presentation at ip conf. 02 12 10

For private use only -- CASPA Copyright Protected

Intellectual Property as theCrown Jewel of a Highly Valued

Semiconductor Start-up –a Real-life Case Study

Intellectual Property Symposium 2002 in GuangzhouDecember 10, 2002

Presented by: Al KwokPresident, CASPA Pearl River Delta Chapter

Member, VSI Alliance IPP DWG

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Outline General background

Intellectual Capital, Human Capital, IntellectualAssets & Intellectual Property

IP as the strategic leverage A case study – for high-tech start-ups to follow Semiconductor IP business model Best practices in IP management China’s situation

Suggestions to investors Suggestions to entrepreneurs

Acknowledgements and appreciation

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Intellectual Capital (IC) According to Brooking Institute study of thousands of non-financial

companies, the percentage of company value attributable to intangibleassets (Intellectual Capital) has increased dramatically: 1978: 83% in tangible assets; 17% in Intellectual Capital 1998: 31% in tangible assets; 69% in Intellectual Capital

In Information Age, Intellectual Capital represents the value of a company IC is defined as KNOWLEDGE that can be converted into VALUE

Knowledge companies make profits by converting knowledge into revenue. Product/market knowledge for differentiation -- a key competitive advantage

IC consist of 2 elements: Human Capital and Intellectual Assets Human Capital (tacit knowledge, know-how and relationship)

Person (employee) specific and not interchangeable – e.g., a chef’s know-how The employer does not own it: It leaves the company at the end of each workday

Intellectual Assets (codified knowledge, know-how and relationship) Independent of the operator and interchangeable Belong to the company and not to its creators

Intellectual Property is legally protected Intellectual Assets

Source: VSI Alliance (IPPWP2 1.0)

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Intellectual CapitalIntellectual Capital

HumanCapital

IntellectualAssets

(Tacit Knowledge Codified Knowledge)

I PHow to expand one’s Intellectual Property (IP): By converting Human Capital into Intellectual Assets through the

Employment Agreement and systematic and thoroughdocumentation of the process of engineering and improvement

By converting Intellectual Assets into Intellectual Property throughlegal claims (by confidential notices) and protection (by NDA andproper access controls – on a “need-to-know” basis)

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What is Intellectual Property? Innovation => Creation of marketable values

The core competencies & primary differentiators

Intellectual property Crown jewels of innovation - lasting values!

Sole ownership (without contaminations)!? Exclusive rights to use for commercial purposes

Patents, trademarks, copyrights, tradesecrets, etc. Mark your market territories by patent, copyright

and trademark claims (No Trespassing signs!): Let people know you are the owner!

Keep some know-how to yourself as trade secret

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Competitive Intelligence An organized process for gathering and analyzing

publicly available information about trends andcompetitor activities to further company objectives Companies about which information is desired

In the same technology and business space Competitors, customers and enablers (service providers

& partners) Key competitors’ IP portfolios

# of patents, segments by technology area, pace ofpatenting (in quantity over time & by technology area)

Strength and weakness of the technology, strength ofpatent claims (their breadth & depth) How to navigate through the “patent minefield”

Internal IP audit to understand one’s own SWOT(Strength, Weakness, Opportunities and Threats)



Intellectual Property (IP)as

the Strategic Leverage

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IP for Commanding Mkt. Position IP defines the ownership of any market territory and

one’s position along a product/service food chain: Dell and Compaq/HP dominate PC market

Protected by their IP portfolio (brand, patents, know-how, etc.) Controlling the Market/Customer Channels Sitting on the top of the PC food chain Striding to outsource their manufacturing & design work

Taiwan manufacturers as manufacturing partners Providing low-cost manufacturing supports (open book for audit!) Managing the logistics for 48-hour global ship-to-order end-

customer delivery Financing the WIP and buffer inventories at multiple

manufacturing sites world-wide Responsible for all RMAs and replacements to consumers Funding the BRAND (IP) OWNERS’ businesses, with much

lower profit margins (actually <10% gross margin) in return!! At an inferior position along the PC food chain

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The Value HierarchyV

alue

s/P

rofit

Mar

gins

Applications (Mkt. & Standards)

System Integration (Archit., …)

Engineering (Design, ODM,..)

Manufacturing (Process, OEM)

Intellectual Property

Out

sour

cin

gTr

end

Consumer recognition Core competency

Brand Innovation

50%

40%

30%

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The Value Hierarchy – cont. A corporation defines its profit-making potential by

the activities upon which it focuses its key resources. <30% PM (profit margin) for contract manufacturing <50% PM for ODM with little IP leadership >50% PM for an IP leader setting a de facto standard

The two curves along Core Competency axis (basedon Innovation) and Customer Recognition axis(based on Brand) form the wall of the bowl holdingthe potential profit Lowering of either curve will let the potential profit escape In order to achieve high profit (like “Wintel”), a corporation

must focus its resources mainly on strengthening its corecompetence with differentiating IP generation and promotingcustomer recognition as the leading brand.

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Evaluating of a High-tech Corp. Value Proposition

Market: What are the product(s) and service(s)? Applications: De facto standards (e.g., “Wintel”)?! Competition: Who are in the same market space? Profitability: Profit margins attainable, ROI

Core Competency Differentiating values – by how much? Uniqueness? Barriers to competition – by means of intellectual property Protecting the lead – outsourcing non-core functions

Brand Recognition (as a de facto standard) Building reputation and customer base (market share) Securing long-term customer loyalty

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Hierarchy of IP Management


Level 1

Long-term Growth(Market dominance)

Short-term Growth(Market share)

Profitability(Within the domain)

Cost-effectiveness(Within the domain)

Increasing capabilitiesto affect the future

Each level of IP Management builds on the foundation of the lower levels


A Case Study –for high-tech start-ups to follow

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IP for High Investor ValuationCase Study #1 (in Silicon Valley): A 5-year-old hot start-up in Network Search Engine

(NSE: a co-processor & a core component for routers) Building an impressive patent portfolio since 1998

In-house patent attorney to manage IP creation/development 25 patents granted & much more being reviewed @ USPTO Enabling cutting-edge product developments

Closed 2 recent rounds of financing – investorsapproached US$22M+ (“UP”) round in September 2001 US$32M+ (“UP”) round in June 2002 While the NASDAQ index dropped from >4000 to <1600 and

many start-ups were abandoned by investors Seasoned investors value IP for its lasting values!!

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Market Demand for NSEs New paradigm - network (parallel) search engines

have become mainstream (in the last 3 years) Higher data rate (in # packets/sec.)

More packets (data traffic) to process: ~10X

Deeper processing (in # searches per packet) More searches per packet for QoS & security: ~4X

More items (stored in the table) to check Table size increase from 12.8K to 2M entries: ~100X

4000X increase in search rate requirement by now New applications with ~2Mx128 bit table for >150Msps

Traditional software (hash-based) search approachis out of date!

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An Application Example

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Valuable Patent PortfolioPatent # Title matter Type Elapsed # Claims Yearly

Filing Issued Days Total

1 6,199,140 Multiport CAM and timing signal S, A 30-Oct-97 16-Mar-01 1,233 21

2 6,148,364 Method for cascading CAMs S, A 30-Dec-97 14-Nov-00 1,050 31 2

3 6,240,485 Learn operation in depth-cascaded CAMs F, BA 11-May-98 29-May-01 1,114 30

4 6,219,748 Implementing Learn instruction BA, C 11-May-98 17-Apr-01 1,072 39

5 6,381,673 Next HPM in CAM F, BA 6-Jul-98 30-Apr-02 1,394 37

6 6,418,042 Tenary (3-state with "don't care") CAM A 9-Sep-98 9-Jul-02 1,399 75 4

7 6,237,061 Method for LPM F, BA 5-Jan-99 22-May-01 868 7

8 6,125,049 ML control circuit for CAM BA, C 5-Jan-99 26-Sep-00 630 8

9 6,137,707 Compare operation for CAM F, BA 26-Mar-99 24-Oct-00 578 40

10 6,460,112 Determining LPM F, BA 22-Jun-99 1-Oct-02 1,197 51

11 6,393,514 Full flag and almost full flag F, BA 12-Jul-99 21-May-02 1,044 38

12 6,175,513 Detecting multiple matches in a CAM F, BA 12-Jul-99 16-Jan-01 554 35

13 6,243,280 Selective match-line pre-charge in IRC BA, C 9-Sep-99 5-Jun-01 635 40

14 6,275,426 Row redundancy BA, C 18-Oct-99 14-Aug-01 666 53

15 6,154,384 TCAM cell A 12-Nov-99 28-Nov-00 382 19

16 6,147,891 ML control circuit for CAM BA, C 21-Dec-99 14-Nov-00 329 15 10

17 6,191,970 Select ML discharge in a part. CAM array BA, C 13-May-00 20-Feb-01 283 11

18 6,324,087 Partitioning a CAM A 8-Jun-00 27-Nov-01 537 33

19 6,249,467 Row redundancy BA, C 8-Jun-00 19-Jun-01 376 20

20 6,229,742 Spare address decoder BA, C 8-Jun-00 8-May-01 334 5

21 6,252,789 Inter-row configurability (IRC) A 14-Jun-00 26-Jun-01 377 49

22 6,246,601 Inter-row configurability A 14-Jun-00 12-Jun-01 363 10

23 6,243,281 Segment access in IRC BA, C 14-Jun-00 5-Jun-01 356 29

24 6,317,350 Hierarchical depth cascading S, A 16-Jun-00 13-Nov-01 515 53 8+

25 6,445,628 Row redundancy BA, C 18-Jun-01 3-Sep-02 442 20

Ave. / S.D. 709 / 367

Total 769

Date

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Build a Valuable Patent Portfolio Application & market potential

Assess commercial values – in term ofcost/performance improvements

Differentiation – for competitive advantages Types of innovation in order of value hierarchy

System application level (S): e.g., the Sandisk“338” patent for flash-memory card Including new functionality (F) & system architecture

Chip architecture level (A) – building blocks Chip array architecture level (A) – for memory array Block architecture level (BA) – enhanced

functionality/performance Circuit level (C) – circuitry (more difficult to monitor)

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Values to Investors Fast-growing market demand – tied to IT traffic growth Compelling solutions

Solving the IT bottleneck (>1000X improvement)

Great revenue potential High revenue per board (>50% of the total cost of BOM) Attractive gross margin (>55%)

Well-positioned in the market Cutting-edge system solution products (S/W+H/W) Key customer design-wins (at the top 20 customers!)

Well-protected lead Comprehensive and key (system & architecture) patent portfolio Patent portfolio at ~2% of total investors’ money (~US$50M)

~US$12K/patent => 75 patents for ~US$1M


SemiconductorIP Business Model

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Future Trend for SOC The success of SOC depends on IP Reuse

SIP trading will be a fact of life for 90nm node and beyond IP Reuse means standardization of IP library Organizations driving SOC IP reuse:

VSI Alliance (US), VCX (EU), SOC Consortium (Taiwan) Key factors about IP Reuse/SOC effort

Technical aspect: Design for re-usability IP interface specification IP verification, characterization & promotion

Legal aspect: IP novelty – ownership & non-infringement IP authentication – certification of originality IP protection – by law

Business aspect: IP licensing (from owners to users) IP library consolidation (by foundries) IP trading (3rd parties as escrow agents)

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Semiconductor IP Business ModelKey success factors based on H&Q’s SIP Flywheel

Model: Differentiated SIP -- performance

IP portfolio – clean (uncontaminated) & comprehensive User-valued features – mission-critical, >10X improvement? Silicon verification – full validation of the innovation

Market “Pull” -- market acceptance End users pull -- lead user (market leader) endorsements

Market presence, applications, references & recommendations Industry (standard) “Push” -- becoming the de facto standard

Partners and supporters push JEDEC promotions, strategic alliance (e.g., Intel ecosystem), … Foundry & EDA supports, service partners, etc.

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SIP Flywheel Model

Differentiating SIP

Industry “Push”Creating an ecosystem (a self-sustaining and enrichingsystem):Strategic partners and enablers

Market“Pull”Creating a huge demand

to be the de factostandard

Standardization based onvolume & cost advantages

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Areas for Innovation

Noise(Low)

Performance(High Speed& Features)

(Low)Power

(High)Density(/area)

Reliability(High)

Form factor(Small & Robust)

ReducingOverall

Cost

Syst

em In

terf

ace

Fact

ors

Fab Technology Factors

Package Technology

Key Design Considerations

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Focus for Innovation Proper SIP focus for design-house start-ups:

System architecture and interface New system architecture/function(s) New interface scheme for higher I/O data rates

Performance (chip level): =/>100X improvement New functions New architecture: chip and block level

Power/Voltage reduction New power management scheme New architecture: chip or block level

Density (feature size reduction) New array architecture New storage element


Best Practicesin

IP Management

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Best PracticesTo convert Intellectual Capital to Intellectual Property: Patent Program

To define the general practices to protect inventions To educate employees issues about patents and patent law,

especially those related to the preparation of patent applns. To encourage the proper documentation of inventions

Patent Award Program To encourage inventors to develop patent-able ideas To recognize and reward inventors’ creative efforts and extra

time and energy required to successfully pursue a patentapplication to conclusion

Documentation Laboratory Notebooks (bound & serialized) – legal document

providing corroborative evidence (sequentially dated andsigned)

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Best Practices – cont. Patent Committee (top management focus)

Maximize ROI of IP dollars by identifying Which inventions should be protected by patents, Which should be kept as trade secrets and Which should be published (put into the public domain)

Provide a well-organized and consistent evaluation ofinventions and their disposition

Set patent budget (as a % of investors’ investment dollars!!) Consist of 3 to 5 key persons: In-house patent attorney, CTO,

VP of Business Development, VP of Product Definition, … Meet on regularly basis (weekly or bi-weekly) for inventor

presentations and invention review Review all patent proposals for filing decision and strategy Make suggestions to inventors for improvements and

refinements Make foreign filing decisions

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Best Practices – cont. The patent process

Inventor/Idea Reduction to practice (a key step!) Corroboration of the engineering notebook (legal document) Invention Disclosure Form (legal document) Patent Committee review Preparation of patent application

Should be drafted by the patent attorney Foreign filing of application

Thorough evaluation of the costs vs. benefits Procedure in the USPTO (office actions, etc.)

Monitor the status at USPTO closely Issuance of a patent Assignment to the Assignee (Company) Product/Literature marking

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Best Practices – cont. Invention Disclosure Form (legal document)

Inventor(s): name, employee ID #, address, contact #s,citizenship, etc.

Conception of invention (dates, where, to whom, etc.): 1st drawing, 1st written description, 1st oval disclosure

Construction of device (when, by whom, witness, data): Design, construct and test

Sale (record) Use and publication Industry standards Related printed publications, patents and/or patent applications Government contract Detailed description Any disclosure to a third party on the matter: NDA? Record

To ensure “clean room” uncontaminated creation process

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Detailed Description of Invention General purpose or goals of your invention. Describe the general area of technology to which your invention

applies and prior ways, if any, of performing similar function orgoals.

Indicate the disadvantage(s) of prior technologies. Describe generally your invention. Describe in detail your invention referring to block diagrams,

schematics, flow charts, graphs, or other illustrations. Identify how your invention overcomes the disadvantages of the

prior technologies. Summarize the advantages of yours over the prior technology. Indicate the features which are believed to be new. Indicate alternative embodiments or methods of your invention. Suggested claim ideas. If this is a joint invention, indicate the contributions of each

inventor.


China Situationand

Suggestions

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China’s Situation Domestic market with huge potential

Envy of the world – the ONLY leverage for China’sHigh-Tech Economic Development

Open to global competitions – by the rules of WTO State of the high-tech industries

Still in early stage of development Few domestic corporations have achieved world-

class stature (like TSMC) IP infringements and violations are commonplace

Short changing the future (will remain at the bottom of thefood chain in economic development)

Lack of IP protection infrastructure to earn customers’ trustfor high-tech service industry (like software subcontracting)

Too many resources wasted on low-value IPs!

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Missing Links! IP Protection is the base for Software Industry

Software industry in developing countries (like India andIreland) builds on subcontracting (services).

Overseas customers have to be made comfortable to disclosetheir proprietary information for the outsourced software work.

Lack of an adequate IP protection infrastructure & culturemeans NO CUSTOMERS’ TRUST and NO BUSINESS!

IP Reuse & Licensing is the future for IC Industry System-on-chip (SOC) is the product trend for semiconductor. No company has the resources to develop all the IPs for SOC. IP trading and cross-licensing will be the way of life for product

development at 0.13um node and beyond. Lack of an adequate IP protection infrastructure & culture

hinders the advancement of semiconductor industry. Trading contaminated IPs can poison the whole IP blood

supply – “AIDS VIRUS” to the whole industry!

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Cost of IP Infringement A highly probable scenario:

Dr. X joins a hot Chinese start-up (Company C) as its CTOdeveloping a flag-ship IC chip (Product A) competing with hisformer US employer (Company I).

Dr. X uses some key circuits that he developed at Co. I. Product A is a big hit; Co. C goes IPO with a big bang! Co. I files a lawsuit against Co. C in US/Europe claiming IP

infringement and requests for injunction. All US and Europe bound shipments of Co. C’s customers are

stopped, causing enormous financial losses (>1 million folds!). The US jury finds the key circuit is essentially the same and Co. C

infringes Co. I’s IP. Headline news in US: “Chinese company steals US technology”.

Talk shows exacerbates the bad press, hurting the image of Chinaand its entrepreneurs as well as Chinese American entrepreneurs!

The foundry cuts off its support. The stock crashes; investors flee. Co. C goes bankrupt and shuts down.

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Suggestions To China investors (incl. Gov’t science parks)

Protect your long-term interests by funding only projects with legallylicensed IPs or GENUINE IP development (REAL value creation)

Take a proactive role to discourage IP infringement and encourageIP licensing

To China entrepreneurs Define your market position with competitive intelligence

Join the international standardization body to get first-hand information Do your homework first and map out the “patent minefield” Ignorance is not an excuse! Be responsible to your investors

Focus on genuine value creation and build a lasting foundation tocompete globally Money is not everything!! Don’t short change the future! Play by the international business rules of the game (set by WTO) You have the pride and capability to flourish without IP infringements

Be the PRIDE of China and a WORLD-CLASS GLOBALcorporate citizen!!

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Acknowledgements

Many thanks toHong Kong IP Department

for inviting me

Thanks to VSIA IPP DWGfor its fellowship & inspiration

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Thank You Very Muchfor

Your Attention!

I am looking forward tofuture cooperation with you!

presentation at ip conf. 02 12 10

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