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