myself, I’m going to test the heck out of this assumption. Every time I did, it kept getting bigger than I thought it was.”

On Jan. 18, 1998 Martin marched into a meeting of Mosaic’s board of directors and announced, “Guys, this is what we’re going to do. Everyone’s jaws kind of went, ‘What?'”

After board members straightened up and listened to Martin’s detailed proposal, they launched a new business that is now being touted as having the potential to revolutionize the world of banking.

That morning, the Mosaic board created a spin-off company called M·CAM that would take Mosaic’s technology expertise and combine it with a new lending concept — one that allows banks to use intellectual property as collateral.

M·CAM is believed to be the first company of its kind in the United States, and its presence will soon be felt in Hampton Roads, where M·CAM is in the process of rolling out its product for the first time. Richmond and the rest of the state will soon follow. In addition, Martin is talking to the U.S. Small Business Administration, which is interested in M·CAM’s novel approach to financing.

M·CAM’s basic principle sounds simple, but its application is complex and rigorous. It works by allowing banks to make commercial loans to fledgling companies that have developed solid concepts, but that don’t qualify for traditional bank loans because of a lack of collateral.

It can do this by using Mosaic’s years of buying and selling technologies — whether it’s processing aluminum in Russia or lung cancer detection equipment in Singapore — as its means of determining the worth of specific types of technology and identifying its place in the market.

“In essence, what he’s doing is writing the blue book on technology,” says Dennis Ackerman, director of the Bank of America Entrepreneurial Center at Old Dominion University.

M·CAM is developing a software program that can evaluate the worth of each different type of technology, and in doing so, assess the value of the intellectual property that goes along with it, such as patents, trademarks, copyrights and trade secrets. The program includes a pre-determined depreciation schedule for all technologies.

The program, called First Dollar, will be used by banks, and opens the door for M·CAM to provide collateral to the bank for the intellectual property of a company requesting a commercial loan. If the loan goes sour — just like a car or home loan gone bad — the bank repossesses the intellectual property and must liquidate it to minimize its losses. That’s where M·CAM comes in: if a company fails, M·CAM buys the intellectual property.

The formula for assessing intellectual property is “rigorous, logical and systematic,” Ackerman says of the patented software being developed.

Through this new process, as Ackerman sees it, M·CAM also will create another tier of capital from a secondary market — an auctioning source for intellectual property. For example, when banks repossess property and equipment, such as cars, the bank doesn’t sell the property, it turns it over to a car auctioning company.

M·CAM will be the first company of that type for intellectual property.

Martin makes it clear that M·CAM’s client is the bank, not the company seeking the loan. The banks pay M·CAM a fee for assessing the property and providing the up-front services. In the event the company goes belly up, “we get the assets that are held, we pay back the bank what the bank needs, and we keep the rest,” Martin says. “And the rest is a pretty staggering number. It’s phenomenal.”

If successful, M·CAM has the true potential to “shake up the capital market,” industry analysts say.

“We have found the concept to be very interesting and enticing and we look forward” to seeing a finished model, says Dudley Patteson, senior vice president of Citizens and Farmers Bank in Williamsburg and West Point. Patteson says that if M·CAM’s program can “serve the market in a safe, sound manner,” it will “open up another tier of capital that isn’t available now.”

When Ackerman first heard about M·CAM, his curiosity was piqued. After he and Martin met, they developed a relationship that has since put Hampton Roads in the forefront of this venture.

“I was interested immediately in supporting this,” Ackerman says. Because of Ackerman’s position and experience with the entrepreneurial center, he understands the investment potential in the Tidewater area and the plight of up-and-coming technology companies.

With this in mind, Ackerman is helping M·CAM on two fronts: to develop a large institutional guarantee fund, and to create a regional guarantee fund. These funds will help mitigate the risk of putting up collateral. “There has to be a pot of money that may have to be used until the intellectual property can be sold by M·CAM.”

The funds also will provide another way for banks to know who’s picking up the risks. Ackerman, who is working with regional banks, local investors and large institutions to develop these funds, says it’s a much anticipated service that was bound to happen somewhere.

“It’s fate and circumstance that this is happening here,” Ackerman says. “We’re really lucky he’s [Martin] in Charlottesville. It’s terrific that we are going to get a jump on this market in Virginia and establish a name for ourselves.

“Banks have been watching the technology market grow, and they haven’t been able to be involved. This gives them the tools,” he says.

“I think this is a true leap forward,” says Terry Woodworth, regional director of the Center for Innovative Technology in Charlottesville. “They are doing some really exciting stuff, developing an accurate means of estimating whether or not an asset has appropriate collateral. Their experience gives them the ability to know how to quantify the risk.”

That know-how comes from Martin’s varied experience. At age 32, Martin is a former faculty member at University of Virginia’s medical school, the founder of the Charlottesville Venture Group, a contributor to the discovery of the first cholesterol analyzer test to be used in doctors’ offices and the originator of the first wholly owned, for-profit business with UVA’s Health Services Foundation. And, of course, that doesn’t include his having founded two businesses: Mosaic and M·CAM.

Seven-year-old Mosaic Technologies is a thriving, complex company that focuses on three separate areas: research and development, start-up financing and community service.

“We take projects that are improbable,” Martin explains. “Most of the time, those are technology projects, but we’re not limited to that. We have taken graphic art companies, restaurants — we even helped a buffalo farm get their products to market. We always stay involved through the first round of major financing.”

It started in 1989, Martin says, when he worked as a technology claims analyst for a health insurance company. Martin would evaluate how much technology equipment, such as an MRI, cost the company. His next stop was with a company that worked through the lab at Ball State University, his alma mater. There, Martin worked to commercialize a broad variety of technology.

“I helped launch the first physician office cholesterol analyzers. Think of that — before around 1991, you didn’t ever hear about cholesterol. We put high-tech chemistry analysis into a medical application, and that was the first technology transfer I was affiliated with.”

After that, business opportunities flourished.

Martin began to get referrals for U.S. Food Drug Administration approval for products it was trying to bring into the U.S. market. “I happen to be really good at positioning technology in improbable places. Whether it’s medical technology that applies to an environmental concern or environmental technology that would be of material science concern.”

Along the way, he also developed solid experience in helping companies get their start or reorganize. “We’ve helped restructure, get financing and assist in the turnaround of a company,” he says. “We are an odd group to characterize.”

Odd perhaps, but complex and skilled in many areas, industry observers say, and that’s where so much of their strength lies.

“David happens to know both sides” of business, says David O’Donnell, director of Richmond’s CVEC Inc., alluding to Martin’s understanding of management and finance.

“I’ve never heard anything like it [M·CAM’s program] before, but it seems solid as a rock,” he says. O’Donnell says that through his position with the Central Virginia Entrepreneurial Center in Richmond, he will help feed deals to M·CAM and to explain to people in the region how the First Dollar program works. O’Donnell anticipates that as soon as M·CAM gets a couple of success stories with banks in the Hampton Roads and Charlottesville areas, Richmond banks will jump on board.

“He’s planning this roll-out and controlling it very carefully, so that if there are holes he would see them immediately. He’s put together a team that’s super confident and competent.”

To be sure, Martin is confident in his team’s ability and approach. “Our strength has always been aggregating people, management and resources around opportunities that are worth launching. That’s the reason M·CAM works — because we’ve done it. M·CAM was a very logical thing to come out of us, despite the fact that it’s not logical in most people’s minds. It was the only logical way we could grow.”

Martin’s approach to his business appears to be as much philosophic as it is strategic. Inside Mosaic’s office building, which meanders through a narrow, 100-plus-year-old building in downtown Charlottesville, there are many hints as to what inspires Martin. There’s a framed photo and law degree of his grandfather, who was an attorney for the U.S. Supreme Court Bar and whom he fondly refers to as “my best friend in my whole life.” There’s an artist’s sketch of his wife, who he says “keeps him grounded.” Behind his desk is a large wallboard with “I love you daddy” scribbled in marker by his 10-year-old daughter. And in one corner of his office hangs a black and gold banner that celebrates the Yukon gold rush of the 1890s — something Martin says he reflects on often and relates to constantly.

He says he has always been fascinated by the California and Alaska gold rushes, and connects the discovery of gold in the Yukon — an improbable event that forced people to be creative in ways they never had, he says — to the inception of M·CAM. “What we really do is see opportunity where none existed,” he says.

He tells how a young woman doing laundry in an Alaskan stream found a large gold nugget, and how that discovery sparked miners and businessmen from California to race north. In the end, the Californians, although experienced, weren’t successful in Alaska, because mining for gold there is completely different than in California. “They had to rethink and change the method,” Martin says.

That’s what M·CAM is doing in the world of commercial lending. Instead of lending on equity, Martin emphasizes, lend on assets.

“David Martin is one of the most visionary people I’ve ever met,” says Woodworth. “He’s gone outside the box.”

Martin sees it this way: In traditional financing, where equity allegedly is king, investors still are frequently wrong.

“We look at Silicon Valley and all the places that allegedly have figured this thing out, but you know what?” Martin says. “In the last 10 years, venture capital is still wrong 90 percent of the time. It’s still betting on the 10 percent of the wins that are so big that they eclipse all the garbage out there.

“And in 10 years, we really haven’t gotten a whole lot better. We’re getting marginal hits. Good firms are getting marginal hits at 20 percent, good hits at 10 percent, which means that 80 to 90 percent of the deals that they do are never going to materialize.

“[Ours] is a more conservative way in some respects, but the funny thing is, what we’re doing is being branded as ridiculously, wildly, speculatively risky. We’re taking a model that takes the Wild West of equity financing and puts it allegedly into the stodgy banker suit. But it isn’t, because this isn’t a banker that we’ve seen before. It’s a very different animal. It’s fascinating.”

The fascination doesn’t end with commercial lending. Martin, who considers himself more business prospector than entrepreneur, sees another gold mine waiting to be discovered.

“There’s a whole graveyard” of assets buried in banks everywhere, he says. “It all boils down to one little line” on commercial lending contracts that says in case of a default, the bank will repossess all property, equipment “and all intangible assets.”

Those assets are the patents, copyrights, trade secrets and other intellectual property. M·CAM would like to sift through this graveyard and buy some of the relics back from the banks.

“They’ve already been doing this, but they’ve just never done anything with those assets,” Martin explains. “They take them, but they don’t do anything with them — leading me to one of those obvious points in time where you go, ‘Alright, how hard is this? We are just trying to sell what you already have and don’t think is worth anything.’

“We’re not even asking banks to change how they do business. They’ve taken in these assets all along, now we’re saying use them as assets and stop letting them go into nonexistence because you don’t know how to do anything with them.”

“This is really intriguing,” O’Donnell says, because it allows M·CAM to collect a “basketful of intellectual property” and resell what it can, or to try to combine assets — such as copyrights and patents, etc. — to possibly start another business.

But first, M·CAM must prove itself.

That could start happening soon. The deal on the $15 million trademark that first got Martin thinking back in October 1997 was being finalized at press time. When it closes, Martin says, “it will validate M·CAM’s business premise.”

And that, he promises, will be the real beginning of the story.

David Martin will discuss the details of M·CAM at a meeting of the Virginia Venture Capital Forum in Norfolk on June 15.

M·CAM Featured in the State of the Capital Report

Date:  Mon, 1999-05-17

Capital Challenge, The Modern Day Prospector